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DBL%20Hendrix%20small.png College chemistry, 1983

Derek Lowe The 2002 Model

Dbl%20new%20portrait%20B%26W.png After 10 years of blogging. . .

Derek Lowe, an Arkansan by birth, got his BA from Hendrix College and his PhD in organic chemistry from Duke before spending time in Germany on a Humboldt Fellowship on his post-doc. He's worked for several major pharmaceutical companies since 1989 on drug discovery projects against schizophrenia, Alzheimer's, diabetes, osteoporosis and other diseases. To contact Derek email him directly: derekb.lowe@gmail.com Twitter: Dereklowe

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September 11, 2008

US and UK Biotech: Growth and Form

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Posted by Derek

There’s an interesting editorial in Nature Biotechnology on a role-playing exercise that took place recently in London. The UK government (in the form of the Bioscience Futures Forum) asked a University of London simulations group to work out what would happen to two identical companies in England and in the US. These would be university spin-offs with promising oncology compounds that had already shown oral activity in tumor models. (Here's the site for the whole effort - I have to say, it looks like an awful lot of effort for a two-day simulation).

What happened? Well, things diverged. The US version of the simulated company was able to raise more money, had better access to collaborations with larger companies, and better chances of going public by the end of the simulation. That gave them a broader platform to deal with setbacks in the original compound program. Meanwhile, the UK company faced this:

. . . the biotech finance marketplace in the United Kingdom is weak. AIM has little liquidity and virtually no follow-on market. Preemption rights allow existing shareholders to block potentially diluting but opportunistic fundraising rounds, such as private investments in public equity. And there is little access to debt capital for biotech firms.

The game also suggests that UK management and investors have mindsets adapted to constrained financial circumstances. They design businesses to fit the financial environment rather than seeking the environment that their business needs. They discount early valuations because of the inflexible later-stage financial circumstances. Their low expectations become self-fulfilling prophecies. In contrast, US management looks to build a sustainable business from the outset, and investors get higher returns as a consequence.

What I found interesting about the editorial, though, wasn’t these conclusions per se – after all, as the piece goes on to say, they aren’t really a surprise. (That makes you wonder even more about the time and money that went into this, but that's another issue). No, the surprise was the recommendation at the end: while the government agency that ran this study is suggesting tax changes, entrepreneur training, various investment initiatives, and so on, the Nature Biotechnology writers ask whether it might not be simpler just to send promising UK ideas to America. Do the science in Great Britain, they say, and spin off your discovery in the US, where they know how to fund these things. You'll benefit patients faster, for sure.

They’re probably right about that, although it’s not something that the UK government is going to endorse. (After all, that means that the resulting jobs will be created in the US, too). But that illustrates something I’ve said here before, about how far ahead the VC and start-up infrastructure is here in America. There’s no other place in the world that does a better job of funding wild ideas and giving them a chance to succeed in the market. The startup culture here a vital part of the economy and a great benefit for the world, and we should make sure to keep it as healthy as we can.

Comments (13) + TrackBacks (0) | Category: Business and Markets | Who Discovers and Why


COMMENTS

1. Ed on September 11, 2008 7:42 AM writes...

Two months after the event, and they still haven't posted the executive reports on the BFF website.......says a lot about Biotech leadership in the UK.

Permalink to Comment

2. processchemist on September 11, 2008 7:53 AM writes...

And UK is heaven on earth about biotech funding, if you look at continental europe. In two cases I know about, both the spinoff biotechs failed in their search for funds and invertors, and only an interest in their patents gave them some money to go on with their projects...

Permalink to Comment

3. Wavefunction on September 11, 2008 9:08 AM writes...

"Do the science in Great Britain, they say, and spin off your discovery in the US, where they know how to fund these things."

