Bets on Biotech
The nonprofit world steps in to finance for-profit drug ventures
Five scientists created a new way to make an antimalarial drug in their University of California-Berkeley lab and wanted to build a company around it. But when they considered the traditional path of asking venture capitalists for money, their ambitions hit a roadblock. The timing turned out to be all wrong. It was the summer of 2003, and after being badly burned on iffy prospects, biotechnology investors had become squeamish.
U.S. biotech funding had peaked at nearly $33 billion in 2000 and then collapsed. The market has yet to fully recover. By last year, the money raised by American biotech firms from stock offerings, venture capital, and other sources was still at less than half its peak. There has also been a change in where biotech money is going. Investors now favor companies with drugs and devices nearing Food and Drug Administration approval rather than early-stage ventures. "There's been a valley of death between research coming out of academic institutions and the capital needed to fund these companies," says John Maraganore, CEO of Alnylam Pharmaceuticals in Cambridge, Mass., which despite its risky research went public two years ago. That has left a void for entrepreneurs like the Berkeley scientists, who had promising, but still unproven, initial research.
Now a surprising source of funds is filling that void: the nonprofit world. A new breed of foundations flush with capital and a more businesslike approach is stepping in to pick up the slack. And many formerly skeptical biotechnology executives are warming to the idea of using nonprofit money to prop up projects during the lengthy, failure-prone path to profit. So when the Berkeley scientists stumbled on an answer to their funding problems in a nonprofit just across the Bay Bridge in San Francisco, they took it. The result is their company, Amyris Biotechnologies, one of a growing number of biotech-nonprofit marriages.
Gates money. Amyris's partner, the Institute for OneWorld Health, opened its doors in 2000, with help from the Bill and Melinda Gates Foundation coming in 2002. It aimed to be the first nonprofit drug development company. It started with a low-risk project, resuscitating a drug that had gone off patent and was no longer available. That black-fever injection received Indian government approval last month. Then the institute got bolder. Looking for new ways to attack malaria after a decades-long dearth of research into parasitic diseases, it decided to fuel a biotechnology company from the ground up. OneWorld Health funneled $12 million from a $42.6 million Gates Foundation grant directly to the Berkeley researchers to help get Amyris up and running. "It was a scary experiment," says OneWorld Health's founder, Victoria Hale. "We were the first venture capitalists for Amyris-the only ones."
Amyris would have eventually found funding, insists its president, Kinkead Reiling, a protein engineer who is one of the five Berkeley scientists who founded Amyris. But the money helped Reiling and his colleagues move faster and gave the company "some breathing room," he says. Amyris is trying to mass-produce artemisinin, a chemical found in a Chinese herb used to treat malaria. Because the parasite hasn't yet developed a resistance to it, the chemical has great potential to treat the afflicted in Africa who've developed resistance to other medicines.
Since it would be too expensive and time consuming to grow and harvest the herb, Amyris is exploring how to synthesize it in a lab using a microbe. While the malaria market is not likely to be lucrative, the technology may have applications for making nutritional supplements and even rubber. The OneWorld involvement has had another upside. "Someone else has evaluated our team and technology," says Reiling. "Most science is high risk, but this shows you as an organization can set milestones and meet them," which will help attract future investors.
That's what Los Angeles-based SiDMAP had in mind when it took $100,000 from the Inflammatory Breast Cancer Foundation. SiDMAP had been "the victim of timing," says a principal, David Manheim. The company provides metabolic-profiling services used by other drug discovery companies, but venture capital for such enterprises was scarce. The deal with the foundation, completed in January 2005 just four months after SiDMAP started, was its first bit of outside cash. "It definitely gave us some exposure and some ability to go to the market and hit the ground running," says Manheim.
Foundation money helps attract investors to a company because they get more return for the dollars they put in, says Greg Simon, president of the nonprofit think tank FasterCures. It gives investors cheap research without paying high university royalties. The nonprofit investment also serves to limit the number of shareholders. "It's a pretty good deal," Simon says.
Validation. Working with a foundation can offer a company nonmonetary benefits. Alnylam raised $100 million in public offerings, so the funding it has received from the Cystic Fibrosis Foundation won't make or break the company. But the company deals with unproven drugs that aim to stop the production of disease-causing proteins by interrupting RNA, the messenger gene. The Cystic Fibrosis Foundation's network of doctors and access to their patients eased clinical trials for Alnylam's research. "These foundations have a keen understanding of the types of therapies their patient would benefit from," says Maraganore. Plus, he says, "there are some benefits to having CF experts validate the Alnylam approach."
It's a benefit that the CF Foundation has capitalized on for almost a decade to help recruit biotech companies into disease research. In 1998, the foundation approached companies about developing a high-tech screening for potential compounds to treat patients with cystic fibrosis. But the disease affects only about 30,000 people nationally, so there's no market for a blockbuster drug. No one called back, recalls CEO Robert Beall. Now the biggest-selling CF drug brings in about $187 million a year to Genentech. Even that company told Beall it wouldn't have pursued such a small market, since the average cost of developing a drug has risen to $1 billion. Beall remained persistent, even though, he says, "with many companies, I wonder if they can spell cystic fibrosis." The foundation kept backing university research, and scientists were on the threshold of developing marketable therapies. Beall finally found a biotech partner with Aurora Biosciences, a San Diego firm where an employee coincidentally had done work on the disease.
The foundation pledged to give Aurora, which conducted bioassay screens to aid in drug development, $42 million provided it met project deadlines. The foundation's experiment might have stalled when Vertex Pharmaceuticals bought Aurora in 2001. But by then Aurora had already developed an assay to help test the effectiveness of a cystic fibrosis drug. So the publicly held Vertex kept working with the foundation. "If the CF Foundation was not willing to step up and support early-stage development, I am positive we wouldn't have prioritized work," says Vertex President Joshua Boger. The research was too risky, and "it's not a market that Wall Street is going to get excited by," he says.
The CF Foundation has invested over $161 million in drug development. Donors are demanding new approaches, says Beall. "It's not like the old days where you gave $50,000 and hope it goes well. That's all gone. Everyone now is held accountable." But some nonprofits have warmed up slowly to the idea of making investments that might not pay off. Earlier this year the Prostate Cancer Foundation, founded in 1993 by former junk bond king and cancer survivor Michael Milken, re-evaluated its strategy. It decided to start working with for-profit ventures to help them design clinical trials, although it has yet to fund a company.
Billions. The Bill and Melinda Gates Foundation, the world's largest foundation and a major funder of drug development, has given nonprofits focused on treating diseases raging in the developing world another incentive to test out the entrepreneurial model. The Microsoft founder is experimenting with his wealth to find new ways to target cures. "They are the biggest game in town, putting billions of dollars a year into existing and new treatments," says Christopher Earl of BIO Ventures for Global Health, which tries to persuade biotech companies to take on nonprofit projects. "The biotech industry is an integral part of that."
Drug companies have typically shied away from diseases prevalent in poor countries because they can't charge a premium for cures and protect drug patents. And biotech scientists are stunted by the lack of sustainable markets for any drugs they develop. So international foundations are working to spur multinational companies into exploring these areas.
The biotech-nonprofit marriage may still hit some rough patches. Figuring out pricing can be tricky, as can knowing when to pull the plug on research. In addition, as venture capital regains its appetite for start-ups, biotech entrepreneurs might turn their noses up at foundation money. But industry insiders say the successes so far show it's a financing model that should gain momentum. So biotech executives had better start honing their grant-writing skills.
This story appears in the September 25, 2006 print edition of U.S. News & World Report.