Editor

SAN DIEGO – "Two scientists with a novel multiple sclerosis treatment and a patent from Stanford walk into a bar . . . "

It could have been the beginning of a joke, but it was in fact the beginning of a hypothetical situation proposed by Gabor Garai, partner with Foley & Lardner LLP, during the law firm's annual life science conference. Garai convened a group of industry veterans to help the two fictional scientists build a biotech.

"They need money and advice – and here we are ready to give them one and not the other," he quipped.

The panelists recommended the scientists start by tapping into entrepreneurship resources like the University of California, San Diego's Connect program for help building a business plan. Garai also noted that many law firms and accounting firms will defer fees for start-up services.

To get venture capital, Robert Mashal, president and CEO of NKT Therapeutics Inc., said the scientists will likely need a lead molecule or a plan that involves licensing an existing molecule to hit their novel target. If their research is earlier stage, it needs to have either the potential for broad applicability across a platform or a focus in an area of biology considered attractive to large pharma, he said.

Which isn't to say venture capital is the only option. There are government grants, of course, and Mashal said some pharma companies have their own grant programs that might result in "a couple of hundred-thousand dollars."

Jeffrey Draa, vice president of the Tech Coast Angels network, added that angel investment could be an option for start-ups with about a $3 million to $4 million valuation, seeking an investment of $300,000 to $1.5 million.

But at the end of the day, the scientists will need between $15 million and $50 million to get Phase II proof of concept data, Mashal said. And once they get there, they should expect that venture investors will own 80 percent to 85 percent of the company, management will hold about 12 percent, and the founding scientists and Stanford will have what's left.

The venture money will likely be tranched, Mashal added, with perhaps $5 million to $6 million going toward selection of the lead candidate, $6 million to $12 million invested to complete preclinical work and file the investigational new drug application, $2 million to $4 million spent on the first safety study, and $10 million to $30 million required to establish efficacy.

Before the scientists get too far along, Foley partner Keith Lindenbaum cautioned that they need to allocate $5,000 or so for a patent search to ensure they have freedom to operate. He said the average biotech going public has one or two granted patents and another one or two patents pending. For partnering negotiations, he said biotechs need one granted patent and a continuing application that provides the flexibility to adjust and cover any attempt by suitors to design around the granted patent.

Lindenbaum noted that patent applications are "taking longer and longer" to make their way through the patent office, often requiring two years. But he shared a few tips to speed the process: first, if the patent filer is over 65 years of age, the application gets moved up in the queue; and second, there is an accelerated process that results in the patent being granted within a year, but it requires significant effort from the filer and doubles the cost of the application.

Turning to the exit plan, a trickle of biotechs continue to file for initial public offerings (IPO), despite the below-range pricings and generally poor aftermarket performance seen thus far. Many investors fear the IPO may never again be a viable exit option for small biotechs, but David Parrot, managing director at BMO Capital Markets Corp., noted that the market "has gotten progressively, in small steps, better." (See BioWorld Insight, Oct. 4, 2010.)

Parrot predicted that with elections over and the broader markets recovering, it's possible that investors will start being more receptive to risk again, and that generalist funds will return to biotech.

Yet the "vast majority of companies want to be taken out by pharma, but that is by far the least probable outcome" when it comes to exits, Parrot said.

How to improve the odds? Mashal suggested starting early: "It's never too early to start talking to pharma companies."

Other advice, from Linda Pullan at Pullan Consulting, included the fact that while material transfer agreements can "boost confidence in your asset," they can also slow down the partnering process because scientists having fun playing with a technology are often not motivated to move things forward.

"It is incumbent on the small firm to keep the pressure on without being a pain," Pullan said. She also advised biotechs not to take offense and walk away from an initial low-ball offer, citing a case where a biotech was able to negotiate for a seven-fold improvement in terms.