There exists in some quarters a long-standing belief that, in terms of starting biotech companies, university technology transfer offices are staffed with highly educated order takers who do not understand business. If the lawyers and scientists in these offices are not actual impediments to getting business done, then at best they are bureaucrats frozen in idleness until an entrepreneur spies a technology worth millions and thaws them out long enough to strike a deal.
The truth is somewhat different. Tech transfer offices can indeed wait passively for entrepreneurs to walk in the door and license something. But sometimes startup formation begins at the universities, which in their excitement about their technologies do not wait for entrepreneurs. Instead, they spin off companies and seek CEOs to manage them. This happens not just at Stanford and MIT, which benefit mightily from flourishing venture capital activity nearby. Other universities also do startups very well -- or are getting better -- even where VC activity is less intense, or is mainly devoted to other industries, or where spinoffs lack a tradition of encouragement.
Biotech spinoffs from universities have been around a long time. They got a significant push in 1980, when Congress passed the Bayh-Dole Act. If a university takes possession of intellectual property developed through federal funding of its research, the act requires the university to make an effort to commercialize it.
Still, where teaching and research are the primary duties, licensing technology remains a minor concern. Within universities, tech transfer officials seldom win popularity. For they are the ones who deliver bad news, such as telling a faculty researcher that a technology will not be patented, or when it is, that royalties will be low. A university may care more that tech transfer runs smoothly without causing trouble than about licensing fees and royalties. This is why a basic measure of spinoff success, how much money a university’s spinoffs have raised, is not necessarily a number tech transfer officials must keep track of. In some academic environments, no one may seriously wish to know.
And if no one in a tech transfer office needs to know that, then probably no one will care how many startups a university does each year. Probably as well no one will care to change a tech transfer office practice VCs hate and regard as unprofessional -- the lack of standard term sheets. Simply put, a culture gap exists between tech transfer offices and the world of entrepreneurs and VCs.
But in some places the gap is smaller than others.
“Only very strange or very old VCs would be willing to do this,” says Nora Zietz of her job. She is neither strange nor old, but does have a point: “The money is not here,” meaning that as associate provost for development at Johns Hopkins University in Baltimore, she cannot make the kind of money she made during 12 years as a venture capitalist at New Enterprise Associates, or the four years she ran venture money for the Able Foundation. But there are compensations. She’s not traveling anymore. “Being a venture capitalist is ninety percent travel.” She’s already made some money, she says, and doesn’t want to leave Baltimore just to be a VC. Here, “it’s a chance to make something happen that wouldn’t happen elsewhere. I’m having fun. Nobody’s telling me what to do.”
Biotech startups from Johns Hopkins are not new. Its office of licensing and technology development lists 37 companies started with Hopkins technologies. (Click here to view the list of companies.) Almost all are medically related. Even so, a consensus that Hopkins could have done even better prompted the creation of Zietz’s new business development office two years ago. Working with Blanche Johnson, director of biomedical initiatives, Zietz helps faculty make contacts with the business community that will result in more startups. “It’s a sort of concierge function, facilitating the process,” Zietz says.
Hopkins is renowned for medical research. But other universities of its stature have been better at startups, she observes. “I think it was a function of some of the universities in the east and on the west coast being surrounded by healthy venture capital cultures,” Zietz says. “Hopkins was not. Most of the tech transfer revenues at Hopkins have been from licensing to big pharma, not startups. Hopkins has had a very different kind of culture from Stanford, for instance, where VCs were looking to create companies. A lot of its tech transfer revenues have actually come from their equity liquidity in startups.”
Part of her job is teaching Hopkins scientists how to present new technologies in terms of investors’ interests. “Years ago, when I was at NEA, Hopkins had science fairs,” Zietz recalls. “They were deadly, a series of posters. Scientists wanted to talk to you about projects and algorithms. Talk to me about the market. Nobody was there to help them package this.” In addition, some investors complained of unprofessional behavior, which was why NEA, one of the largest and most famous venture firms, “basically stopped coming here.” The last straw, she remembers, was when “NEA tried to license a technology where there were several people on the patent, and they could not decide how they would license it out. It was sort of mom-and-popish. And so we didn’t visit for a while.” These problems aside, it is still no easy matter to interest VCs in university startups, she says. “When a VC finds something at a university, it’s the very beginning. You then have to go find the management team, everything. It’s heavy lifting. On the other hand, they can find a small company already in existence and they are two, three, four years ahead.”
