How do you start a thriving biotech company?
The most painful way might be as follows: You’re Jay Lichter, managing partner of Avalon Ventures, and you’re driving your car near the post office in La Jolla, and all of a sudden you have a horrible attack of vertigo.
You pull the car to the curb, convince yourself you’re dying of a heart attack, notice you are still alive after 15 minutes, no pain in the chest, but you still can’t sit up, can’t get out of the car. You call your secretary, who takes you to the hospital where your wife is waiting.
The doctors run the tests and it turns out to be Meniere’s, a disease of the inner ear, which you note after quickly Googling, strikes 615,000 Americans each year. The doctor staring into your own ear happens to be Jeffrey Harris, chief of otolaryngology at UCSD, and so you soon suggest starting a company together.
You call it Otonomy (ears plus “autonomy” in case you don’t want to sell it off later) and you patent a sustained-release steroid gel that makes you and a whole lot of other people with vertigo or bad ringing in their ears (tinnitus) feel better. You later come up with a steroid antibiotic to treat toddlers with chronic ear infections.
Lichter, 51, now long recovered, leads life sciences investments for Avalon’s $200 million Fund X. Lichter was a postdoc from Yale in pharmacogenetics before he came to San Diego in 1993 to co-found Sequana with Avalon originator Kevin Kinsella. He holds more than 260 patents and patent applications for six current Avalon companies, including Otonomy, Afraxis, Carolus, Zacharon Pharmaceuticals, and Sova, and sits on their boards. Lichter also sits on the board of Aratana, the medical company for dogs and cats, and the John Wayne Cancer Center.
So if Otonomy was a painful launch — “but cork-popping at the end,” Lichter is quick to add — then what’s the painless route?
That might be curling up with a good scientific paper, calling up the author Susumu Tonegawa, Nobel laureate at MIT, and proposing they start a company around Tonegawa’s research, which had begun to show that a rare genetic cause of autism disorders might be cured by inhibiting a certain protein in the brain. Their company, Afraxis, was bought last month by Genentech for some $178 million. When the product is given to what appear to be autistic mice, they no longer cower in corners or engage in repetitive motion.
Painless to lucky, in terms of how Avalon meets up with good ideas, might be called the Sorrento Valley Coffee Shop approach, frequenting Zumbar’s, the biotech hangout, and ordering enough lattes long enough that people like Floyd Romesberg walk up and ask, “You’re a VC? Well, I have an idea,” as Lichter recalls the story of Avalon partner Court Turner’s meeting with Romesberg, a professor at The Scripps Research Institute.
Romesberg’s idea turned out to be a highly novel arrow from the quiver of evolutionary genetics. Some bacteria (and maybe a lot of creatures closer to us) can actually regulate their own evolution when they really need to, with a special enzyme.
If that resourceful bacteria happens to kill some 70,000 people in U.S. hospitals annually, like MERSA or C.diff, and every time the pharmaceutical industry tries to whack the bacteria out, the little guy shape-shifts into a more resistant bug, then holding the bacillus to its current genetic form long enough to kill it with conventional antibiotics would be a very valuable thing. That company was RQx, and Genentech also bought it out recently for $104 million plus royalties.
Lichter explains Avalon’s model: “We have always found this little niche between the academic ‘eureka’ and the early stages of pharmaceutical discovery and development.”
He believes this accounts for their current success rate, going “seven for seven” on making candidate drugs, with four of seven Avalon companies already bought out or “exited.” The industry average is only 10 to 15 percent, he says, in the race to come up with a profitable compound or process before running out of money. The time it takes for development and approval by the FDA can be longer than venture funds and their shareholders can wait. Biotech is not social networking, or online gaming. Avalon made hundreds of millions from its early investment in Zynga, for instance.
As the national ecosystem for venture “turned horrible in biotech,” says Lichter — venture capital fundraising in life sciences tumbled after 2007-08 — Avalon’s 25-year emphasis on early stage development suddenly became fashionable. Late stage expensive Phase 2 and 3 companies, “were picked over like sweaters in Filene’s Basement” (the famous Boston department store); big pharma had drastically cut their own discovery groups; and one of the very few venture firms with a portfolio of innovative companies — but not purely academic— was Avalon. (Lichter praises Domaine Partners as “absolutely fantastic,” but points out that Domaine is headquartered in Princeton, N.J., and Avalon makes some 80 percent of their life sciences investments in San Diego.)
Ironically, says Lichter, “What’s been wrong with venture lately is that there has been too much money in it. It is a cottage industry and you have to make the shoes, have to shine the stones. The only way you can increase it is to have more cottages. You can be a village, but you can never be a city. That is how we look at it.”
