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| Atlas Venture partner Bruce Booth |
After a record year for IPOs put billions in the hands of drug developers and saw some of the industry's mainstay venture capital firms debut their first post-downturn funds, it seems like halcyon days for biotech startups. But despite the warming climate, many are sticking to the hyperefficient model that gained popularity when capital was far more scarce.
The Wall Street Journal rounded up some virtual innovators--taking meetings at coffee shops, squatting in universities and struggling to maintain their own calendars--who prefer to work in a micro-organization over dealing with the boards and bureaucracies present even in small biotechs. Most virtual outfits are focused on just one or two assets, employing one or two (or zero) managers and relying on CROs to shoulder R&D.
The model, somewhat clumsily tied to the 2008 financial crisis, has been around for quite a while, and, from an investor's view, its utility is simple: Laser-focusing on one asset helps keep a close eye on risk at each step, minimizing the cost of failure. And, unlike once-fledgling biotechs like Gilead Sciences ($GILD) and Amgen ($AMGN), virtual players aspire not to become vertically integrated drugmakers but rather to get bought out by larger entities that can bring their ideas to market.
And, as Nimbus Discovery Chief Business Officer Jonathan Montagu points out in a blog post this morning, that has worked out for some of the sub-field's stars. In 2012, Shire ($SHPG) signed a deal to buy the virtual FerroKin BioSciences for up to $325 million, and Biogen Idec ($BIIB) swooped in on Stromedix with a bid worth as much as $552.5 million.
That creates an enticing potential return on investment for VCs, who typically invest $2 million to $3 million in a virtual drug developer in its first year, Atlas Venture partner Bruce Booth told WSJ. Now, as as much as a third of biotech's roughly $5 billion venture spend now goes to virtual shops, Booth said.
But the virtual model's flexibility comes with a host of constricting challenges. Nimbus Discovery, a 2013 Fierce 15 honoree, has struggled to find a single, full-service CRO that fits its needs, instead having to deal with a complex patchwork of partners to handle disparate tasks, Montagu writes.
Furthermore, contractors tend not to share their clients' passion for each project, which can lead to errors and developmental delays, Leonide Saad, CEO of the virtual Alkeus Pharmaceuticals, told WSJ. Nimbus attacks that problem by seeking out risk-sharing agreements with its service providers, working to align incentives to deepen the relationship. Among Saad's solutions is handing out Champagne bottles to CRO employees after a big milestone, he said.
But, for many, despite its pitfalls, the virtual model beats a stilted corporate culture. Saad wooed Joshua Boger, founder and former CEO of Vertex Pharmaceuticals ($VRTX), back into drug development with the offer of an unpaid exec position. Boger told WSJ he was swayed by the "elegance" of Alkeus' science and, frankly, "wasn't interested in helping someone hire all their vice presidents."
- read the WSJ story (sub. req.)
- check out Montagu's post
Special Report: 10 Truths (or Fictions) About Virtual Biotech Startups