One sign of the coming of a new year in the biotechnology sector is the annual release of Steven Burrill’s Biotech Outlook, which augurs the world of biotechnology for the upcoming year. BioCommerce Week caught up with Burrill, the CEO of San Francisco-based private equity firm Burrill & Co., which manages some $500 million in investment funds, to look at the emerging systems biology marketplace.
What is your outlook for ‘05?
2005 is going to be a banner year, with a large and positive capital market driving a lot of value building. The 37 public companies that came out in the ‘03-’04 window are beginning to perform at much higher levels. Two-thirds of those companies are above water today, meaning above their IPO price. That’s a dramatic change from where we were just a few months ago. Capital drives a lot.
The big negatives on the systems biology side, and this may be a negative / positive story, come from the FDA, where I think there is no doubt that we are going to have slower drug approval and more correlation with patient benefit. The answer to the drug-safety issue is better correlation against responding patient populations. That’s where systems biology will make its big contribution.
How does this affect the market?
I think we are going to see a very dramatic shift from the treatment of sickness to the emergence of the treatment of wellness. If you look at the FDA today, and the pressures on the FDA, particularly vis a vis drug safety, improved performance will largely come from the therapeutic drugs being able to identify a subset of users by applying molecular diagnostics, or pharmacogenomics, or other more diagnostic-related tools that emanate from systems biology. That will begin to drive us not only into the theranostics world, and deep into the more-personalized medicine world, but also move us down the pathway towards predictability.
We are already seeing the emergence of centers like at Duke and Ohio State and others, where we can take someone’s genome and run a bunch of tests that will be fairly predictive of things that are going to happen in their life and where we can begin to be fairly preventative and blend nutriceuticals, or nutritional enhancement, with other forms of preventative care — be that rudimentary things like exercise or diet, or the use of drugs. We will treat cancer more [as a chronic disease] than acutely. We will see a lot of the chronic care being treated more preventatively. All of that change will emanate from the progress we are making broadly in systems biology.
Do you see the CYP450 microarray assays as an enabling technology?
Yes, but one of many. I think we will see lots of mutation- or gene- or pathway-specific developments. If you look at the big drugs — Gleevec, Herceptin — in all of those where the FDA approved them in record time, there was a good correlation to specific mutations or specific patient populations and a Dx that could identify them. So, theranostic approval was key to those drugs’ approvals. I think that will ultimately add extraordinary value to the things coming out of the systems biology world.
How do you define systems biology?
Well, more broadly than I did before. We are just beginning to understand extraordinary complexity. Up to now, we’ve had a fairly rudimentary knowledge of the genomics and the complexity of the pathways up from SNPs and genes through the proteins to the pathways. I think systems biology is the study of that complexity and drawing broad correlations across biological systems that reduce complexity to understanding. And through that understanding, we will ultimately improve wellness.
Broadly speaking, I see the developments of systems biology coming from educational and institutional places like the Institute for Systems Biology, and George Poste’s work at the Biodesign Institute at Arizona State University, and the work that MIT is doing. That progress will boost the Agilents, the Invitrogens, and even a company like Icoria, which I am now the chairman of, who are making the transition from being genes-are-us or informatics-are-us and are going up the food chain to a point where they are beginning to bring together the gene-to-cell-to-system approach.
That should — and this is where it gets tricky — enhance the value equation, which has been in the penalty box since the spring of 2000. Largely, the investment community has reacted to all of these companies as either not sustainable in their present business or not highly valued propositions — that they are just service businesses that are low-margin, hand-to-mouth businesses. I believe we will begin to see the transition, first on the diagnostics sides, then on the tools side, where a lot more value is attributed to the information that is created. That value will turn out to be very real. For example, today we are seeing diagnostic tests moving from being purely low-margin commodity products to now being highly valued pieces of a therapeutic regimen and commanding therapeutic-like margins — not historical diagnostic margins. I think that will migrate relatively quickly to a more highly valued proposition on the tool provider side.
Do you see the private equity world changing its predominant dislike for investing in tools?
Well, the pendulum clearly swung too far the other way. Largely these things devalued to zero, or even traded at heavy negative value, at discounts to cash. I think we are beginning to see VCs coming back into the space and recognizing that there is some value there. Now, I don’t think we are going to get to where we were in the spring of 2000 where values were extraordinary and anybody who had anything related to genomics was a highly valued proposition. I think we will earn our way there, as opposed to getting there through hype and exaggerated expectations.
ISB has an affiliation with an incubator of sorts, called Accelerator. Is that type of infrastructure and support a critical part of nurturing new technologies?
I am a big fan of that model.
But you haven’t invested.
We want to see what happens, but we are watching that pretty carefully.
I think the VC world is split a little bit. There are guys with lots of money who are putting really big bets on the specialty pharma model, where you take stuff out of big pharma that is semi-developed — late Phase I, early Phase II, late Phase II — and funding them with $30 million to $50 million to $100 million to make a bet on the clinical development progress and the fact that big pharma is even paying up for even preclinical compounds.
So, we are seeing VCs at some levels funding later-stage stuff. And, I do think we are seeing VCs coming back into the [early-stage] space, providing more than just capital. I do see a lot of the technology developed on the academic or institutional side and quasi-handed off to the venture-backed companies; and we may see more development in the academic institutions before it’s handed off than we have historically.
How do you see the global markets?
Look at the BRIC countries — Brazil, Russia, India, China — they will represent more than 50 percent of the world’s economy in 25 years. When you look at costs of development and outsourcing, whether it is clinical development, or discovery and tools development, there is probably a 5-to-1, a 10-to-1, or in some countries, a 15-to-1 benefit. This means you can deal with a certain degree of inefficiency and still have dramatic cost advantages. We are going to see dramatic development in those parts of the world, not just in clinical development, but also in discovery and tool development.
How do you see mergers and acquisitions?
The GEs and the Invitrogens will be large acquirers; I think the value proposition is in their favor. A lot of these [smaller] companies are relatively cheap on the acquisition side and struggling for capital from public and private sources and so are attracted to the acquisition mode. I see some fairly dramatic consolations in ‘05.
You are involved in the ag-bio space. How do you see this market?
Opportunities are difficult. We have been investors in the ag space since 1998-1999, and we are struggling to find interesting things to invest in. The GMO overhang is still pretty real and big ag companies are not investing or partnering with new technology. Partnerships between the big ag companies and the ag / bio companies have virtually dried up to zero. There is no question that the adoption of, broadly speaking, systems biology tools and techniques, will have a dramatic impact. The same is true in the industrial biotech world. The difference there is that the work is being done largely by the DuPonts, the Cargills, and the ADMs and the large biofuel and bioprocessing facilities using biological processes to replace historical chemical process.
After this year’s JPMorgan Healthcare Conference, formerly the H&Q Conference, you say there will be a discriminatory period. Can you explain that?
I think there are a flood of companies that are anticipating getting their IPO off after H&Q. Some are even starting their road show next week, at beginning of H&Q. I think we will see in the second half of January and early February, a flood of offerings. Let’s assume for a minute they do well. Then, you have the buy side sitting there, having recovered a fair amount of value in what they invested in during the last year, they are feeling better and they have new money to invest, they are looking for new stories to invest in. I think they will buy a lot of these IPOs at higher values. That will be a signal to a lot of companies that there is a robust window opening and I think we will see a flood of offerings being filed and coming into the market in the first two quarters of ‘05. The discrimination will come when we have the supply out-stripping demand and we may see too many offerings on the table. Investors are not going to buy 30 of these.
You are talking about biotechs?
That includes the genomics, systems biology companies, everything other than Internet. Broadly speaking, the medical technology companies.