Case in point- The Manhattan Project
Second case in point- Penicillin

Permalink to Comment

4. Retread on September 11, 2008 12:47 PM writes...

Third Case in point: Computerized axial tomography

Permalink to Comment

5. Hap on September 11, 2008 2:27 PM writes...

I'm not clueful here, but what rights do stockholders have? Particularly with startups, where initial investors are taking a substantial risk, it seems the ability of the company to dilute your stock not only gives the last ones in much more power than the initial funders, it also means that even if you invest at the beginning of a potentially successful company, you have no idea what your likely benefit is at the other end (because you may own 10% of the company or 0.1%, and thus receive a proprtionate amount of the profits). You are now dependent on the ability of the company to estimate its funding needs and their need for further funding for your yields, in addition to the other sources of uncertainty.

Sometimes, voting to dilute your stock is better than losing its value entirely, but it seems that if you have no say in such maneuvers, there is very little reason to invest in startups. If your money gives you no say in directly relevant financial issues and you have no idea what the yield will be if the company is successful, there seems to be no point in investing in a startup.

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6. Jason on September 11, 2008 6:20 PM writes...

"Sometimes, voting to dilute your stock is better than losing its value entirely, but it seems that if you have no say in such maneuvers, there is very little reason to invest in startups. If your money gives you no say in directly relevant financial issues and you have no idea what the yield will be if the company is successful, there seems to be no point in investing in a startup."

VC will have locked in rights, majority stake. VC effectively own the company so will do what's best for themselves. Not worried about bogus CEO who is
dependent on them.

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7. NJBiologist on September 11, 2008 7:04 PM writes...

@Hap--I spent some time working for a company which did something like 5 PIPEs in 7 years. I don't management ever bothered to ask the shareholders whether they were OK with this. (The PIPEs seem to have stopped, now that shares are well under $1.)

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8. herve on September 12, 2008 11:00 AM writes...

I am not a specialist of biotech but of IT. However I am passionate about silicon valley and start-ups and I have studied a lot SV vs. Europe. Both in IT and LS, I have noticed how small the European success stories are. What are the European Genentech, Amgen, Google, Cisco and so on? Except SAP, we just have nearly nothing. I have the feeling I meet a lot of resistance where I talk this way so I wrote a book (www.startup-book.com). My main thesis is that the individuals and the culture matter: risk taking, facing uncertainty and tolerating failure. I am not sure it is about the barriers (legal, fiscal, financial) that we claim we have here in Europe...

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9. Still Scared of Dinosaurs on September 12, 2008 1:15 PM writes...

I worked at a company that by most measures would be considered a success story for the American model. Yet when all was said and done two things were clear: (1) The basic pattern was "Blow a lot of smoke and then sell out to the big guys" and (2) the American model ended up putting some very promising technology in the hands of some people who were not up to the task of developing it.

My suspicion is that VCs are pretty good at getting the best deal on their side and not very good at ensuring they put the best people on the other side - at least not in biotech.

Permalink to Comment

10. Hap on September 12, 2008 1:34 PM writes...

It would seem that more than anything, the Europeans would do better if they generate sources of funding for medium- to late-stage startups. It might also be a problem for startups if the debt obligations the US has compiled (government/promides entitlements/mortgages, etc.) impinge on the credit situation - if our financing becomes difficult to get, at least some of our advantage in developing technology for market will disappear.

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11. Anonymous BMS Researcher on September 13, 2008 6:00 AM writes...

In the Europe a lot of biotech startups got their seed money from the government, but the correlation of what impresses bureaucrats and politicians with what's gonna fly in the market is not terribly high.

Permalink to Comment

12. processchemist on September 13, 2008 11:42 AM writes...

#11

The correlation is not so bad. The main problem is to put projects in words that a bureaucrat can understand, or at least that his consultants can understand. Not so easy when (and it happens) the consultant is an electronic engineer, called to valuate anything from new irrigation systems to drug discovery.

Permalink to Comment

13. Chris on September 15, 2008 10:32 AM writes...


On the subject of war games and UK innovation: the jet engine?

Permalink to Comment

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