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Gene Logic's CEO Shares Strategies For Financing A Bioinformatics Startup

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GAITHERSBURG, Md.--Gene Logic CEO Michael Brennan met with BioInform recently to talk about the rapid growth experienced by his company, which sells proprietary genomic databases and technologies. In part one of the interview, published in the December 7 BioInform, Brennan discussed his recent decision to expand Gene Logic's bioinformatics marketing efforts. Since then, the company announced an expansion to its 1997 discovery collaboration with Procter and Gamble Pharmaceuticals, which is expected to result in a doubling of Gene Logic's revenues from the collaboration. Procter and Gamble has utilized Gene Logic's Reads gene expression technology to build a database of differentially expressed heart tissue genes. Gene Logic also announced last month that it has received a patent for its Flow-thru Chip microarray device.

In under three years, Gene Logic has grown from one employee to 170, from two customers to nine, and from annual revenues of $2 million in 1997 to almost $9 million in the first nine months of 1998. In the conclusion of his exclusive interview with BioInform, Brennan discussed financing strategies for a bioinformatics startup.

BioInform: What is Gene Logic's financial history?

Brennan: Gene Logic started three years ago. That's when I joined as its first employee and wrote the business plan that enabled us to raise $9 million in first round capital in May 1996. The thesis was, beyond sequence information, based on the value of genomics for drug discovery. It was quite clear then, and it has become even more so now, that gene expression information is the core genomics technology that will enable drug development to be more efficient. It's the most effective way of discovering new drug targets, it's the most efficient way of prioritizing them. The expression of genes is the way the cell changes its basic metabolism, so being able to look at that information is the most direct window into the molecular machinery of the cell.

So, I wrote a business plan that said basically that. How were we going to make money out of it? By generating high-value data content on behalf of customers and selling it to them in such a way that we get paid more money than it costs us to generate the data on an ongoing basis. So it's a profitable business just taken independently, but it also gives us the opportunity for milestone payments and royalties on products that are developed using that information.

BioInform: Who did you approach for capital?

Brennan: We went to the usual suspects in terms of venture capital groups that we thought would be receptive to that kind of idea. We were hugely helped by Alan Walton who had identified the technology out of Yale University medical school and had supported research work done by Sherman Weissman to get the technology to the point where it could be transferred to a commercial entity. Alan has a sterling reputation in this field. He was one of the founders of Human Genome Sciences and the Institute for Genomic Research and has a reputation for being able to sniff out the next technology wave. He and I went around the venture capital world and we raised $9 million, led by Hambro Health International and Oxford BioScience Partners.

BioInform: Then you started up operations?

Brennan: We set up a laboratory in a facility that we subleased in Columbia, Md. Maryland is a good place to go because there's a very strong biotech and academic infrastructure there. Not only are there a lot of companies, there are big resources you can draw on like Johns Hopkins and the National Institutes of Health. Plus, the state is extremely keen to attract that kind of industry and gives really excellent incentives to be there.

BioInform: How did you spend your first year in business?

Brennan: We spent 1996 doing three main things. First we converted what had been benchtop technology into an industrial production process which, needless to say, was a lot harder to do than we thought it would be.

We also fleshed out the management team. I was lucky enough to be able to hire really top-rate people for corporate development. We brought in Greg Lennon, one of the premier figures in the world of genomics, from Lawrence Livermore National Laboratory. He had headed up the DOE-funded Joint Genome Program, and became our chief scientific officer. We built a management team that was capable of delivering on its promise. If there's one thing that's critical, it's ensuring that you get that right. If you're able to get good people to work for the company it's worth more than money or technology.

Then we went about getting input. I'd been in the pharmaceutical industry a number of years and knew a lot of people; so did Mark Gessler, who came from Gene Medicine and is our CFO and head of corporate development. We went on the road visiting people in the industry and telling them, this is what we're planning to do. What do you think? Is this a good idea or not?

What we expected was for folks to say yeah, that's really interesting and if it works come back and see us. But a number of groups said they didn't want to wait until it was completely developed.

BioInform: You had your first customers before you had a product?

Brennan: We signed up our first commercial partners very early on and that's been extremely helpful to us. It puts enough pressure on the organization that you actually have to deliver in the real world. And there's a huge difference between telling a story, even if its a good one, and actually having to cough up the goods. Having early partners, who were by no means easy on us, matured the organization tremendously.

BioInform: What was the next step?

Brennan: We raised a second round of financing in July last year, when we had two partners in place--Procter and Gamble and Japan Tobacco. We signed up a third major customer, Akzo Nobel, and did a public offering in November 1997, 18 months after the first money came into the company.

BioInform: What led to your decision to go public?

Brennan: We wanted to raise the capital because we wanted to expand in two main areas: the development of our Flow-thru Chip and our Data Logic operations. It was very lucky that we did go public at that time because since then, with the exception of a period at the first quarter of this year, it would have been pretty much impossible to raise money in the public market for a company in our position.

