Some Biotech Babies Are Just Born Lucky

"The Company has no products available for sale and does not expect to have any products commercially available for many years, if at all."

--ARIAD Pharmaceuticals Inc., private placement memorandum, Jan. 22, 1992

It's surely not the first biotech company to try to raise money with an unproved technology and no products in sight. But even in this high-risk, high-reward field, the leap of faith that a startup called ARIAD is asking investors to take is enormous. Soon, the Cambridge (Mass.) company will announce that it has successfully completed a private placement raising $46 million. That will make it the largest startup deal in biotech history. Not too shabby for a company whose headquarters and labs consist of chalk lines and two-by-four frames in a gutted building.

Ordinary biotech startups emerge from several years of incubation by venture capitalists parceling out money in dribs and drabs. But ARIAD is no ordinary startup. "I thought about what the characteristics would be of a company that would be a big success," says CEO Harvey J. Berger. Less than a year ago, he and a savvy group of co-founders custom-designed the company to win investors' hearts. They packaged a sexy new technology called signal transduction, well-known names on the advisory board, and experienced management.

STRANGE BEHAVIOR. It was the right recipe. The deal was oversubscribed, and Berger says he could have raised $10 million to $20 million more. But he couldn't keep controversy out of the mix. Some biotech executives and venture capitalists say ARIAD is no further along than a handful of competitors pursuing more focused research in the same field. And they worry that if ARIAD fritters away its huge cash hoard, all of biotech could get a bad name. "This is distressing for people who are trying to build real companies," says Joshua Boger, CEO of the drug design company Vertex Pharmaceuticals.

Berger & Co. would argue that they are building a real company--they're just cutting down the construction time. Over a year ago, Kevin Kinsella and Lawrence A. Bock of the La Jolla (Calif.) venture-capital firm Avalon Ventures saw that scientists were making progress in unraveling what's sometimes called the black box, the interior of the cell where the messages that control its destiny and behavior are transmitted (diagram). Drugs typically work at the cell surface level, but what they trigger inside has been a mystery. It's one reason drug developers have trouble controlling side effects.

Avalon decided that signal transduction, the science of controlling those cellular signals, was ripe for commercialization. Meanwhile, Berger, a respected R&D chief at Centocor Inc., an established biotech company in Malvern, Pa., was itching to start his own company. Berger agreed with Avalon that a company could use signal transduction to design drugs that zeroed in on disease-causing signals and disrupted them without side effects.

The previous year, Berger had watched New York investor David Blech raise a then-record $33 million to start Icos, a Seattle company focused on inflammatory disease. Although he didn't know Blech, Berger knew that he, too, wanted to put together a big deal. After a series of meetings, Berger, Avalon, and Blech decided to join forces, with Blech agreeing to foot the bills until they could pull off a mega-funding deal. As the popularity of biotechnology stocks last year soared, it just "made us more ambitious," Blech says.

Bock and Kinsella met with more than 300 scientists to scope out the field. Berger began recruiting scientists and executives from Centocor and elsewhere. By January, the company had lined up a dozen licensing deals with universities and persuaded 20 well-known scientists, including Nobel laureates David Baltimore and George E. Palade, to join an advisory board. Berger scored his greatest coup in enlisting Joan S. Brugge, one of the world's most respected investigators in signal transduction, to be scientific director.

But things happen fast in biotech. As Brugge admits, the "signal transduction field is changing daily." And today's leading researcher can be tomorrow's flat-earther. And there's no certainty a company can harness its new findings to make safe and effective drugs.

That's why it's tough to figure why the company deserves a valuation so much higher than other startups. Although Berger insists ARIAD will "dominate the field," its technology is at a very early stage--and it has plenty of competition already. At least three other young companies, Tularik, Sugen, and Sphynx Pharmaceuticals, are working in aspects of this field. Soon, the biotech company ImClone will announce it's spinning off a subsidiary called Cadus to do the same. And both Sphynx and Cadus are further along: Cadus has a patent and 20 preliminary drug candidates. Sphynx will test its first drug on people this summer.

BIG DEALS. Investors and fans of the deal say they are betting on the all-star cast and that by giving them a war chest they can concentrate on building a business instead of fund-raising. "I think Harvey Berger is a money-maker," says analyst Peter Drake of Vector Securities International. Amerindo Investments is confident enough in the strategy to buy in. Amerindo fund analyst Sarah L. Gordon notes that the $2-a-share placement likely is "a lot cheaper than participating in the IPO" somewhere down the line.

But it's fair to ask how many great chefs the broth needs at this stage: Scientists have strong egos, and that can make for conflict. One of Icos' key founders quit abruptly just months after that company's private placement. Says Samuel D. Waxsal, CEO of rival ImClone: "If the scientific board has real power, they'll all try to force programs they care about," imperiling the company's focus. Boger chides that a big advisory board is "a prescription for total chaos." Retorts Blech: "It will take just one major lead from one of these eminent people to pay off in spades."

ARIAD's financial coup will undoubtedly prompt other ambitious deals. Avalon is already working with Blech on another. But are the investors in these financings making their decision based on the company's long-term potential? Not entirely. They're also betting that the company will go public in a few years. If ARIAD goes public within a year or two, as it hopes to do, and the market's appetite for biotech is still keen, ground-floor investors figure to make a bundle--even if there are still no products in sight.

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