Focus and Funding Give Sorrento Mesa Biotech Firm a Head Start : Research: Armed with technology from the company that spun it off, La Jolla Pharmaceutical has wooed $12 million from increasingly wary venture capitalists.
Unlike many of the 72 other biotechnology firms in San Diego, La Jolla Pharmaceutical Co.’s researchers are not planning to discover and market a cure for cancer or AIDS. At least not yet.
Instead, researchers at this new company, based in Sorrento Mesa, are focusing their technology on creating two genetically engineered drugs for patients suffering from lupus erythmatosus and myasthenia gravis, two diseases that cause the immune system to go haywire by producing antibodies that attack the body’s own cells.
It was that specific focus, along with a well-respected management team, that in September won La Jolla Pharmaceutical $12 million in start-up funding from venture capitalists at a time when such financiers are tightening their purse strings.
La Jolla Pharmaceutical is not a ground-zero start-up company in the strict sense, because it inherited some of its core technology from Quidel, a 7-year-old pharmaceutical firm that spun off its therapeutic division to create La Jolla Pharmaceutical. Having a chemical compound in hand that had already produced some promising results in tests on mice “was key to our success in terms of getting investors right now,” said Joseph Stemler, president of the company.
“The biotech market has gotten a lot tighter than it was three or four years ago, and people are looking more for specific products to accomplish specific ends, as opposed to just basic concepts,” he said.
Financial advisers joke about it now, but there was a time when any company that put the name of a prestigious doctor or scientist on its stationery could get money just for an intriguing idea on how to cure a disease.
“If you said to a group of investors, ‘We’re going to cure cancer and here’s how we’re going to do it,’ and the person saying it was from a leading university, and the academic community thought it was an interesting approach, you could raise money,” said Ted Greene, president of Amylin Corp., a local biotechnology start-up firm involved in diabetes research.
“What people didn’t understand is that ideas are a dime a dozen. I could spend all afternoon listing ideas of how to cure cancer,” Green said. “But each one is like putting a man on the moon. It takes a real quality management team to translate that idea into a working product.”
Investors have become increasingly wary over the past few years. The realization that a good idea is not nearly enough to sustain a technologically complex biotech business, along with the sobering effect of the stock market crash of 1987, have narrowed the capital markets, making less money available for risky start-up companies.
As a result, enterprises such as Quidel are beginning to spin off a second generation of biotech companies that are, in general, more sophisticated in their approach, said G. Steven Burrill, national director of accounting firm Ernst & Young’s high-technology group.
The ability of La Jolla Pharmaceutical to attract $12 million in funding “is a very positive statement that the investment community thinks highly of them,” Burrill said.
Of the $200 million to $225 million invested by venture capitalists in biotech companies in 1989, very little was raised in increments larger than $10 million, Burrill said. La Jolla Pharmaceutical’s financing represents “both a big piece of the total and a big single piece of funding against an average of the other firms” also competing for money, he said.
In the past few years, San Diego has become one of the nation’s biotech hot spots, thanks in part to the quality of such research institutions as the Scripps Clinic and Research Foundation, the Salk Institute and UC San Diego.
A regional comparison of biotech companies nationwide by Ernst & Young ranks San Diego fifth in the number of companies headquartered in the area (73), sixth in the number of people the industry employs (2,137) and ninth in the amount of revenue its local public companies generate ($28.5 million). In each category, the San Francisco Bay Area ranked No. 1.
Ernst & Young marketing director Karen Johansen said a relatively small amount of revenue was generated last year in San Diego because so many biotech firms are at the start-up level. But, with 64% of the San Diego biotech companies surveyed having matured to a point where they have a product for sale, revenues are expected to rise significantly in the next couple of years, she said.
“We’re getting out of the love period with biotech companies,” said Denise Gilbert, an analyst with Montgomery Securities in San Francisco. “There was almost a feeding frenzy at one point, where almost any company doing something biotech and pharmaceutically related could go public. But we got to the point where the public markets were saturated with biotech companies.”
It took Quidel, which was founded by Scripps researcher David Katz, seven years and about $25 million to identify, isolate and develop the chemical compounds on which the fate of La Jolla Pharmaceutical now depends.
In that time, Quidel has grown from a small lab on Torrey Pines Road, employing 12 researchers, to an industrial complex with 220 employees, where about a dozen diagnostic test products, including a home pregnancy kit, are produced.
Despite some negative publicity after an employee was sentenced to an honor camp for poisoning the office coffee pot and after another researcher was accused of cloning an off-limits viral gene, Quidel was able to successfully weather its own start-up phase.
Last year, Quidel’s annual sales reached $11.5 million, enabling the company to finally turn a profit and prompting its board of directors to decide to spin off a new company to focus solely on developing drugs for lupus, a sometimes fatal disease that affects the skin and kidneys, and myasthenia gravis, which causes extreme weakness and muscle fatigue.
“Quidel was becoming self-sufficient financially and could not afford to pour millions and millions into La Jolla Pharmaceutical,” said Stemler, the president. Besides, he added, “investors in La Jolla are willing to take higher risks for higher returns, while Quidel’s investors tend to be more conservative.”
It took La Jolla Pharmaceutical eight months to raise the $12 million needed to bring the company to a point where it could begin conducting toxicology tests on the two drug compounds and prepare for the lengthy human trials required before they can win Federal Drug Administration approval.
The group of more than 10 venture capitalists received two-thirds equity in La Jolla Pharmaceutical for their $12 million, said Bill Engbers, a manager with Allstate Venture Capital in Northbrook, Ill., which invested $2 million in the company.
“The team was going after an attractive product that not a lot of people are pursuing,” Engbers said. “They have very prominent technology, a full management team including 10 Ph.D.s, an accomplished CEO and world-class facilities. Also, a lot of money had already gone into it. Previous investors had taken a bit of the risk out of the situation.”
Although a few other companies are trying to find a cure for lupus, La Jolla Pharmaceutical appears to be in the lead, Engbers added. That advantage naturally attracted the interest of venture capitalists, who generally look to make five times their investment in five years.
But the success or failure of La Jolla Pharmaceutical has implications for San Diego that go beyond just the pocketbooks of its investors.
“It sure is exciting for San Diego to think of all the money that is being poured into start-ups,” said Bill Otterson, director of UCSD’s CONNECT program, an organization that tries to link technologically oriented entrepreneurs with potential investors and management sources.
“If 50% of the companies planning to become pharmaceutical manufacturers made it, and if each of them employed 1,000 people in the next five or 10 years, just think what it would do to San Diego,” he said. “If only a few succeed, San Diego is going to become a very important center for pharmaceuticals.”