Her job is like and unlike being a VC. “I do the same market research and due diligence. But I don’t do deals (I don’t have any money). And I don’t sit on boards. Blanche and I roam the halls and find faculty willing to talk about commercializing and starting a company. And then, if they want to, we help them find a management team and introduce them to money.” Every semester they conduct an evening boot camp for faculty. “We invite law firms, or we lecture. They are told how to incorporate, how to protect intellectual property. They get a primer on venture capital, what a term sheet looks like. It’s the basics,” she says.
Hopkins has had about 10 spinoffs since Zietz joined in 2003. Cartilix Inc. is one that Hopkins launched from within. Jennifer Elisseeff, an assistant professor of biomedical engineering at Hopkins, co-founded the company last year with Zietz as concierge. Elisseeff’s lab focuses on musculoskeletal tissue engineering. In 2002 Technology Review Magazine named her as one of the nation’s top innovators under 35.
Cartilix applies Elisseeff’s research to the repair of knee cartilage. As Elisseeff explains, “knee cartilage allows the knee to move smoothly and easily and painlessly, but does not have natural repair capability. If something happens to damage it, it is generally not going to get better. So we have been working on new materials and strategies to grow new cartilage, starting with the knee.” Later on, Cartilix will probably be interested in growing hip and ankle cartilage.
“We have a technique to stimulate the stem cells so they can form tissue. We stimulate them in place with our biomaterials,” she says. She explains that to repair cartilage, stem cells need a way to migrate into very sick tissue. “You have to surgically provide access for them to get where they are needed.” Her biomaterials do that and then degrade once their job ends. She compares it to gardening, making fertile soil for new tissue to grow.
“A lot of people had come to me about starting a company and raising money,” Elisseeff says, “but I didn’t think we were quite ready technologically. I wanted to have a clear idea for a product that was feasible.” When she was ready, Zietz began to help. “I brought Jennifer whenever there was a chance to present her intellectual property to venture capitalists,” says Zietz. “She did that six or seven times, in Boston, New York, DC, the west coast.” “Nora would help guide the presentations,” says Elisseeff. “We faculty members tend to put too much science in it. Nora told us how to simplify it for business groups and talk about the things that they wanted to hear.”
And then one day, Zietz recalls, “Jennifer comes in and says, ‘I think I have found a CEO.’” “I thought Frank Huerta would be a great business partner,” Elisseeff continues. “I met him through the Arthritis Foundation. He had developed arthritis in his hip and had a background in physics and business. Two years ago he sold his computer security company. And I saw that he was knowledgeable in my field. So Frank put together a business plan and got some people on board. And he hired some scientists that graduated from my lab, so they already know what’s going on.”
“Nora has been a morale booster,” says Elisseeff. “When we run into roadblocks at Hopkins or things that take a long time, she helps us move things forwards.” Zietz assisted Cartilix in licensing Elisseeff’s intellectual property and in negotiating very advantageous terms for leasing space in an incubator on campus. “She also helped from a cultural perspective,” says Elisseeff. “I knew I was thinking about starting a company, and I ran into some issues here at Hopkins when I even mentioned that. Nora would explain that this is a really good thing and pointed out how involved the students are with business plan activities and competitions. So a year later when we started Cartilix, people weren’t shocked.”
After raising over $2 million, Cartilix officially started in July 2004. Elisseeff is on the scientific advisory board and consults for Cartilix. The company is doing preclinical studies and hopes to submit an application to the FDA within a year that will allow Elisseff’s materials to be tested in humans.
Hopkins hopes Cartilix stays permanently in Baltimore, instead of going to the west coast where Huerta lives. Hopkins strongly prefers keeping Cartilix’s high paying jobs in Maryland. And maybe one day it will be extremely pleased with the financial payoff, Zietz adds. While spinoffs based on university technologies are very risky, she predicts that eventually one will win big. “It may be 20-30 years from now,” she acknowledges. “But then a guy finally makes it big and becomes a Hopkins alum. Hopkins profs and alums have been extremely generous to the institution.”
To create spinoffs consistently, says Zietz, “you need somebody to go get the CEO, somebody to talk to the venture community, and somebody who understands licensing. Otherwise you become a licensing agent to big pharma.” And as an example of doing things right, she points admiringly to the University of Pennsylvania, where Tom Fitzsimons and the Penn tech transfer team have been on a tear. Pre-Fitzsimons, Penn averaged three launches a year. His first year as director for startup business development, Penn launched 12. Then 12 again the next year, and 14 after that, and in 2005 Fitzsimons expects Penn will launch 16 or 17 spinoffs. In 2004 Penn’s portfolio of companies, 95 percent of which have life sciences applications, raised $120 million.
