Feb 1, 2011
Clovis Oncology raised a $145 million Series A round in 2009 with exactly zero programs in development. How was this possible? Clovis has an impressively experienced founding team, who investors believe will replicate past success for a lucrative exit. Clovis is obviously an exceptional case, but for many investors the leadership team of an entrepreneurial venture is more important than even the idea or product to be developed. However, not all great ideas come from seasoned veterans. If you’re a biotechnology innovator, do you really need to dilute your founding equity by adding more founders? Biotechnology incubators provide innovators with an opportunity to move a technology forward with minimal business administration hurdles. Incubators also provide laboratory facilities and support for the science itself. These resources minimize administrative burden and allow the scientists to focus on science and, hopefully, maximize success.
It is estimated that it costs a biotech company upwards of $1 billion to promote a drug through pre-clinical and clinical trials to approval . This cost does not represent direct costs associated with an individual drug, but rather a net cost resulting from the attrition of unsuccessful drug candidates. As a result, stakeholders across the industry seek to improve drug development efficiency. Biogen Idec, one of the largest and most innovative biotechnology companies in the world, has created the Biogen Idec Innovation Incubator (BI3) as one way to approach this problem. BI3 is a funding and support division of Biogen Idec that identifies promising academic discoveries and assists inventors with founding an independent company. These companies start with as little as an inventor, scientist, and a single lead drug candidate.
BI3 helps innovators outline a realistic research plan that can be executed on the time frame and monetary scale of the BI3 investment. This is typically about three years and less than $10 million. As BI3 companies approach their graduation period, Biogen Idec assesses their success in meeting predetermined milestones and the viability of lead candidates. Attractive leads may help a parent company be optioned and acquired by Biogen Idec, while those deemed either unsuccessful or uninteresting for Biogen Idec will be assisted in presenting their work to venture firms to potentially obtain outside funding. BI3 provides its incubator companies with more than just funds and facilities, all of the companies’ administrative operations are handled by the BI3 system including payroll, legal, and human resources. Their offices and laboratories are located in close proximity to the Biogen Idec laboratories so they also have the opportunity to tap into the knowledge base of the scientists working in their labs.
BI3 currently supports two companies, Escoublac and Provasculon. Focusing on diabetes and peripheral artery disease, respectively, they represent opportunities for Biogen Idec to expand into areas outside of their capability and expertise. Companies that join the BI3 program are generally focused on a single molecule that has shown early promise in a small-scale animal study. BI3 seek molecular entities programs that represent a unique and potentially transformative approach in a specific therapeutic area, rather than more revolutionary and broadly applicable platform technologies. The BI3 program is built upon the success of their case study company, Neostasis, and their work with the T15 antibody, which binds phosphorylcholine and contributes to the auto-antibodies found in autoimmune disease. Neostasis’ work in animal models of lupus showed enough promise for Biogen Idec to exercise their option and bring the proprietary molecule in-house. Given the initial success and the promise of the current portfolio companies, Rainer Fuchs, director of BI3, is optimistic for expansion of the program and suggested that it might grow to support as many as five companies. He also pointed out that the vast majority of their portfolio companies are products of personal networking (a result sure to disappoint reclusive minded scientists).
Another place where personal networks and connections have driven the majority of business development is the Accelerator Corporation in Seattle, WA. Like BI3, Accelerator Corp. is an incubator for nascent biotechnology companies and serves a model for stake holders to minimize the cost and risk of drug development. Accelerator, unlike BI3, is a joint venture between a number of different venture investing groups and focuses on promising platforms rather than lead molecules or therapeutic programs. ARCH Venture Partners, Olympic Venture Partners, Amgen Ventures, PPD, Inc., WRF Capital, and Alexandria Real Estate Equities all contribute to the larger Accelerator funds, which are now in their third round.
In much the same way that BI3 companies gain from the scientific network and expertise at Biogen Idec, Accelerator companies are supported scientifically by affiliation with the Institute for Systems Biology (ISB). Founded by Leroy Hood, the ISB focuses on genetics, proteomics, and immunology, which jives well with the scientific bias of Accelerator companies. ISB scientist do more than just support Accelerator, in one case their innovation led to the formation of their own Accelerator company. Accelerator also provides advanced facilities and administrative support staff. The primary difference between BI3 and Accelerator is that instead of being funded by a single agent, Accelerator is the product of a number of different venture investing groups. For the investment groups, Accelerator’s activities are a means of risk mitigation. Biotechnology start-ups are expensive and can burn through millions of dollars without a whiff of revenue. When companies like these have independent management, there can be a tendency to “drink the Kool-Aid”, denying scientific shortcomings and postponing an inevitable liquidation of assets. This result incurs greater losses for increasingly frustrated investors. By establishing an agnostic administration across the different scientific investments, failing companies are disbanded sooner and losses reduced.
Accelerator is presently incubating two small biotech companies, XORI and Mirina, based on technologies for unique protein production and microRNA respectively. Since establishing their first investment “class” in 2003, Accelerator has incubated eight companies. Currently still recruiting for their third class, over Accelerator’s first two investment series the incubator saw four of their six projects graduate to become independent entities, supported by Series A funding primarily from Accelerator’s core investment groups.
For inventors interested in obtaining funding and support through incubators like these there is an opportunity to retain substantial equity as founders and through incentive stock options. For Accelerator companies, founders can retain as much as 20% even after some $23 million investment. If those founders had obtained financing through traditional VC funding they might retain barely more than 4% equity. This gain in equity retention comes at a price; there is no guarantee that the company will be selected to for additional funding after the initial incubation period. But for founders who are confident in their technology and wish to gain valuable insight and experience, it can be a unique opportunity.
1. Tufts Center for the Study of Drug Development (http://csdd.tufts.edu/)
2. Biogen Idec Innovation Incubator (http://www.biogenidec.com/bi3/)
3. Accelerator Corp. (http://www.acceleratorcorp.com/home)
4. Institute for Systems Biology (http://www.systemsbiology.org/)