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Netgenics s CEO Is Prepared For Increase In Momentum In Bioinformatics Market

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CLEVELAND--Bioinformatics firm Netgenics got its start here two-and-a-half years ago with $1.5 million in venture capital. "Then," said CEO Manuel Glynias, "we made what was probably a stupid decision. We hired enough people that the $1.5 million wouldn't last through the whole year."

Two financing rounds and a few deals later, however, Netgenics is thriving and Glynias is confident in the market for his company's cornerstone product, Synergy, a Corba- and Java-based software framework for drug-discovery computing.

In October, Netgenics made a deal to build an enterprise-wide bioinformatics infrastructure that will link seven drug-discovery sites in three divisions for pharmaceutical giant American Home Products. Netgenics has an existing agreement with Abbott, and another with an undisclosed pharmaceutical firm. Glynias said a fourth deal will be announced soon.

Last month, Glynias met with BioInform to talk about his company. In part one of the interview, he discusses how Netgenics has continued to raise the funds it needed to keep its staff employed. The conclusion of the interview, in which Glynias reveals his vision of the future of the industry and his strategies for continuing to prosper, will appear in the February 1 issue.

BioInform: What were you doing before you started Netgenics?

Glynias: I had been writing commercial bioinformatics software ever since I was in graduate school. I wrote the very first sequence analysis program for Macintosh, called MacGene, while I was still in school. Then I wrote what was probably the best sequence analysis program anyone had written up until then, called Geneworks. I sold the rights to Intelligenetics right before they were acquired by Oxford Molecular. It was the source of most of Intelligenetics' revenue for years and years. I think Oxford continued to sell it until last year, although I hadn't touched it in about five years.

Then I wrote software called Primer Express, which is a PCR-primer-finding program, for Perkin-Elmer. I made a reasonably good living on those things, but it was clear the way the industry was changing. Up until then, pharma companies were a very small part of the bioinformatics market. It was mostly academics.

BioInform: What gave you the idea for Netgenics?

Glynias: Three years ago it was obvious that the world was changing. Incyte was starting to make some sales and people were hiring bioinformaticists. It was clear that this was going to become a much bigger business than what it had been. We thought that the focus was going to change dramatically, too; that people were going to look for services, not just programs. If you're going to do services you have to have the guts to go start a company. I called a few friends at Sun Microsystems, MDL Information Systems, and Intelligenetics, and I called my friend Wally Gilbert, a Nobel Laureate in chemistry and founder of Biogen. The four of us decided we would try this.

We started writing the business plan around Christmas 1995. By April 1996 we had a pretty good plan. We took it on the road, and by Memorial Day we had a venture capital deal, in less than two months. We raised $1.5 million in that first round with John Pappajohn.

BioInform: Then you staffed up right away?

Glynias: They were all brave, my first 12 people, and they all knew it. Our goal was to build a prototype of the system by February 1997, to be able to show it at the Cambridge Healthtech Institute Human Genome Project conference in San Francisco. We opened the doors on August 1, 1996, and by December we were talking to venture capital firms for the next round. By February we had a number of them interested, and they came to the San Francisco show and hung around the booth while we did 27 demonstrations for different pharma companies. They judged by the excitement they saw in these executives that we were probably going to succeed.

We were able to raise another $7 million in the spring of 1997 and that included Incyte as one of the investors, along with Venrock and Oxford BioScience partners. So we have Rockefeller money; we have Oxford, which is some of the main money behind Gene Logic, Genset, Human Genome Sciences, and a number of other genomics companies; and we have Incyte. Those were the three major investors in that round.

BioInform: How did you use that next $7 million?

Glynias: We hired a bunch more people and turned the prototype into a program. We sold it to Abbott in November 1997. We had started talking to the folks at Genetics Institute by 1998, and both Abbott and they were willing to talk to investors for us. So we got positive feedback from pharma company people--Abbott people who had already paid for it and Genetics Institute people who were starting to look at it--and we used that as a way to go raise more money.

We also raised the post-funding money to the company from $4 million to $54 million in less than two years. We started at 37 cents a share for the first round, we did the second round at $1.025, and we did the most recent round at $2 per share. The most recent round, which was completed in March 1998, brought in Rothschild and TIAA-CREF Investment Management, the educators' retirement fund. They do something like one private investment a year and we were it.

