To follow up on a post we ran in February 2006 on Biotech Valuations, I wanted to alert you to a recent series of postings on biotech valuations on sizz’s biotech blog. 

Sizz’s biotech blog says that in making valuations of biotech companies, a good valuation method is risk-adjusted net present value, which is described as follows:

Risk-adjusted net present value (rNPV) attempts to value a company by taking into account not only the future cash flows, but also the probabilities that those cash flows will even take place. This is especially useful for small biotechs that have not yet obtained FDA approval for a product. In using rNPV, we are able to find a company’s value while taking into account significant events that could affect the stock price (like moving from Phase II to Phase III trials).

NPV is the same as a discounted cash flow analysis. It finds the present value of a firm’s future cash flows. rNPV is similar. It is the present value of future cash flows, but those cash flows are adjusted by the probability of effect.

In a follow-up posting, sizz’s biotech blog states:

Risk-adjusted net present value is most useful for biotechs because it can place a value on an individual drug. This helps us out for small biotechs because most of these firms’ value is derived from drugs in their pipelines. With rNPV, we can find the value of each drug in a company’s pipeline, add them up, and get a value for the whole company. This could also be applied to larger biotechs, but rNPV really only values the pipeline, so we would also have to find a value for the drugs that are already marketed using a traditional discounted cash flow method.

Sizz’s biotech blog also provides in subsequent postings a specific example of how this valuation can be put into practice using GenVec, Inc.  In GenVec: Profile, sizz’s biotech blog profiles the company, discussing its risk factors and drugs.In GenVec: Potential Markets and Financials, Sizz’s biotech blog examines the potential markets for GenVec, which are the foundation for the valuation.

This series of postings provides a very informative overview to the art of biotech valuations, along with specific examples to show how the formulas can be applied in practice.   All in all, these entries are definitely worth checking out.

In case you missed it, The New York Times ran an interesting story yesterday: "A Challenge to Gene Theory, A Tougher Look At Biotech."

The New York Times article stated:

Last month, a consortium of scientists published findings that challenge the traditional view of how genes function. The exhaustive four-year effort was organized by the United States National Human Genome Research Institute and carried out by 35 groups from 80 organizations around the world. To their surprise, researchers found that the human genome might not be a “tidy collection of independent genes” after all, with each sequence of DNA linked to a single function, such as a predisposition to diabetes or heart disease.

Instead, genes appear to operate in a complex network, and interact and overlap with one another and with other components in ways not yet fully understood. According to the institute, these findings will challenge scientists “to rethink some long-held views about what genes are and what they do” . . . .

With that link now in place, the report is likely to have repercussions far beyond the laboratory. The presumption that genes operate independently has been institutionalized since 1976, when the first biotech company was founded. In fact, it is the economic and regulatory foundation on which the entire biotechnology industry is built.

The article goes on to state the following:

Evidence of a networked genome shatters the scientific basis for virtually every official risk assessment of today’s commercial biotech products, from genetically engineered crops to pharmaceuticals.

“The real worry for us has always been that the commercial agenda for biotech may be premature, based on what we have long known was an incomplete understanding of genetics,” said Professor Heinemann, who writes and teaches extensively on biosafety issues.

“Because gene patents and the genetic engineering process itself are both defined in terms of genes acting independently,” he said, “regulators may be unaware of the potential impacts arising from these network effects.”

Needless to say, the article was provocative.  Does this new finding that scientists don’t know quite as much as they thought they did really shake the foundations of biotechnology?  Does this now mean that biotech commercialization is actually putting the public at risk?

With all due respect to The New York Times, I can’t help but thing that this is "much ado about nothing."  The biotech industry may have some new challenges to face, but I hardly think that news of this research is going to have a significant impact on the industry.  So, scientists decide that they didn’t know as much as they thought they did–how does that change all the discoveries and innovation that have already come out of the industry?  Do these new findings really erase those achievements?  Of course not.