What caused such a turnaround? “First,” says Fitzsimons, “we did a really intensive amount of networking in the entrepreneurial and financial community.” His message: Startups at Penn were under new management. The new Penn would a business partner they could deal with. Second, to prove it he simplified Penn’s business terms to give them more appeal with venture investors.
Most VCs, he explains, “If you ask if they want to do a deal with a university, they’ll tell you, ‘No, it’s just too hard.’ Because universities want things that don’t make sense, like equity positions that are undilutable and large cash payments at the beginning. We wanted to make sure that we were not at the beginning making it more difficult to raise the round of funding.”
Moreover, he continues, “from a VC perspective, you are interested in growing a company, not paying a university.” The VC view coincided with his own that Penn’s old licensing terms were a financial burden on startups. Especially, large license fees placed large obstacles on the path to royalties, which have grown to about $12 million a year at Penn. Since royalties are “where the homerun is” for Penn, startups’ precious cash is best spent making royalties happen sooner. That means spending on product development, not license fees. “Anything that diminishes the royalty stream, making it harder to get to, is going to diminish what our long-term win is.” Therefore, Fitzsimons says, “we will defer and in some cases even forego cash payments from the licensee until certain benchmarks have been met in terms of amounts of equity capital raised.”
In exchange for foregoing license fees, “we will take the biggest chunk of equity we can get in the company, valuing the technology on a dollar for dollar basis.” At Penn, technology valuation involves researching what similar product concepts have been licensed for, analyzing how much of the market the technology can address, and then calculating the technology’s worth as an initial investment. For example, says Fitzsimons, “the licensing initiation fee will usually be $250,000. We’ll convert that into a $250,000 cash equivalent and invest it in the company on a dollar for dollar basis with the early stage investors.”
Most university tech transfer offices operate quite differently, he says. Whereas Fitzsimons advocates technology valuation as a rational process, he sees most universities valuing technologies and setting license fees with “the dartboard technique, the get-everything-you-can-technique. It is axiomatic in the tech transfer community that everything in your portfolio isn’t worth a damn thing until someone expresses an interest in it, at which point it is worth much more than it is actually worth.” Darts away, these universities take a license initiation fee up front and milestone payments triggered by achieving benchmarks in product development. “And they take a small portion of the equity, undilutable to some amount of paid-in capital, maybe 3% or 5%.”
Once Penn signs a deal, “We are hopefully dealing with an experienced and seasoned entrepreneur. At that point we essentially give the baby to the entrepreneur and get the hell out of the way.” Fitzsimons believes many universities do little or nothing to attract the CEOs their spinoffs need, the people who can lower the risks of startups. For him, however, finding CEOs is something of a specialty. He makes note of people he encounters he thinks might have what it takes. Sometimes it’s someone he’s dealt with before in a previous company. A couple of CEOs he found in Penn’s tech transfer office. Sometimes he hires a search firm: “We’ll give them the parameters that we think we need,” he says. “Depending on circumstances, it could be a long-term CEO or an entrepreneurial lead -- somebody to get the company up and running, with the understanding that they may not be the person to be CEO as the company gets larger.”
Fitzsimons knows what to look for in CEOs because he was one. After starting two companies, he found Penn while looking for a technology with which to start a third. Or rather, he says, Penn found him. “I was talking to a whole bunch of institutions and consulting on the side to help some of them understand the value of some of their technologies. Penn was one of the places where I was consulting and they said, ‘Why don’t you just hang out here for awhile?’” And so he became director of startups.
It was through a search that Fitzsimons found Guy Maestre, the CEO hired to launch PhenoTech Inc. At the time, Maestre was CEO of St. Louis-based Novactyl Inc. PhenoTech was started last year, based on an innovation in phage-displayed monoclonal antibodies. The inventor is Don Siegel, an associate professor of pathology and laboratory medicine at Penn. Isolating human monoclonal antibodies by panning phage-displayed MAb libraries is a well-established technology, says Maestre. However, the technology has a notable limitation: It cannot isolate monoclonal antibodies to cell surface antigens if panning, which involves repeated selection cycles, must be done with whole cells instead of isolated antigens. Whole cells, which naturally express multitudes of surface antigens, do not provide the specificity that successful panning requires. In particular this limitation applies to isolating human monoclonal antibodies to red blood cell antigens. Now, says Maestre, thanks to Siegel an elegant solution to the problem is at hand.
