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December 2002: Proteomics Battens Down the Hatches

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Geneva Proteomics CFO Bertrand Damour's cell phone is a relic of headier times for the proteomics business. On a train ride between GeneProt's headquarters and its biggest customer in Basel, Damour explains why a New York-based reporter has to dial New Jersey to reach him in Switzerland.

Last year GeneProt had grand plans. It leased 100,000 square feet for a new HQ in North Brunswick, NJ, that, with 150 employees and 51 mass specs, including six MALDI-TOF/TOFs, would be the largest proteomics center in the US. High on an $84 million deal with Novartis, the mantra was "grow fast, go public." The New Jersey shop would double GeneProt's size. "I would have moved there to lead the IPO," Damour says.

Now? "We won't spend one more cent there," he says, unless there's a US deal to fund it.

When GeneProt launched in early 2000, the market was at its peak. VC funding flowed and pharma deals were fat. Celera had just raised a billion dollars touting proteome-wide data as its next big project. Within six months, GeneProt signed the Novartis megadeal.

But in the twilight of 2002, the proteomics flame is a mere glimmer. The term has devolved from buzzword to dirty word; VCs are skeptical of p-word business models. Celera has abandoned the proteomic data model in favor of drug discovery. GeneProt, too, has stopped describing itself as a data provider. Perhaps the best example of the diminished punch of proteomics is Affinium Pharmaceuticals in Toronto: early this year it changed its name from Integrative Proteomics to avoid being linked to a technology fad.

With pharma licking its wounds from speculative genomics investments and wary of new ones, GeneProt's canceled US expansion is just one example of a sector in survivalist mode. Faced with the likelihood of a major shakeout, enthusiasm has given way to realism. Proteomics companies are bracing for trying times, lowering expectations, and taking creative steps. They are also slashing staff, abandoning cash-intensive projects, negotiating more willingly on deal terms, and rethinking short-term strategies — anything to preserve funds and raise new revenues.

"Everybody's been moving towards some kind of survival mode," says Robert Walden, president of Large Scale Biology's proteomics unit. "You just gotta hang in there until things improve."

To get a handle on how proteomics companies are coping, GT spoke with the chief executives of seven companies in the business of protein data analysis: Affinium, Caprion, Cellzome, GeneProt, Large Scale Biology, MDS Proteomics, and Syn X. Two other companies that fit this description, Oxford GlycoSciences and Myriad Proteomics, did not respond to requests for interviews. But the comments of those who did talk indicate they're all in the same boat, and struggling to keep it afloat.

Choppy Waters

First, a reminder of how dire the situation is. Cash to get these companies through their long trek to drug development can come from two places: investors and pharma. "Nobody's interested in selling additional shares when their stock prices are in the $1 to $3 range," says LSBC's Walden. VC or other private funding is way too costly — those who can get it will give up huge chunks of their company for it. "The VCs out there, they like the market, but you don't want to be there," says George Jackowski, chairman of Syn X of Toronto. "We have to fund ourselves."

Meanwhile, pharmas, facing the same financial crunch, "are looking critically at the amount of money we have to take risks on these technologies," says a Connecticut-based director of protein chemistry at a major pharmaceutical company who requested anonymity. "That tends to work against deals."

Proteome players are also fighting a backlash. "There's a lot of singed hair and burnt fingers from some of the genomic endeavors, and big pharma is being more careful," says Affinium CEO John Mendlein.

And it's not just genomics that's to blame. In the '80s, PCR-based cloning of targets was going to revolutionize drug discovery. It didn't. Then came antisense, combinatorial chemistry, genomics, and bioinformatics. "These things are like fashions. They have their moment on the stage. There's tremendous hype and that's when they raise their money," says the pharma director. As a result, "there is this natural cautiousness that pharmaceutical companies have towards the claims that the proteomics companies bring forth."

