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Keeping Up Appearances

NEW YORK, Oct. 2 - To stay attractive to venture capital investors and remain competitive, young genomic companies must have a broad platform that reduces their failure rate, they must be able to generate drug candidates, and they should be more frugal, according to some industry watchers. 

Traditional tool and technology companies are a “wonderful starting point for generating short- to medium-term revenues through corporate partnering arrangements,” according to Michael Lytton, general partner of Oxford Bioscience Partners, an early-stage investor. “But it is true that the only long-term successful business model in the roughly 30 years of biotechnology’s existence has been to develop a successful drug.”

“So the ideal situation is to have a broad technology platform that both can accelerate drug discovery and generate high-value corporate partnerships, and at the same time develop high-quality internal development candidates [through which] the company can retain and capture the upside,” he said.

A business model that Lytton said would attract him is one that has the legs to persevere through the long term and have something to show for increased rounds of financing. 

“In better times, when there was an IPO window to talk about,” said Lytton, “many companies would only feel that it would need to do a series B or series C round of financing.” In current times, in which the IPO window has been shut and latched, a company is likely to need series D and E rounds to stay in business. 

“And to justify its needs for more money, a young company will have to have installed in its business plan a set of closely linked milestone targets.”

An analyst from Atlas Ventures said: “Now that the genome has been sequenced, VC firms want to see drugs in their future. The tool and technology segment of the industry is too crowded, and companies must either integrate, or adjust their platform so they can sustain growth,” the analyst said.

“And the answer may not be in being bought by big pharma,” the analyst went on. “Many tool-based genomic companies are waking up to the fact that, ‘Hey, if I can discover the targets and make the chemicals, I can make the drugs. The money is in the drugs.”

Tracy Lefteroff, global managing partner of the venture capital practice of PricewaterhouseCoopers, doesn’t think so. “I believe there will always be room for new discoveries and new technologies,” he said. Besides, others caution, making drugs is not what genomic companies do best. Leave that up to the pharmaceutical industry, which has the experience with downstream regulation.

Bryan Roberts, general partner of Venrock Associates, told GenomeWeb that a firm’s economic agility will likely see it through troubled VC waters. “I think companies should be better prepared to justify expenses,” he said. “People are taking a hard pencil to justify expenses, and are saying ‘Can you do more with less money.’”

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