Using Siegel’s invention, PhenoTech plans to isolate phage-displayed monoclonals for a host of medically important blood type antigens. Blood typing with PhenoTech phage reagents will rely on direct analysis of the unique DNA particle included in each reagent. Basing blood typing on DNA analysis will allow a huge advance in blood typing automation. Many assume that blood typing, like so many clinical tests, has been automated. Not so, says Maestre. The agglutination assay on which blood typing is based has resisted automation. Technicians at major blood centers type blood in the same way they did 50 years ago: by hand. Automation could make blood typing far cheaper. In addition, PhenoTech’s reagents will make it economical to greatly expand the number of blood group antigens routinely typed. (Humans have over 400 different blood types, of which perhaps 30 are clinically relevant.) Better blood typing can mean safer matching of patients’ blood types to donor blood.
Maestre has aligned his own rewards with those of the other shareholders by foregoing his initial pay until he raises capital. That will be his sweat equity in PhenoTech. “There is a good logic to that,” he says. “The traditional deal, if the CEO gets a salary, is that the CEO gets 4-5% of the company. I got a lot more than that, a very significant equity in the company.” Naturally, empty pockets concentrate the mind on raising cash. PhenoTech is currently financed through a grant from NIH and a seed grant from Bioadvance, the biotech greenhouse for southeastern Pennsylvania. All of it goes towards product development, which, to keep costs down, takes place at university laboratories. The additional funds Maestre is in the process of raising will allow PhenoTech to start a field trial next year to test its first diagnostic monoclonal antibody.
He is delighted how much support he receives from Penn: “It goes way beyond, ‘Here is some technology and an empty shell of a company. Go run with it.’ Here, all the companies created by the university meet regularly to get support, ideas, and contacts. And every time I have gone in front of VCs, I have had someone from the university by my side, saying, ‘The University will vouch for the credibility of the technology, for the support it intends to give the company, and for the credibility of management.’ It’s tremendous.”
What could be handier for a university than a VC firm to call its own? Spinoffs from Baylor College of Medicine (BCM), in Houston, have certainly benefited from BCM Technologies (BCMT), the early stage VC firm that BCM founded in 1982. BCMT’s current portfolio comprises 14 companies. Its current fund of $40 million comes entirely from Baylor.
Hopkins, Penn and most other universities do not have venture groups, probably because of the sensitive issue of investment decisions concerning faculty technology. Would decisions be influenced by academic politics? “There is a rich list of conflicts that can arise when you start making internal funding decisions,” says Buz Brown, BCMT’s president. “The answer most people have come to is to steer clear of any such potential. That is why BCMT has always been independent, outside the college.” Independence means in fact that some Baylor faculty have applied to BCMT for startup funds and been turned down.
Usually faculty scientists do not approach BCMT with funding requests. “It’s not as if I were running a half-billion dollar venture fund,” says Brown, “where the perception is of a bunch of guys sitting in a conference room, listening to people present requests for funding. That is not how it works. Most of the time we’re in the halls of Baylor and other institutions, mostly Baylor, trying to identify key faculty and to figure out who has made important discoveries.” If an interesting technology is found, launching a startup is still a last resort. “Startups,” he says, “are what you do if you believe the technology needs to be commercialized, but don’t see an obvious path through an existing licensee. It is a whole lot harder to create a successful company than it is to license to an existing company.”
BCMT originally combined a technology transfer office and a venture group. In 2000, however, tech transfer went back into the medical college. BCMT now focuses exclusively on startups. Predominantly its new companies form around technologies developed at Baylor. But Brown adds that startups at Baylor are seldom these days based on a single technology: “The notion that a company is formed around just one technology may have been true in the 80s and 90s, but is rarely true today. Regretfully for many of the universities, the market now wants products. And that is the real dilemma -- the gap has widened between what the market wants and what the universities have. That leaves them scrambling, figuring out what they should do about this gap.” Accordingly, BCMT envisions startups based not solely on Baylor technology, but also on technology opportunities from other institutions, places like the Texas Medical Center and MD Anderson.