That's not to say deals have come to a halt. Affinium landed its first big pharma customer in May: a three-year, $30 million contract with Pfizer. Montreal-based Caprion recently penned a $7 million cancer target deal with Idec, and got a $4 million equity investment to boot. LSBC's proteomics unit won a $12.3 million, five-year contract from NIEHS for toxico-proteomics work. And just eight weeks ago Syn X signed Johnson & Johnson, while MDS Proteomics signed Eli Lilly for undisclosed amounts.

But the deals, by all accounts, are of smaller magnitude and fewer and farther between than proteomics players anticipated. "In the good old days, you might be able to convince a large pharma company to enter into a very substantial relationship with a lot of money up front with not an awful lot of proof that you could actually deliver," says MDS Proteomics CEO Frank Gleeson. At the height of the bull market, investors and pharma tossed money toward biotech at an unprecedented level.

Those days are over. Deals the likes of Millennium's nearly half-billion dollar pact with Bayer or even DeCode's $200 million arrangement with Roche are things of the past. "The massive investment that pharmaceutical companies made in genomics has not led to the payoff that people expected," says Gleeson. "So to walk back in and say, 'Now pony up even more for proteomics' is a very difficult sell."

At $84 million, GeneProt's Novartis deal is the most lucrative ever in proteomics. But to the fledgling GeneProt, it was just a good start. "We were expecting companies to come [to us] by the same token that Novartis came," says Damour. GeneProt shifted gears to prepare for the tons of business that would come its way. It tripled its staff of 35 and hoarded tens of millions of dollars' worth of mass spectrometers and high-performance computers for its factory.

But the build-it-and-they-will-come strategy didn't pan out. GeneProt is still waiting for its second customer. "We have been, like a lot of people, talking for the last year and half about having new deals in the pipe, and nothing matured," says Damour.

"The milieu for proteomics companies isn't very good," says Syn X's Jackowski. It's gotten so bad that "without our J&J deal we were going on fumes," he says. Scary? "It sure is."

Damour says GeneProt would be happy to get one more fee-for-service deal in the next few months. "And for sure the financial size will not be anything like the Novartis deal."

Not a Drop to Drink

To capture what business might be out there, proteomics companies are trying all sorts of strategies. GeneProt, for one, is now willing to accept less cash up front than in its early days. "There was a time where fee-for-services paid completely for the work we are doing for big pharma, and we could offer that in a proposal. Today you can't," says Damour. Since pharma is not willing to shell out gobs of cash with no guarantee it will translate into drugs, GeneProt will do the work at a loss. "We will share the risk now," says Damour — in exchange for greater milestone and royalty rewards later on. In other words, the customer pays the big bucks for the results, not for the effort.

Canadian company Caprion is not resorting to such concessions to grab a deal. "Unlike a lot of people in our peer group, we are unwilling to sell something at a loss and think we're going to make it up on volume," says CEO Lloyd Segal. "We are going to get our partners to pay us more than the cost of undertaking a program."

Segal doesn't want to worry midway through a project about being able to make payroll or rent. "We'd rather sell the deals up front, even though in some ways we feel like we're selling our children," he says. "As cruel as it sounds, we know we can create more children, because our procreation skills are abundant."

Large Scale Biology is taking yet another approach, offering to forgo royalties completely. "We've restructured how we're approaching our customers," says Walden. "The days of people demanding six- and seven-figure upfront payments and large milestones and high single- or double-digit royalties and IP participation — that's just not happening now."

Instead, the Germantown, Md.-based proteomics division is focusing on quick and dirty contract services. In a typical arrangement, LSBC would run both normal and diseased tissue through its mass specs and look for proteins expressed differently as markers for a disease. "We have backed off some of the stickier IP issues to just make it more attractive for people to do business right now," says Walden. The idea is to get money — and get it fast. "If you want a high seven-figure deal with some IP participation and royalties, you're looking at a sales cycle of like 18 to 24 months," he says. "It's basically just part of our survival strategy."

Syn X, too, has readjusted its expectations — but not without a lesson in humility. Last year, under pressure from investors to have pharma experience at the helm, the board hired Sean McNicholas from Pharmacia to replace Jackowski as CEO. But in the spring, when the Alzheimer's diagnostic markers deal with J&J nearly collapsed because the two companies couldn't agree on terms, he was fired.