BioInform: Do you think Wall Street understands your business?

Brennan: This isn't biotechnology, this is the juncture of information technology and genomics technology. It's got nothing to do with traditional biotech. It's not having an interesting idea about a disease and taking a couple of years to figure out what the biology is all about, finding a drug lead, and then taking a drug lead through clinical development in the hopes that you're going to get a product to market.

There's a completely different dynamic in this business. We build and sell information products and the technology that makes that information useable. It's so unlike regular biotech that it shouldn't even be in the same sector except that there's nowhere else obvious to put it. As it evolves it's going to become more and more driven by advances in IT than it is necessarily by advances in biology.

BioInform: Has being lumped in with biotech impaired your ability to raise money?

Brennan: Investors are so fickle about this. Three years ago when we started Gene Logic you couldn't have given away a company that said it was going to develop a drug and market it and become a fully integrated pharmaceutical company. Now everyone's saying, well gee, if you do actually get a drug and it really does work you'll make a lot of money doing that. There's one chance in 50, but if you buy 50 companies one of them is going to hit big and you'll do very well.

At the same time, just as the pharmaceutical industry is indicating how ravenous it is for the kind of information we provide, the investor community is saying we don't know how these companies are going to make money, despite the fact that you can see easily how you're going to make money in the very near term. They're completely fashion driven.

So we don't pay any attention to that. It's easy to see how you can turn this into a strongly cashflow-generating business. And assuming that the general investment thesis is that you're paying for a stream of cashflows out of the businesses that you invest in, it's easy to see how you can do it with this company in a relatively short period of time, by comparison with what a drug development company is all about.

You can argue about how much cash and so forth. But if we're right--and the industry is telling us that we're right--that this kind of information content together with the systems to manage it is going to be incredibly valuable to pharmaceutical companies and they're going to pay for it because it doesn't make sense to generate it themselves, then this is going to be a growing part of the pharma world.

It's already evident in the ways pharma companies spend their money. According to figures published by Jeurgen Drews, the former head of international research at Roche Group, in 1997 pharmas spent 16 percent of their preclinical discovery dollars outsourcing the kinds of technologies we sell. For the year 2000, the projection is that they'll spend 30 percent of their discovery dollars on this. Moreover, the fraction they're spending on discovery is growing more than any other part of research and development, by about 16 percent a year. So if our business is a $3 billion industry today, it's going to be a $9 billion industry two years from now.

What we're saying is that the industry as a whole is exploding and growing incredibly rapidly. We're occupying an ever-increasing portion of that market. Why is that a hard economic proposition to understand? Baffles me why anyone wouldn't pick it up immediately.

BioInform: At least you have some good coverage from analysts.

Brennan: The problem is that no one on the buy side listens to analysts. They read their reports but don't pay a lot of attention because they realize a lot of the analysts have a banking relationship with the companies they follow, or would like to.

BioInform: What percentage of your time is spent on meeting with potential investors?

Brennan: About 20 percent. A good chunk of my time is also occupied with customers. Seeing existing ones, talking to new ones, and selling the company. I'd say about half my time is spent on those two components. Which is another reason it's critical to have good management at home: you're not there the whole time.

BioInform: Have there been obstacles to raising money?

Brennan: We haven't had any obstacles raising money. We raised the first two rounds of private financing reasonably easily. The public offering was tough, but that's because we started our roadshow the day the Dow tanked 554 points. And it had nothing to do with the company, it had everything to do with market conditions. You can't do anything about that.

BioInform: What advice would you give to other bioinformatics startups trying to raise capital?

Brennan: I guess part of the message is raise money when you can. Don't be obsessed with the price at which you raise money. At the early stages of the company, give early investors a good deal because then they'll be there for you again. It's nice if an investor in a first round can double his money in nine months. He hasn't doubled it in reality because he hasn't taken it out--he's not liquid. But as a venture capital fund he can write up his investment to the price of the last private round. So try to give everyone an opportunity to make money. It endears them to you.

Also, try to get in strong investors, people who understand that the first money that goes into the company isn't the last. A lot of companies finance themselves by saying we'll call up all the physicians we know and we'll get in touch with rich members of the aunt's family and they'll give us a high price for the company. They will, but they won't be there when you have to go back to them again.

Professional investors understand. They want a good deal now, but when you come back in a year and you've made good progress they'll give you a higher price because they've got more money to give you. It's not as if you've had everything we're going to put in.

Really strong venture capitalists can be of managerial assistance, too. I don't mean that they manage the company, but their contacts, especially in the financial community, are very helpful. You want to get people who are prepared to put in more than just cash. They're prepared to put in expertise and experience. You don't want them trying to run the business. That's hopeless. But it's very nice to have people who are able to give you strategic thinking help.

--Adrienne Burke

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