June - 2001 - issue > Cover

What are the most compelling sectors for investment in biotech today? There are really two kinds of companies in the biotech sector. First are the product companies, which are developing new pharmaceuticals, and are currently in clinical trials. Second, there are the companies that are developing technologies and tools that are sold to biotech and pharmaceutical companies to accelerate their drug discovery efforts. And bioinformatics companies fall into that second category.
The product companies are the most exciting in the next five years because of the number of new drug candidates that are in clinical trials now that are in later stages of human testing. The expectation is that of the 350 drugs that the biopharmaceutical industry has put into phase three clinical trials, at least a third will eventually make it to market. Potentially we could have over 100 new biotech drugs in the marketplace in the next several years. So a lot of diseases that have so far been unmet or poorly addressed — from cancer to cardiovascular disease — could lead to a broad range of companies (both public and private).

If you look back over the history of biotech, the ability to produce novel pharmaceuticals is really what has been rewarded by the financial community. Companies like Amgen or Genentech have gone from a $100 million market cap at IPO to two or four billion in market cap on the basis of a single successful drug.

One of the most exciting areas that is still five to ten years away is the field of proteomics — which is the ability to understand the proteins that will be derived from understanding the human gene sequence. Because a small portion of all of the human genes encode for valuable proteins, we have the difficult task of going from identifying a gene to producing a protein. Unlike genes, which are sequenced in a linear fashion, proteins are three dimensional in their structure, and they fold in many different ways. The field of proteomics is where a lot of money is being invested, and that’s the long-term goal for the industry — to identify the proteins that are implicated in disease and be able to address those proteins.

The tools companies are interesting as well, but there have been a lot of tools companies that were formed and went public in the biotech market of 2000 that have failed to deliver on expectations. A lot of those companies believed that they would have many repeat customers that would need their products, but thus far they’ve been unable to deliver on revenues. Some of them will make it, for example companies that are developing databases of gene expression, but now there are a lot of companies pursuing that. The pharmaceutical companies are subscribing to many of the tool companies because they are anxious to get the latest technology, but there is a high risk for tools providers of being rendered obsolete by another new approach.

Interestingly, some tool companies are shifting over to developing drugs. There is a public company called Aurora, which has developed ultra high throughput screening systems. They have built a successful business in that area but they are recognizing that the growth potential isn’t very high, so they are trying to turn their business into a drug discovery business.

As more and more VCs gravitate toward this sector, given that it is in its early stages, is there the potential for over-investment ? There are always sub-sectors that get hyped. There is certainly a risk, but as a whole the industry has been relatively under-funded in the last five years. The capital that is being invested today is barely enough to keep pace with the rate of change and the discoveries that are talking place. We’re still faced with too many good ideas and not enough money.

What would be a biotech business model that you or the industry is dying to fund right now — what’s the “killer app” that everyone is looking for?
It comes down to having a cure for an important disease. So far we haven’t really cured any diseases. We have replaced deficient proteins, as Amgen has done with Epogen, we have found ways to dissolve clots in the arteries as Genentech did with TPA, but we have not solved the underlying basis of disease. We have a very long way to go.

We have an aging population, and pharmaceuticals continue to grow as part of our GNP.

Are there some breakthroughs in the near term?
There are promising approaches. The people that have committed their lives to the biotech sector certainly believe that they will make a difference eventually. I think we will cure some of these diseases in the next five to ten years.

Will many of the currently unprofitable biotech companies turn profitable in the near term?
There are currently 25 to 30 companies that are profitable in the biotech industry and that number is going to double in the next year, so the trend line is very positive. But it takes companies a year or two after they get a drug to market to turn profitable, and to get that drug to market takes ten years.