Biotechnology challenges state's greatest minds

This month's roundtable discussion focuses on biotechnology with Michael J. Baader chair of the Business Transactions Group at Venable LLP; David J. Fink, Venable Biotech Entrepreneur-in-Residence at techcenter@UMBC; and Donald C. Fry, president of the Greater Baltimore Committee. This “roundtable discussion” was conducted electronically. The participants' answers are organized alphabetically.

How many years have you been in business? During that time, how have things changed for the biotechnology industry in general and specifically here in Maryland?

Baader: I have practiced corporate law at Venable here in the Baltimore-Washington region for the past 19 years. Currently there is more activity around biotech and life-science companies in the region than ever as evidenced by the Hopkins and University of Maryland biopark projects in Baltimore, which represent over $1 billion of investment. Universities have become more willing to transfer technologies to partners to develop and commercialize, which is critical because 80 percent to 90 percent of bio products and therapies start with academic research. The total cost to develop new drug technologies has skyrocketed, which has caused investors to embrace strategic partnering as the way to finance growth. There is more money now than ever available specifically to finance biotech companies as evidenced by the formation of Emerging Technology Partners and Red Abbey Venture Partners here in Maryland during the past two years. Finally, the capital markets now require bio companies to focus on the development of products rather than platform technologies.

Fink: I have been in business 31 years. During that period the biotechnology industry has grown from a collection of academic research projects to one of the fastest growing sectors of the U.S. economy. Many of the basic elements of this industry were literally developed and nurtured at the NIH, which cannot be underestimated as a factor in the growth of the industry. I have lived in Maryland since 1997. In the last decade, Maryland has become a major player in biotechnology, especially on the research side through the national labs and leading research universities. It is clear that attempts at economic development in Maryland will have a strong emphasis on this biotech base.

Fry: The Greater Baltimore Committee will be 50 years old in January of 2005. During that time we have seen the base of industry change from heavy manufacturing to finance and corporate services and now to one that has a strong emphasis in higher education and health services. These are tremendous changes. During the last 10 years, we have seen the biotechnology and life-sciences industries emerge as an economic force.

Ten years ago, the GBC first looked at this emerging industry, and although it was not a primary focus area for our organization throughout the decade, we kept our eye on it, making it a primary issue area two years ago. We did this because the Baltimore region is at an important crossroads in the development of its bioscience cluster. Although the biosciences are a key asset for the region, with Baltimore City ranking fourth out of all cities in the amount of research dollars it receives from the National Institutes of Health, the success of the research base is not seen in the industry base. The biosciences industry base in the region has been flat and has failed to keep pace not only with national growth but also, and more importantly, in comparison to emerging regional competitors.

What are the most common misperceptions people have when they set out to create and grow a biotech firm?

Baader: Founders often suffer from “irrational exuberance” which is OK; the outside advisors just need to harness and focus this energy. The management team needs to develop a business plan that includes a realistic assessment of the cash needs of the business very early in the life cycle of the company. Biotech entrepreneurs almost always underestimate how long it will take to raise the capital necessary to finance the product development and commercialization efforts. Often it is important to use cooperative research and development agreements and SBIR (Small Business Innovative Research) funding to access federal funding, facilities and expertise as a bridge to traditional financing. Most biotech companies also do not possess the resources or expertise to manage the critically important clinical trial phase of product development. Generally, they are well advised to partner with a large pharmaceutical company who has the regulatory, testing and marketing infrastructure to manage the process.

Fink: Experienced entrepreneurs recognize that biotechnology is a very difficult field in which to develop marketable products. The demands for financing, the extended time to market and the regulatory environment are especially difficult. Inexperienced entrepreneurs often fail to understand these issues and underestimate the barriers they face, especially with therapeutic products. Management issues are generally the reasons that biotech companies fail, so most institutional investors consider the management at the top of the list when comparing potential investments. We see the lack of a strong pool of biotech management as one of the major impediments to expansion of the industry in the Baltimore region. At UMBC, we are about to initiate the ACTiVATE program, with support by the National Science Foundation, to train mid-career women for entrepreneurial roles in the biotech industry.

Fry: In this market, some of the most common misperceptions are that startups will be able to find managerial talent, venture capital, lab space, and the resource and management support that they will absolutely need to succeed. Also, our region does not yet put a premium on fostering bioscience commercial innovations.

Given the magnitude of the research base here, with outstanding universities such as The Johns Hopkins University; University of Maryland, Baltimore; and University of Maryland, Baltimore County, one would easily assume that there would be enormous amounts of collaboration among institutions. One would also think that the research going on at our great universities would generate a large number of opportunities for startup companies. To date that has not been true, but due to the vision and hard work of those institutions, that is starting to change.

What are the most common mistakes biotech executives make? How can mistakes be avoided or overcome?

Baader: Scientists tend to fall in love with their science and pursue too many applications at once. They should focus on the couple most promising technologies or applications in the portfolio, get them to market, and use the cash flow to finance research and development of other potential applications. Similarly, most companies really should focus on deep broad relationships with a couple of key strategic partners, rather than pursuing alliances with too many partners, which is unmanageable and ineffective. Biotech companies virtually never follow their original plan, so they need to constantly consider and refine their alternative backup plan. They also should build their corporate infrastructure slowly and carefully, because usually it is easier to catch up than to shed excess people, facilities or other costs. Management should use the initial round of financing to eliminate/reduce the one “white hot risk” the company faces (i.e., determine where each marginal dollar will achieve the most benefit).

