Why Bio Businesses Are the ‘Dot-Coms’ of the 21st Century

The mantra for investors today may be the ubiquitous “dot-com,” but long term the magic word for the most important industry of the 21st century will surely be “bio,” as in biotechnology, biomedicine, bioengineering.

That judgment is based on the fact that more good science work is being done today by private companies in the bio field than ever before. And it’s based on the fact that new forms of finance and corporate investment are arising to provide wherewithal for research and development.

A little background. Biogenetics, a name for the development of engineered gene compounds that mirror actions of genes occurring naturally in plant, animal and human life, has transformed the pharmaceutical and chemical industries in the last 15 years.

In the early years of the new century, genetics promises to transform not only medicine and agriculture, curing diseases and increasing food supplies, but also society’s very laws and ethics--as abilities to clone and transform life (male mice have just been cloned by University of Hawaii scientists) give rise to questions as well as wonder.

And it promises to be a time of success for investors and participants in biotech companies. Biotech has been here before. A dozen years ago, before the Internet was ever thought of as a business tool, visions of biotech wonder drugs lured investors into small firms that frequently disappointed them. Investors and entrepreneurs learned the painful lessons that wonder drugs are not overnight sensations, biotech firms need lots of money for lengthy clinical trials, and failure is frequent.

So money dried up, and the story of the biotech industry in recent years has been of a few large companies that have managed to survive--Genentech, Amgen and Chiron among them--and about 400 small companies desperately trying to raise enough capital and get through the seven years of clinical trials it takes to get a new drug approved.

Yet better ideas are cropping up. In a significant action last week, Roche Holding, the Switzerland-based pharmaceutical giant, exercised its long-standing option to acquire the remaining one-third of Genentech it didn’t already own, but then said it would sell 19% of Genentech’s shares back to the public. That will create a separate Genentech stock so that the San Francisco-based company can maintain independent operations and offer incentives to employees.

Venture capitalists are talking about Corixa, a small Seattle-based company that is able to finance its research into numerous genetic vaccines because it has formed 20 partnerships with larger companies for a total of roughly $300 million.

Corixa has partnerships with SmithKline Beecham, the $13-billion-sales British drug giant, to finance research on ways to attack the genetic characteristics of prostate, ovarian, colon and breast cancer; tuberculosis; and other diseases. The big company funds the research; Corixa does the work; both will share the proceeds when and if successful products are developed and get through testing.

Meanwhile Corixa, which also has partnerships with Abbott Laboratories of Chicago, Diamed of Switzerland, Heska of Fort Collins, Colo., and other companies, can operate its business securely on $18 million in annual research payments and a comfortable $42 million in equity capital.

“Corixa is a new and favorable model for biotech financing,” says Drew Senyei, managing partner of Enterprise Partners, a San Diego-based venture capital firm that gave the company early backing five years ago.

That model of numerous research partners is being demonstrated also at Millennium Pharmaceuticals of Cambridge, Mass., a 6-year-old public company with $133 million in revenue. Millennium has formed alliances worth $1.1 billion with large U.S. and European companies. It does research for Bayer of Germany on genes thought to have effects on important illnesses, and also works on medical devices for Becton Dickinson of New Jersey.

What is new is that Millennium and Corixa work under revenue-sharing partnerships. Formerly, big drug companies financed research in biotech but paid only royalties to the smaller companies. “Royalties didn’t bring in enough money to allow biotech start-ups to build up capital of their own--or to make it attractive for venture capital companies to invest in them,” says Stan Fleming, a partner of Forward Ventures, a San Diego venture capital firm that also backed Corixa.

Fortunately, recognition is dawning that long-term investment is needed for the proper development of this new industry. The ideal would be for institutional investors, particularly pension funds with longer-term needs for returns, to make equity investments with five- to seven-year terms. But nothing like that has emerged yet, although individuals with a background in medicine and business are attempting to do so.

For example, Sariba Ghodsian, a Los Angeles-based scientist, is looking to place investments from T.L. Ventures, a Philadelphia firm, in biotech start-ups. Charles Troe, a partner in Barrington Associates, the investment firm, is an “angel,” or early-stage investor, in biotech companies.

Interest is rising, in short, and will rise further as completion of the human genome project, the government and privately funded effort to map the 80,000 genes of the human body, opens up new possibilities in the next few years.

Meanwhile, the use of biogenetic science is already a far more pervasive force in agriculture and medicine than is generally understood. For example, genetic research led to the discovery of Celebrex, the successful new anti-arthritis drug that was brought out by Monsanto, the 98-year-old St. Louis-based chemical company. Monsanto has invested more than $2 billion over 15 years to transform itself into a producer of biology-based “life science” products for agriculture and human medicine. Other chemical companies, DuPont of Delaware and Hoechst of Germany, have similarly changed their business.

And many more companies will change in the years to come as bioscience provides the basis for the most important industries of the 21st century.

* MORE ON BIOTECH: Finding land may be as important as raising capital in developing a biotech industry in Los Angeles. Monday in The Cutting Edge.