The New York Times pointed to a possible effect on previously granted gene patents as one possible effect of these findings.  While it is plausible to think that gene patents could be affected by this new research, I think it is a stretch to extend the reach of those findings much further.  But apparently everyone does not share that view–certainly not The New York Times.  It will be interesting to watch and see how this story unfolds in the future.

The California Stem Cell Report reported on the plan released by the California Institute for Regenerative Medicine ("CIRM") on how to distribute the $85 million in research money to twenty-five researchers. 

According to author David Jensen of the California Stem Cell Report, the plan "shed some light on issues related to have and have-not institutions, quality of grant recipients and spreading the CIRM wealth geographically around the state."  Jensen writes:

Under the plan, the awards would go to persons who hold fulltime, faculty-level positions at academic or non-profit institutions in California and who are "young," meaning in the early stages of their careers. Academic institutions with a medical school could submit four applications in support of new Ph.D.’s and two new physician-scientist faculty members. Institutions without a medical school would be limited to two applications. The grants would go for research, salaries and possibly educational loans. They are akin to Pioneer grants awarded by the National Institute of Health. . . .

The discussion of the faculty award program reflected some of the questions recently rippling through CIRM. Do the big, well-established programs continue to receive generous grants? How much should go to institutions without the reputations and facilities that UC San Francisco and Stanford have? Should the location of institutions be a consideration? Does spreading the money around mean that unworthy science is being funded?

These are questions that we as taxpayers should all be considering: how should the CIRM be dividing up all that research money?  Did Californians intend that young researchers should get the money and build their careers in part on this research money?  Or did taxpayers envision something different taking place?

I have mixed feelings on the issue myself. 

As a young attorney myself in my early thirties, I tend to believe that young professionals are in large part hungrier for opportunities than are more established professionals.  I am a hard worker, but let’s be honest–I really don’t aspire to be putting in the kind of hours I have been working the last three or so years in getting my business off the ground twenty years from now.  If I am still working that hard, it may have the effect of cutting my own life short.  In truth, I already feel like it has, and it has only been a little over three years–not twenty.   While there are late bloomers, i.e. professionals who really "bloom" as experts in their fields later in life, I think that by and large it is a fair statement to think that younger professionals will be more driven in the early years of their careers.

On the other hand, there is a good argument that the money should be distributed to those researchers who are already experts in the field so that they can do more research on the areas they built their life’s research on.  If you go back to the analogy of me as a young attorney, there is no doubt that in twenty years I will be much more expert in my field than I am today.  In fact, my expertise grows little by little each year. 

So, what’s more important: the "young drive" and "hunger" for success?  Or the years of establishing a career and developing expertise?  That seems to be the question grappled with in every field.  But should we be grappling with it here in distributing all of this taxpayer money?  Well, the decision seems to have already been made.  Now, it’s up to us as taxpayers to decide whether or not our tax dollars have been put to good use.

The blogosphere is buzzing today about Freeman Dyson’s article in The New York Review of Books titled, "Our Biotech Future."  In this column, Dyson describes a world where biotechnology predominates every aspect of life.

Among Dyson’s predictions are as follows:

Will the domestication of high technology, which we have seen marching from triumph to triumph with the advent of personal computers and GPS receivers and digital cameras, soon be extended from physical technology to biotechnology? I believe that the answer to this question is yes. Here I am bold enough to make a definite prediction. I predict that the domestication of biotechnology will dominate our lives during the next fifty years at least as much as the domestication of computers has dominated our lives during the previous fifty years.

Dyson further states:

I see a bright future for the biotechnology industry when it follows the path of the computer industry. . . . .Every orchid or rose or lizard or snake is the work of a dedicated and skilled breeder. There are thousands of people, amateurs and professionals, who devote their lives to this business. Now imagine what will happen when the tools of genetic engineering become accessible to these people. There will be do-it-yourself kits for gardeners who will use genetic engineering to breed new varieties of roses and orchids. Also kits for lovers of pigeons and parrots and lizards and snakes to breed new varieties of pets. Breeders of dogs and cats will have their kits too.

