Controlling Your Own Destiny

Sarah Lacy

So much of the groaning and hand-wringing over biotech start-ups has to do with the science. They have to discover a compound or some novel science. Then formulate it. Try it out in animals. Then graduate to the expensive and time consuming three phases of clinical trials. For all that hard work you get the reward of trying to get it through the FDA.

Much less is written about the other big challenge of biotech: commercialization. Most every startup feels lucky to get a commercialization deal with big pharma. In fact, since most of these companies don't have revenues when they're trying to go public, a pharma partnership is a way to validate that they've got something good. But as the Wall Street Journal's story today on Genentech, Novartis and Tanox shows- there's a heavy price to partnering.

First a word on what these arrangements are: Typically these are ways for the cash-strapped startups to offload the expense of later stage clinical trials and building a sales force. The oft-noted trade-off is giving up a good percentage of revenues since the partnering company is going to get a big chunk of the proceeds.

But as the Journal story shows there's a deeper trade off. The story is about a Houston biotech Tanox Inc. that developed a promising drug to help treat severe and potentially deadly food allergies. It contracted with Genentech and Novartis to commercialize the drug, and the story alleges the two scuttled Tanox's drug in favor of one Genentech was developing-- even though it wasn't as far along in trials. The result? Nearly ten years of legal battles between the three and a small biotech that did develop a promising drug, but has never turned a profit.

In contrast, I recently interviewed some of the top executives at Gilead, the third largest biotech in the U.S. in terms of market cap. Although still tiny in the overall drug industry, it has carved out a lucrative and successful HIV franchise, turned losses to profits, and passed $1 billion in revenues for the first time last year- all of which helped land them as one of a few drug companies in the BusinessWeek 50, published a few weeks ago.

Since such success is so hard fought in the drug discovery world, I often ask companies to share some important strategic moves that lead to their success. In the case of Gilead, the senior management cited two. The first was building their own sales force when they launched their first HIV drug. It wasn't a blockbuster, but it set the company up to keep all the proceeds from its next drug, Viread, which is fast becoming one. The second smart move was a gutsy acquisition that gave them a European sales force. You can't underestimate the ability to control your own destiny, executives said.

That's a lesson it appears Tanox learned the hard way—and one cash-strapped and deal-hungry startups should heed.

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