Syn X was able to bring the deal back after several months. "There's a handful of large pharmaceutical companies and these guys can do deals with anybody. And so if you're aggravating them, they'll just walk away and say, 'I don't need this,'" says Jackowski. Now Syn X is focused on smaller deals. "You can get away with a $3 million to $5 million dollar deal — a nice, clean little deal: deliver markers and get milestones," Jackowski says. With a burn rate less than $10 million a year, "that's doable," he says. "If we do three deals like [that] our burn rate disappears."

The Target Gap

The different approaches aren't arbitrary. Although expectations are lowered across the board, how confident companies are about their ability to snag deals seems to depend on how close their technology brings a customer to a drug.

Take Affinium. Coming off a $30 million deal with Pfizer, CEO Mendlein insists that all this talk about a dearth of deals is overblown. "A lot of people think because of the overselling of genomics that there will not be as many early-stage discovery deals happening. It's a contrarian view, but we think there will be a renaissance and more early-stage discovery deals will get done."

Mendlein might be suffering from the same big-deal afterglow syndrome GeneProt did post-Novartis. But here's his argument: the problem with genomics is it merely generated lots of targets. And a target does not a drug make. "It's just a ticket to the ballgame," he says. "You have to do so many other things to design a drug."

Proteomics suffers the same problem: the gap between protein targets and the true currency of the pharmaceutical trade, chemicals, is just too darn big. It's Affinium's chemistry and structure-based approach to proteomics that Mendlein attributes to landing Pfizer in "the largest early-stage discovery deal that's been done in the last 18 months," complete with R&D support, discovery and clinical milestones, and royalties. After mapping a target's pathway through mass spectrometry, Affinium moves on to NMR to study the binding chemistry of potential small molecule drugs, and then to x-ray crystallography to examine the structure of target-compound complexes.

To pump up its strengths, Affinium lured chemistry-maven Judd Berman from his post at GlaxoSmithKline to be senior VP of chemistry. It also created a subsidiary called Ylektra to develop electrochemistry as a method to optimize potential leads.

Cellzome, too, sees "chemically intelligent proteomics," as the key to pharma's vaults. That's what CEO David Brown calls the kind of proteomics that links targets with drugs. A 28-year veteran who did stints at GlaxoWellcome and Zeneca and led Pfizer's Viagra team through phase II, Brown says he knows exactly how to capture pharma's attention. Before joining Cellzome in September, he led 2,000 scientists across five sites as Roche's global head of discovery. There, his bonus depended on his fulfilling a mandate: make drug discovery more efficient. "The only thing the chairman cares about is how many drugs you're producing, how many are going to get to the market, and what their value is," says Brown.

After about a year of research, his strategy team presented its conclusion: The industry needs help crossing the chemical divide. "The problem is that biology is running well ahead of the chemistry," says Brown. When he spotted Cellzome's yeast protein interaction map publication in Nature in January, he took a Roche team to explore a possible collaboration. Once there, he learned that Cellzome was working on a second technology — "drug pull-down" — that directly linked proteins to drugs. It excited him so much that he left Roche to head the startup.

"With this technology we could take the top 500 existing drugs and go fishing in the proteome," says Brown. In this way, Cellzome plans to find alternate targets and secondary medical uses for pharma customers' already-approved drugs. "The $5 million to $15 million deals are still there," Brown says. "There's a queue of people at the door, a lot of major pharmas asking to come talk to us." But Cellzome has yet to sign one. Brown contends that's only because founder Charles Cohen — CEO until Brown took over — put off seeking partners. "He wanted the technology to be fully validated. And he wanted me in the job before it went out."

Targets were once all the rage. "The industry was captivated by the model that Celera had created in genomics: ultra-high-throughput, heavy-duty analytical instrumentation in extremely large numbers working in parallel for 24 hours a day, performing analytical calculations at warp speed and spitting out increasingly enormous volumes of data, requiring massive supercomputing capabilities to store," says MDS Proteomics' Gleeson. "But how that data related to drug discovery wasn't given enough attention.

