Take heed, ye who reposition your proteomics companies for drug discovery! A panel representing investors, patent law experts, and companies assembled by the Consul General of Sweden earlier this month in New York advised — among other things — that investors aren’t convinced such a turnabout in business plan will necessarily lead to profits.
So what makes a proteomics company attractive to investors, now that the hype surrounding proteomics has begun to recede? This question dominated the 4th Biotech Leader Forum, which included presentations and a panel discussion on the commercial potential of proteomics. The event, organized with the help of the Invest in Sweden Agency and held at the Swedish consulate in New York, also served to showcase two Swedish companies with an interest in proteomics: Biacore, a manufacturer of instruments employing surface plasmon resonance to analyze molecular interactions, and Affibody, which makes synthetic antibodies against proteins.
One answer to the forum’s question was that a solid business plan, more than just an interesting research project, is most important to investors looking to fund proteomics companies, said Chris Earl, managing director of the Perseus-Soros BioPharmaceutical fund, which makes late-stage private equity investments in biotechnology and pharmaceutical companies. “In the rush to create an investment in proteomics, we failed to develop sustainable business models,” he added, “and now it’s a matter of going back and saying ‘How do we do something which in the near- to mid-term is going to generate real revenues that will sustain us?’”
While database licensing models might not be the way to reach long-term profits, companies forging research alliances with pharmaceutical companies might stand a better chance, Earl said. And with NIH budgets growing, the market for research tool providers is expanding, and some companies in this space have done well. “If you can come up with enabling technologies that address major bottlenecks, you will find a market,” noted Earl.
What Wall Street is looking for in proteomics technology companies today is the ability to create “a steady stream of good products,” said Philip Nadeau, a panelist and biotechnology analyst with SG Cowen’s health care team. As examples, Nadeau cited some of the large mass spectrometry companies that have strong research and development efforts. For providers of lower-priced proteomics reagents, what’s important is a strong potential for revenues and earnings growth, strong management, and differentiated products, he said.
What turns investors off, Earl warned, is when a company that touted itself as a proteomics company two years ago overnight moves into drug development.
“Many companies have decided that they are going to be an integrated drug development company, and have avoided questions like ‘at what point does this program turn cash-positive?’” said Earl. Nadeau added that what also puts off investors is the inability of some technology companies to predict their earnings reliably.
What have equally fallen out of favor, both among equity investors and pharmaceutical companies, are target discovery companies, Earl said, unless they deliver “highly meaningful and biologically significant” targets. Because big pharma can only take a small number of targets into drug development, it is looking for truly validated targets, he said. For that reason, companies developing a depth of expertise and intellectual property in one particular disease state “are still quite attractive.”
But even with convincing stories, proteomics companies — both public and private — might have a difficult time raising new capital. In 2000, five years to product launch did not seem too long. Now, “a product that is going to be approved tomorrow is too far away,” said Nadeau.
Not only have stock market investors become impatient for returns, their tolerance for risk has also dropped considerably. The downside is that they might miss out on companies with promising products, for example protein therapeutics, he added.
Apart from wary investors, a major stumbling block on the way to commercializing proteomics involves questions of intellectual property. For example, several companies hold rights to different aspects of the process required to bring a therapeutic protein to market — one company might own the gene, another the protein expression system, and a third the isolated protein, said Steven Kelber, a lawyer and partner with Piper Rudnick in Washington, DC. As a result, negotiating a mutually beneficial licensing arrangement can become a challenge.
In addition, Kelber explained that obtaining a patent on a protein requires not just that a researcher isolate the protein, but also that the investigator define a specific utility for it, such as using it as a disease target. But once a protein has been patented, it may be difficult, if not impossible, to get protection for the antibody that binds to it, he said. Once the protein or antigen is isolated, Kelber said the law considers an antibody an “obvious” invention, even if it turns out to be the useful product in the end.
On the technology side, Kelber cautioned that the reach-through licenses many technology companies offer pharmaceutical companies for their research tools are not as lucrative as they may seem at first sight. Although the potential exists for obtaining royalties from drugs the pharma company produces with the help of the proteomics company’s technology, the payoff might come in 10 years, if at all, he said. Theses payments might not even be enforceable, because the patent on the technology does not cover products discovered with it. “When push comes to shove, one or two percent of a successful pharmaceutical is a lot of money, and the law doesn’t support imposing that kind of royalty on something that the patent just doesn’t cover,” he said.
So what does it take for proteomics to prove that it is more than just hype? “What would validate the whole process,” said Kelber, would be to start with the gene and the protein, determine its three-dimensional structure and interactions, identify interfering molecules, take them through clinical trials, and receive an approved drug. “That hasn’t happened, and until that happens, all these bits and pieces remain suspect.”
But the panel’s comments were not all doom and gloom. Although a degree of skepticism is warranted, taking risks is unavoidable if you want to invest in early-stage biotech companies, Earl said.
“If all that Wall Street wants to hear about is companies that have current revenues and real profits, we might as well invest in forestry,” he said. “We need to be willing to absorb some losses in the near-term for the promise of having a blockbuster drug that makes your company worth a billion dollars.”
— JK