Domesticated biotechnology, once it gets into the hands of housewives and children, will give us an explosion of diversity of new living creatures, rather than the monoculture crops that the big corporations prefer. New lineages will proliferate to replace those that monoculture farming and deforestation have destroyed. Designing genomes will be a personal thing, a new art form as creative as painting or sculpture.

Few of the new creations will be masterpieces, but a great many will bring joy to their creators and variety to our fauna and flora. The final step in the domestication of biotechnology will be biotech games, designed like computer games for children down to kindergarten age but played with real eggs and seeds rather than with images on a screen. Playing such games, kids will acquire an intimate feeling for the organisms that they are growing. The winner could be the kid whose seed grows the prickliest cactus, or the kid whose egg hatches the cutest dinosaur. These games will be messy and possibly dangerous. Rules and regulations will be needed to make sure that our kids do not endanger themselves and others. The dangers of biotechnology are real and serious.

Dyson makes some interesting predictions in his article.  While many of them are very likely uses of biotechnology, others seem to take science a bit too far.  However, he does pose an interesting question for us all: what should be the future of biotechnology?  Where should we go with the science?  Should biotechnology be as integrated in our lives as high technology now is? 

These questions are, of course, far from new, but perhaps the reason they are getting so much discussion today on the blogosphere is the timing of them being posed again to us.  So much of what was envisioned previously in high technology has become a reality to us all in today’s world.  It’s a fair question to ask again: where will all of these novel biotech developments take us?  And, more importantly, do we as a society really want to go there?

Big-cap biotech stocks are no longer exceeding expectations on Wall Street, according to a report by Asx300.blogspot.com.

That report states as follows:

Shares of Genentech (DNA) the world’s biggest biotech by market cap, have declined 15% since reaching a 52-week high on Jan. 22. The stock fell 5% in June, even after a two-day surge last week. Amgen (AMGN) is down 19% for 2007 and 16% the last two months.Celgene (CELG) has dipped 13% since reaching an all-time high on May 22.  Financial returns aren’t the problem. Those three firms along with peers like Gilead Sciences (GILD), Biogen Idec (BIIB) and Genzyme (GENZ) regularly have double-digit sales and profit growth. Most are expected to continue doing so over the near term. Genentech has grown sales and earnings at least 36% in each of the last 10 quarters, but analysts expect growth to decelerate in each of the next four.

What is to blame for this change?

The report points to new challenges facing the industry such as the Food and Drug Administration requiring more data and causing more delays in drug approvals, and also to the new fears of generic competition, which traditionally were only an issue that big pharma had to contend with. 

These statistics provide a first glimpse at how biotech may be impacted by the newly proposed generics bill as well as some of the other issues currently facing the industry.  While factors other than these issues are likely affecting the stocks too, there is certainly reason for the industry to take note of how issues in the news may already be affecting sales of stock. 

The California Healthcare Institute ("CHI") is warning that the California’s biotech industry is at risk as a result of recent court decisions, according to the San Jose Mercury News.

The San Jose Mercury News reported:

[The organization was] critical of several recent Supreme Court rulings, including its decision in January in MedImmune vs. Genentech, which eliminated a longstanding requirement for businesses licensing another company’s patented technology.

The decision allows companies licensing such technology to challenge the patent without first having to breach their license agreement and risk being sued.  As a result, many biotech executives fear the ruling could trigger a flood of patent challenges.

In other cases, the report said, the Supreme Court has made it tougher for biotech companies to obtain court injunctions against companies that infringe upon their patents and to prove their technologies are novel enough to warrant patents in the first place.

According to the San Jose Mercury News, CHI also expressed concern about the patent reform debate in Congress and the potential effects of patent reform on the industry.  At the heart of its concern is the fact that biotech products take many years and significant expense to develop.  If biotech companies are forced to overcome additional obstacles, what will this do to the industry?