BioInform: Why do you think they chose NetGenics?

Glynias: They liked us. A woman named Courtney Kling, who does all their pharma and biotech investment, is a big investor in Human Genome Sciences and Myriad and she had met Wally once. She liked our story and thought it made business sense. The beauty of CREF is that they can call all these CEO's at companies that they are the biggest stockholder of, which she did repeatedly, and say, I've been talking to these guys, this is their idea, what do you think? She did that a number of times and they said, that's a really cool idea.

She led that round, and once you have names like that leading the round it's easy. We were trying to raise $10 million. We had $35 million worth of interest and ended up cutting it to $17.7 million.

BioInform: What accounted for your success?

Glynias: It was a combination of having a good position in the market, having pharma companies that were willing to say good things about us, and having two great lead investors. We also were lucky.

I'll tell you the lucky parts because luck is important, too. Incyte was trading near its all-time high right about then around $100. It was before the split. Companies were getting out and going public in January, February, and March before the whole market collapsed. There was great pharma news. Viagra was getting ready to come out. The whole market was on an upswing.

We did that round before any of our competitors did, so we were prepared. We had a major deal and Pangea didn't, so we could get out and do another round before them. Their $10 million round was before our $7 million round, but we had a $17 million round before they could do another round. That was because we had a significant piece of news and we got out and did a round at a very high price. It forced Pangea to do the same. By the time they reacted, they were late and the market had collapsed.

Another factor was that Hambrecht and Quist did a great job for us as our investment banker. I had a great speaking slot at their healthcare conference in January last year, where everybody in the world of health was. We had 40 one-on-one meetings with investors. It broke the Hambrecht and Quist record for private placements. We were turning down meeting requests from investors. We had so much money pledged that all we were going to do was make people mad at us by not being able to give them a piece. It was a lot of fun.

BioInform: So much for the conventional wisdom that investors aren't interested in this industry.

Glynias: Well, one point to be made is that bioinformatics has nothing to do with biotech. Bioinformatics should track the pharma industry and as long as pharma continues to pour money into research and development, which they are doing, that's bullish for bioinformatics companies. We get categorized as biotech, but we have nothing to do with biotech.

BioInform: That misperception doesn't seem to have hurt NetGenics.

Glynias: I raised money at a good time, I don't need more right now. I'm in a good position. What we want to do is get to a place where we're the clear leader. We need to keep signing up customers. These are enterprise-wide deals, it's not like selling a piece of software for $100,000. We're negotiating our fourth really big deal right now. We think that when we get to six it will be an easy way to move forward with another round of financing, be that private or public.

BioInform: Is going public after your sixth deal the goal?

Glynias: Who knows. It obviously depends on the market and all kinds of other things. But we don't think that's impossible. Certainly we would be taken seriously then. Look at Incyte. They began to be taken very seriously as a player right around their fifth or sixth deal. That's when the momentum started picking up for them.

BioInform: Are you targeting any customers outside of big pharma?

Glynias: We continue to talk to the biggest pharma companies. Unlike a lot of our competitors, we're not really interested in the biotech market, at least not today. We think that the problems of biotech are so different from the problems of pharma that it would be very difficult to write software or even have a business model that made sense for both markets.

When we get big enough that we could have two business models inside the company, then that would make sense to us and we could start approaching smaller biotechs, because they're going to need outsourcing too, but what they need is quite different from what pharma companies need.

So we're continuing to focus on big pharma companies. The only problem is that they're big companies. They make decisions slowly, so it's a lot of work to make a deal. We talked to American Home for a really long time. Finally we got a vice-president who was interested in the deal we proposed. That seems to be the key: you have to get to the right guy.

BioInform: You've talked about the pharma side. Do you also see a market for bioinformatics in other large life sciences companies?

Glynias: The fourth company we're negotiating with right now is an agriculture company. We're starting to see a lot of interest from ag biotech companies. There are a lot of them all of a sudden, and the big guys are all taking genetics and genomics very seriously. They have at least the same information problems everybody else has, if not worse. We think our distributed technology is going to be very useful for them because so many of them have locations everywhere and they need to be able to take data from these test farms and centralize it. Our tools will be quite effective there. It's certainly an area we're interested in.

--Adrienne Burke

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