"There's no criticism implied," he says, "because we were also infected with the target data model." MDS invested heavily in mass spectrometers and got into a computing alliance with IBM. Now it's shifting away from hawking target data to showing how cells from patient samples react to drugs. "What pharmaceutical companies want is help with their drugs, not their targets," says Gleeson.

Plugging the Drain

Then there's the other side of the balance sheet. Aside from calling off its expansion, GeneProt has slashed spending on consumables and plans to sack 20 of its 117 employees by year's end. "We can't control the markets or the budgets of big pharma, but we can control the cash we have in the bank," Damour says. That amounts to about $30 million, with another $26 million due from Novartis within 24 months. Damour will stretch that out to 2005 by reducing his burn rate to around $24 million. If successful, "on the first of January 2003 we will have decreased our operating expenses by more than 40 percent," he says.

Large Scale Biology is also clamping down on expenses. In June it chopped 20 percent off the salaries of its president, CEO, and COO, trimmed 10 percent off the paychecks of the next 28 most generously paid, and sent 48 of its 158 employees packing.

LSBC also stopped protein-chip development work with Biosite. "That had to be suspended because we just didn't have the funding for it if we wanted our cash resources to last," says Walden. Development of technology to detect unculturable viruses was cut, too. "You need to keep yourself afloat until conditions get better." In all, the company trimmed its cash burn from $32 million to $20 million. "We're focusing on survival tactics as opposed to strategic R&D," says Walden. "And in the meantime you need to generate cash so you're not burning your own."

To that end, LSBC has put some of its in-house software on the block, and in October it sold a fractionation technology to Agilent. "It's a balance," Walden says. "You have to decide how much you're giving away for [the sake of] survival, without giving up your competitive edge."

Players such as MDSP and GeneProt that got deep into supercomputers are now looking to cut their losses. MDSP has reassigned its IBM computers to protein structure, and GeneProt is looking to recoup cash from its 1,420-CPU Compaq AlphaServer. It recently renegotiated terms with HP and is also exploring selling excess supercomputing time to others.

Sail or Scuttle?

All players say the ultimate destination is profitable drugs, and these measures are intended to get them there. Jettisoning expenses and changing course could keep them underway longer. But if pharma deals don't pick up soon, some sorry CEOs are going to be forced to scuttle what's left.

VC Michael Lytton, general partner at Oxford Bioscience, says that one-third of the $300 million it takes to bring a product to market typically comes from equity markets. "The numbers are lower for biotech than for pharmaceutical companies," he says, "but private equity can't fully take care of all the capital needs of proteomics companies." So a proteomics company needs to accrue about $200 million from partnerships — more than a half-dozen deals the size of Affinium's Pfizer deal.

"If you do the calculations you can convince yourself [survival is] impossible," says Cellzome's Brown. Call it faith-based proteomics: "[With] the right people heading the company, they'll be able to find a way of making it successful," he says.

Given how R&D-intensive proteomics is, it's hard to see how any of these companies can sustain themselves on puny deals. But smaller-scale will likely be the way to go. The lesson learned from genomics: "The capital markets will put you in the penalty box for a very long time for over-promising and under-delivering," says Caprion's Segal.

There is nothing like the threat of extinction to force companies to hunker down and start producing. If proteomics companies are to regain the confidence of pharmaceutical companies, "we better damn well deliver," says Segal.

Indeed, pharma and biotech are beginning to appreciate the muted pitches. "They're not over-hyping their technology in the same way genomics companies did in the early days," says Roland Newman, a senior director at Idec Pharmaceuticals.

Where will these companies be in two years? In the best scenario, the market will improve and pharmas will once again engage in higher-risk investments. But there's no counting on the current situation as just a temporary setback.

In the meantime, players are looking to alternatives to going it alone. "We're looking at other companies maybe to consolidate with," says Syn X's Jackowski. Others are open to the idea as well. Some — the luckiest? — will be picked up by pharma. Many undoubtedly will sink. Those that survive the next few years on their own will be a special breed, indeed.

Let the shakeout begin.

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