BCMT initially invests between $250,000 and $4 million in a startup and reserves significant capital for future funding rounds if the startup hits its milestones. One tactic for maximizing its reserves is to delay hiring CEOs as long as possible. That saves money on salaries. “Oftentimes what I’ve seen in poorly managed companies is that they raise a million dollars, spend half of it on people and a couple of hundred thousand on attorneys, and don’t move the ball scientifically very far,” says Brown. “We’re trying to avoid that.”
Many universities, he says, hire managers immediately when they create spinoffs. The new companies then conduct proof-of-concept research. “We are not wedded to the notion that you have to have one CEO for every activity that you initially engage in,” Brown declares. “If one can accomplish proof-of-concept research with, say, half a million or maybe a million, why do I want to spend 25% of that or more on management if I believe I have the internal capability to manage that to the same endpoint?”
Brown may delay hiring full time management even after proof-of-concept success. He ideally will delay until technology and product development advance to the point where he becomes convinced raising $10-20 million is possible. In that regard BCMT’s entrepreneur-in-residence program helps greatly. “A problem we face is recruiting sophisticated life science managers to Houston,” Brown explains. “This is the energy capital of the world, not the biotech capital. We do have successful biotech entrepreneurs, just not as many. So we try to recycle them. We have successful company executives come in and spend a couple of years with us. They are essentially looking for their next company. But while they do that, we give them a couple of companies to manage that would otherwise have to support full-time CEOs.”
One BCMT entrepreneur-in-residence is Peter Policastro, who came on board at the beginning of 2005 after spending two years as CEO of Rejuvenon Corp. After raising $40 million for Rejuvenon he was ready to leave, for he considers himself a specialist CEO: His niche is working with companies at an early stage of development. “For me this has developed out of having a primary interest in science, having a PhD from MIT,” Policastro says. “I still have a vicarious passion for research and seeing it applied. It’s satisfying because you are dealing with assets that aren’t understood very well that have a high degree of risk. You don’t know how ultimately they will turn out. I enjoy developing a real understanding of those assets and meeting them up with the marketplace.”
Part of Policastro’s new job is helping BCMT look for new startup opportunities. BCMT launches two or three startups a year. Another part is managing nascent companies in the portfolio. Policastro helps them “set strategic directions, fine tune or articulate their business plans, and find additional resources -- dollars, people or technology -- to complement what they already have.” At the moment his assignments are Molecular Logix Inc. and Progression Therapeutics Inc.
Molecular Logix is an example of BCMT’s policy of not restricting its companies solely to Baylor technologies. “Molecular Logix is making a pan-Her inhibitor for a range of oncologic indications,” Policastro says. About four years old, Molecular Logix has nearly completed identifying lead molecules and will move towards preclinical and later clinical development. Policastro helps the company understand its opportunities and develop a commercialization strategy.
Progression Therapeutics, a virtual company without full time employees, is decidedly a Baylor spinoff. Its major asset, RTVP-1, a tumor suppressor in human prostate cancer, was discovered by Timothy Thompson, a professor of urology and cell biology at Baylor. Progression Therapeutics is trying to better understand the science behind the protein, says Policastro. RTVP-1 has an anticancer effect in animals, affects the immune system, and facilitates apoptosis (cell death) of cancer cells. But the mechanism of action is not completely understood. Like many very young companies, what Progression Therapeutics does now differs from what it first set out to do. “It has evolved into something that has an asset that we can leverage,” he says. “That’s part of my job, to understand that and position something the market will have an appetite for. It’s taken quite frankly some time to figure out what that is.”
Like Policastro, BCMT’s Brown finds considerable satisfaction in guiding Baylor startups. Prior to being recruited a year and a half ago, Brown ran the technology transfer office at Yale University School of Medicine. Before that he had started several companies and worked in big pharma. “Really, my passion is for doing startups,” he says.
Brown runs BCMT by a simple philosophy: Get the biggest return possible for a small amount of money and then increase the investment as the risk profile decreases. “The model down here,” he says, “is incubating these opportunities, working with serial entrepreneurs, and accumulating technologies in order to raise money, so that we can retain credible business people. If you’ve only invested a half million or million, it’s hard to attract the sophisticated management team that you could with $10 to 20 million. So we try our best not to require those teams until we believe the company is ready to raise significant money. We also use nondilutive sources like SBIR and STTR grants to compliment our money for proof-of-concept work. This builds value without diluting anybody before we go for rounds of financing.” After all, he says, “This is not a business of seeing how much money we can spend. It’s quite the reverse.”
—Tom Hollon (thollon@falconriver.com) is a biocommunications consultant in Rockville, MD.
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