I agree with CHI that California’s biotech industry will be impacted by some of the recent decisions by the courts as well as by patent reform; however, I can’t help but think that CHI is focusing on the wrong issues.  In my view, the issues that pose the greatest risk for the biotech industry are not these recent patent decisions, nor patent reform, but rather the push for biogenerics and for adopting universal healthcare, both of which could have serious and even devastating consequences for the industry.  How will the industry survive and flourish in a world, where biotech companies are unable to profit from the next big blockbuster?  As an entrepreneur myself, it’s difficult to believe that biotech entrepreneurs will be out there launching new biotech start-ups to the same degree they are today without the promise of a big payoff at the end.  How many well-intentioned people would really do that to themselves?  As much as I enjoy what I’m doing in building my firm and practice, I’m not sure I would do it if you took away the profit potential.  It’s just too much work.

Don’t get me wrong–I am as concerned as the next person with the rising costs of healthcare and the challenges with obtaining affordable health insurance and medications.  When my former law firm closed its doors unexpectedly and decided to terminate my COBRA six months later, I was surprised to find myself uninsurable.  Then, I had the pleasure of paying full price for brand-name medications for a year as I struggled to get my firm off the ground in a bad economy.  I even became very ill at one point and found myself in the situation of not being able to go to the doctor due to the expense and the fear of being hospitalized.  Coming from a family of healthcare professionals, it was a shock to the system to experience first-hand the other side of the story and to realize how easy it was to find myself–when I was young and basically in almost perfect health–in the position of not being able to obtain the insurance I needed.

And, of course, now that I do have insurance, I just received a letter from my insurer that the prescription drug benefits are being slashed this summer as a cost-saving measure–a move that will likely hit me and a lot of other Californians in the pocketbook.

However, the flip side of argument is that the biotech industry is a for-profit industry, which is just not going to thrive if you take away the "profit" element.  You don’t have to be an entrepreneur to understand that reality. 

With all of the innovation coming out of the biotech world today, a profitable industry could be the difference between any one of us dying from a horrible illness and our being able to avoid getting sick altogether.

So, does CHI have the right focus?  I guess it is up to us to decide.  

In case you missed it, Google is not the only company making news for investing in biotech.  Pfizer has announced that it will be setting aside $10 million to invest in biotech companies. 

Terri Somers of Bend Weekly reported:

In a modern, tile-and-glass building on its campus on the San Diego coast, the pharmaceutical giant is planning to spend $10 million annually for at least the next five years, incubating promising innovations or ideas as they germinate into startup companies. The incubator’s board met for the first time in April and reviewed the initial applications from interested entrepreneurs. The incubator is set up to operate as a separate and distinct business unit from the drug company. But Pfizer expects to favor innovation that may one day help it strategically, either by providing new drug candidates or technologies that make finding drugs more efficient, said Catherine Mackey, a senior vice president of Pfizer Global Research & Development and head of the laboratories.

Tenants will have to agree to an upfront equity-share agreement with Pfizer. When research is done, Pfizer will have an option to acquire rights at a fair market price. Or the incubator could spin out the company as an independent businesss.

There has been significant commentary in recent years about the failure of big pharma to generate a pipeline of new products.  Evidently, this new move by Pfizer is an attempt to secure a pipeline.

Is Pfizer’s new strategy good for biotech? 

Obviously, it does provide some benefits to start-ups who want to get up and running, but based on the article, it appears that the strategy will tie the hands of those start-ups as they go forward, since Pfizer will have the first option to acquire the rights.  As a transactional attorney, I wince at the idea of giving up your bargaining ability before you even get off the ground.  I can only imagine representing such a client down the road and trying to negotiate the deal with Pfizer to transfer the rights.  No doubt it would be a frustrating experience at best.

Does Pfizer’s move signal the launching of a new trend in the biotech world, and if so, what will be the industry impact of such a trend?   Could it ultimately result in a stifling of innovation?  Only time will tell for certain.  Those of us in the industry will be watching to see.

To follow up an earlier posting from April 2, 2007 on  Outsourcing Trends in the Biotech Industry, a new report is out which provides more evidence that outsourcing is on the rise in across all of the life sciences industries.

