FierceBiotech's 2010 Fierce 15

Every year FierceBiotech publishes its list of the top 15 up and coming biotech companies.  Anyone can vote for his or her favorite company making the list rather subjective, but for the purposes of this blog entry that does not really matter.  The main point I want to stress is the fact that 11 of the 15 companies (listed below) are university spinouts (according to my count).  The remaining 4 companies were either created de novo or were corporate spinouts. 

• Accerlon: Columbia, Harvard, MSKCC
• Adimab: Dartmouth, MIT
• Anchor Therapeutics: Tufts
• Catabasis: Harvard
• Dicerna: City of Hope
• Eleven Therapeutics: Harvard, UAB, Stanford, MIT
• iPieran: Harvard, Children’s Boston
• Kymab: Sanger Institute
• Plexxikon: NYU
• Tetraphase: Princeton
• Gelesis: MIT 

I looked at a number of these companies as investment opportunities over the past year and believe that the above list has a number of fantastic companies.  But, there are tons of other companies out there that could have made equally strong cases to be included in the Fierce 15.  So what separates these 11 university spinouts from companies not included in the Fierce 15? 

Scientific Talent:  Many of these companies were founded by leading academics that are both thought leaders in their respective fields and have also had prior entrepreneurial success.  For instance, Joseph Schlessinger, the founding scientist of Plexxikon, is one of the world’s top kinase researchers and previously founded another kinase-focused startup, Sugen (sold to Pfizer).  VCs tend to be attracted to such scientists because they understand the challenges associated with creating a startup, are experts in their respective fields, and are able to attract top researcher scientists to their startups. 

Business Strategy: Of the 11 companies, almost all of them are real companies, not virtual.  VCs are on the hunt for startups that have multiple shots on goal and/or are developing a platform technology.  Supporting the development of multiple products is way more expensive than for a single asset, but diversification provides a safety net for investors.  Also, products can be partnered or licensed which results in non-dilutive capital generation for the company.  

Management Talent:  VCs like to invest in repeat entrepreneurs with significant domain expertise.  To use Adimab as an example, the CEO, Tillman Gerngross, is a former Dartmouth Professor and a co-founder of GlycoFi (sold to Merck).    

Hot Technology Area:  There aren’t a lot of me-too or reformulation companies on the Fierce 15 this year.  VCs are looking for creative ideas in the areas of antibody discovery, iPSC, kinases, and protein-protein interactions.

Ambit Biosciences > Levering Non-Dilutive Capital

On Monday, I read about a company called Ambit Biosciences, which had filed its S-1 to raise up to $86M in an IPO.  Ambit Biosciences is a biotech company that is developing small molecule kinase inhibitors and employs a novel and proprietary kinase profiling technology, KINOMEscan. 

Ambit is both a cautionary tale and a reason for biotech optimism.  The current iteration (the company’s third) of Ambit – screening kinases for large pharma service clients and developing its own internal programs – is a far cry from the company’s original form in 2000 when it was a protein database company.  Ambit literally got two do-overs, something unheard of in the biotech industry.  Why did Ambit get a lifeline that other biotech companies never get? 

Ambit developed a unique services business that enabled it to generate significant amounts of non-dilutive capital that could be used to support internal programs. The proprietary KinomeScan assay (for those interested in learning more) can screen170 kinases at a time against 10 compounds per day.  Several pharma customers (Astellas, BMS, Cephalon) paid greater than $70M in aggregate upfront dollars to have access to the KinomeScan technology.

The services business generated income for Ambit through a variety of deal structures with pharma partners, including upfront payments, equity for services performed, license rights to hits, milestone and royalty payments, and others.  The complex service deals gave Ambit the ability to generate non-dilutive capital without giving up significant upside potential, generated additional platform validation through the work of partners, and bought breathing room for investors to weather the market downturn over the last three years.  

In general, service businesses tend to distract management from the core function of a venture-backed company – that is to develop a strong lead product, validate it, and then sell it or take it to market (rare in the biotech world).  Ambit deviated from that path and concurrently built a services business and worked on their own products, an incredibly challenging feat.  Service contracts with pharma companies are typically lumpy and unpredictable, which is why Ambit’s S-1 registration is all the more remarkable.