Fink: We often see many scientist-entrepreneurs who think they can manage the entire project themselves and fail to appreciate the need for the experienced business management necessary for their success. Inexperienced entrepreneurs often do not understand the realities of the financing process and do not realize that commercialization of products requires an evolution of technical and business skills. They often try to maintain control of the company too long and may fail to recognize, at least initially, that acquisition may be the most realistic and profitable strategy for their project. One of the roles of the incubator system is to assist startups in finding the management, legal and accounting support they generally need. At the techcenter@UMBC, this assistance is provided through our Help Desk, Entrepreneur in Residence and business advisory activities.

Fry: Several things will help biotech executives get a firm toehold in this region. It is not a question of executives making mistakes; bioscience is by its very nature a high-risk game. To look at the most obvious illustration, bringing a drug from the research stage to commercialization takes anywhere from eight to 15 years and costs about $800 million. To say that there is fertile ground anywhere along this path for error is an understatement. The same is true for all bioscience startups and not only for startups but also for established companies. We have seen solid companies take on the distribution of what seems to be a great product only to find that the market is not as good as they once thought. Or a company might be developing a product and not know that another company is working on a very similar concept creating strong competition. That is why it is important to build and sustain a strong bioscience community in the region.

What areas of biotechnology do you expect to be “hot” during the next two years or so and why?

Baader: There will be a continuing emphasis on the development of early diagnostic tools to achieve cost savings in the health care delivery system. Interest in biowarfare detection agents and vaccines will remain strong. Bioinformatic products and tools will experience explosive growth, bringing together more data from more sources, while providing better methodologies to integrate it, analyze it and apply it to experimental designs. Genomic sequencing data will translate into the use of blood as the “window” to design customized preventive and therapeutic treatments for each individual.

Fink: “Hot” academic biotech projects often take a long time to have an economic impact. There is an extraordinary amount of quality research that is never commercialized. I expect that the most important biotech activities in the next three to five years will result from ongoing research and development in proteomics, process and separations technologies and drug delivery formulations. In the next two to three years, I expect that the significant potential of adult stem cell therapy, in which I have been actively engaged for over 15 years, will be demonstrated in the clinic. On the other hand, I am less enthusiastic about much of the commercial potential for much of the research directed to “tissue-engineered” products.

Fry: The greater Baltimore region is in a strong position to maximize the development of a number of key bioscience areas. If we look at the huge growth in industry-sponsored research among our regional universities, we can see areas of strength. They are in cancer research, development of asthma and allergy medicines, clinical trials, commercial research and testing, medical diagnostics, drug delivery systems, and medical devices to name a few. We can also look to the surrounding counties to see that there is an industry growing around support of anti-terrorism activities with special emphasis on preventing bioterrorism. It will be imperative as we move forward as a region to harness the strengths in all the counties surrounding Baltimore and to support the emerging bioscience industry as a regional effort, made up of up strong networks and strong partnerships.

If you were Maryland governor for a day, what would you do to promote biotechnology? New law? Tax break? Regulatory relief? Other?

Baader: I would recommend allowing biotech companies to sell their net operating loses to other companies who can use them as a creative source of financing as has been permitted in New Jersey and other states. Consistent with national practices, I would sponsor legislation to require the Maryland state pension funds to invest significant additional dollars in private equity and venture capital. We rank 36th out of 38 states for which data is available on this performance benchmark. This is appalling and our legislature should be ashamed of its track record considering the number of biotech companies resident in Maryland. We should also require all major research universities resident in the state to annually review, revise and clarify their policies and practices regarding technology transfer, including the development to independent advisory panels, to ensure effective tech transfer on an ongoing basis. That would be a good day's work.

Fink: Maryland basically has two ways to promote biotechnology: 1.) recruit existing companies into the state, and 2.) develop in-state research and technology into successful commercial enterprises. Because Maryland has so many advantages for biotech companies (high quality of life, low cost of living, proximity to NIH, FDA etc.), I would try to create an environment favorable to corporate operations (tax and regulatory relief, etc.), and then actively recruit major biotech companies to relocate or expand into the state. Maryland is recognized as having one of the most aggressive and effective programs in the nation for supporting startups, through DBED, TEDCO, MIPS and the incubator system. In this case, more attention to a good thing is a good approach. Creation and support of centers of research excellence within Maryland's research universities will help the state to maintain a leadership role in key fields and will have eventual economic benefit as new science is commercialized.

Fry: States can clearly signal their intent to support building a strong bioscience industry. Many have done so and it gives them a distinct competitive advantage. Massachusetts passed a law that gives cities and towns the ability to streamline the permitting process for new businesses. It also set up a one-stop shop for companies that want to expand. A bio-venture fund in Pennsylvania was able to attract Pennsylvania state pension investment funds that were used to invest in emerging life science companies in the Greater Philadelphia area. Seven states allow biotech companies to sell or trade unused tax credits and four states have refundable research and development tax credits. As a state we need to embrace and enact measures like these. Bioscience has the capability to account for one-tenth of the state's employment — that is a great number that deserves our wholehearted support.

Roundtable Schedule

January: Public Relations February: Real Estate March: Technology April: Health Care May: Investing June: Small Business July: The Arts August: Economic Development September: Biotechnology October: Higher Education November: Power Elite If you would like to participate in a future roundtable, contact Mark R. Cheshire .