Drugs-about.com News reported:

In EquaTerra’s newly-released Pulse Survey report covering the first quarter of 2007, the firm’s advisors cited pharmaceuticals as the leading vertical industry segment in terms of outsourcing demand. The report also found that outsourcing demand in the pharma industry has increased since the first quarter of 2006. . . .

The report also disclosed that there is far higher interest among pharmaceutical, life science, and biotech companies than among companies in general in expanding their current use of outsourcing. In this industry, 44 percent said they planned to expand outsourcing into new process areas – compared with 28 percent of companies overall. Also, 39 percent said they planned to expand outsourcing into new geographies or business units, compared with 30 percent of companies overall.

This report further bolsters the argument that outsourcing is going to become as widespread and important to the biotech and life sciences industries as it already is in the high tech world.   

Will outsourcing leave even more of a mark on the life sciences landscape than what we previously anticipated?  One can’t help but wonder if it will ultimately result in at the very least  the  modification of the current practices of certain companies, which current run early clinical trials in some of the same countries to which they are now outsourcing.  

The biotech world is buzzing about Google’s newfound interest in biotechnology. 

Of course, if you pay attention at all to Bay Area news, you are likely aware of the fact that Google co-founder Sergey Brin just got married this past month to biotech entrepreneur Anne Wojcicki.  However, the latest news is that Google has now decided to invest in his wife’s start-up.

The New York Times reported:

Google said Tuesday that it invested $3.9 million this month in 23andMe, the biotech company co-founded last year by Ms. Wojcicki, a former health care industry analyst.

Google’s investment was disclosed in a regulatory filing, which also officially confirmed that Mr. Brin, 33, and Ms. Wojcicki are married. . . .

The filing with the Securities and Exchange Commission also stated that Mr. Brin had provided $2.6 million in interim debt financing to 23andMe and that his loan was being repaid as part of the financing of 23andMe.

“Our audit committee requested that we disclose this in order to be completely transparent with our investors about the facts underlying this investment,” said Jon Murchinson, a Google spokesman.

Mr. Murchinson said the search giant, which has invested in other start-ups, made the investment in 23andMe because it furthered Google’s goal of organizing the world’s information. “They are developing new ways for people to make sense of their genetic information,” Mr. Murchinson said.

Needless to say, Google’s new investment in biotechnology has caught the attention of the media as well as the blog world, and there is speculation that this step by Google signals a change in focus by the company. 

Blogger Mark McQueen writes in the  Seeking Alpha blog:

For all of the biotech entrepreneurs out there having a hard time raising an early financing round, Google might be your next roadshow stop.

According to the New York Times, Google invested US$3.9 million in 23andme. 23andme is in the genetics information business, which may well indicate that Google’s cookies are about to get dramatically more invasive into your personal affairs and web habits.

I can see the next generation of the permission form now: “By using Google’s web search technology, you agree and consent to provide a sample of your DNA to us for our own use.”

It will be interesting to see what Google has up its sleeve with this latest move.  Does this action signal a new focus by the company in biotechnology?  Or is this just a case of a company co-founder wanting to help get his new wife’s business off to a good start?  Those of us who follow news over at Google are watching with interest for the answer to those questions.

The Mercury News reported today that valuations for venture-funded life science companies in the Bay Area increased in 2006, according to a survey taken by Mountain View, CA law firm Fenwick & West.

As The Mercury News reported:

The percentage of local life-science companies that saw their per-share price increase from previous financing rounds rose to 79 percent last year, up from 65 percent the year before. . . "Down" rounds were reported by 15 percent of the companies surveyed, while no change was recorded by 6 percent.

For non-life-science ventures, 67 percent reported up rounds in 2006, while 22 percent recorded down rounds and 11 percent said there was no change.

The average price increase for life science companies receiving venture capital in 2006 compared with previous rounds was up 50 percent, with medical-device valuations increasing 55 percent on average compared with a 41 percent average increase in pharmaceutical valuations in 2006.

Non-life-science start-ups saw their average price increase by 55 percent.

This report confirm what those of us in the Bay Area already knew: the state of biotech in the Bay Area continues to be strong.