He explains, “We don’t put $30 million in. If you put $30 million in, you have to sell the company for a $100 million up front to make a venture return. The problem is, to sell for $100 million up front, there are probably only 10 or 15 companies on the planet that can buy. But if you only need to put $5, $6, $7 million dollars in, a $10 million upfront payment with milestones is interesting. And there are probably 200 companies that can do $10 million up front.”
I’m puzzled by one thing, though. Months before he collapsed in his car from vertigo, Lichter had had trouble sleeping from the tinnitus, the ringing in his ears.
Why didn’t he go to a doctor earlier?
“Oh, that? That was probably a guy thing,” he laughs.
Cy Bates of the Jacobs School of Engineering contributed research to this article. Steve Chapple’s Intellectual Capital covers game-changing people, ideas and perspectives. He can be reached at intellectualcapitalchapple@gmail.com
The most painful way might be as follows: You’re Jay Lichter, managing partner of Avalon Ventures, and you’re driving your car near the post office in La Jolla, and all of a sudden you have a horrible attack of vertigo.
You pull the car to the curb, convince yourself you’re dying of a heart attack, notice you are still alive after 15 minutes, no pain in the chest, but you still can’t sit up, can’t get out of the car. You call your secretary, who takes you to the hospital where your wife is waiting.
The doctors run the tests and it turns out to be Meniere’s, a disease of the inner ear, which you note after quickly Googling, strikes 615,000 Americans each year. The doctor staring into your own ear happens to be Jeffrey Harris, chief of otolaryngology at UCSD, and so you soon suggest starting a company together.
You call it Otonomy (ears plus “autonomy” in case you don’t want to sell it off later) and you patent a sustained-release steroid gel that makes you and a whole lot of other people with vertigo or bad ringing in their ears (tinnitus) feel better. You later come up with a steroid antibiotic to treat toddlers with chronic ear infections.
Lichter, 51, now long recovered, leads life sciences investments for Avalon’s $200 million Fund X. Lichter was a postdoc from Yale in pharmacogenetics before he came to San Diego in 1993 to co-found Sequana with Avalon originator Kevin Kinsella. He holds more than 260 patents and patent applications for six current Avalon companies, including Otonomy, Afraxis, Carolus, Zacharon Pharmaceuticals, and Sova, and sits on their boards. Lichter also sits on the board of Aratana, the medical company for dogs and cats, and the John Wayne Cancer Center.
So if Otonomy was a painful launch — “but cork-popping at the end,” Lichter is quick to add — then what’s the painless route?
That might be curling up with a good scientific paper, calling up the author Susumu Tonegawa, Nobel laureate at MIT, and proposing they start a company around Tonegawa’s research, which had begun to show that a rare genetic cause of autism disorders might be cured by inhibiting a certain protein in the brain. Their company, Afraxis, was bought last month by Genentech for some $178 million. When the product is given to what appear to be autistic mice, they no longer cower in corners or engage in repetitive motion.
Painless to lucky, in terms of how Avalon meets up with good ideas, might be called the Sorrento Valley Coffee Shop approach, frequenting Zumbar’s, the biotech hangout, and ordering enough lattes long enough that people like Floyd Romesberg walk up and ask, “You’re a VC? Well, I have an idea,” as Lichter recalls the story of Avalon partner Court Turner’s meeting with Romesberg, a professor at The Scripps Research Institute.
Romesberg’s idea turned out to be a highly novel arrow from the quiver of evolutionary genetics. Some bacteria (and maybe a lot of creatures closer to us) can actually regulate their own evolution when they really need to, with a special enzyme.
If that resourceful bacteria happens to kill some 70,000 people in U.S. hospitals annually, like MERSA or C.diff, and every time the pharmaceutical industry tries to whack the bacteria out, the little guy shape-shifts into a more resistant bug, then holding the bacillus to its current genetic form long enough to kill it with conventional antibiotics would be a very valuable thing. That company was RQx, and Genentech also bought it out recently for $104 million plus royalties.
Lichter explains Avalon’s model: “We have always found this little niche between the academic ‘eureka’ and the early stages of pharmaceutical discovery and development.”
He believes this accounts for their current success rate, going “seven for seven” on making candidate drugs, with four of seven Avalon companies already bought out or “exited.” The industry average is only 10 to 15 percent, he says, in the race to come up with a profitable compound or process before running out of money. The time it takes for development and approval by the FDA can be longer than venture funds and their shareholders can wait. Biotech is not social networking, or online gaming. Avalon made hundreds of millions from its early investment in Zynga, for instance.
As the national ecosystem for venture “turned horrible in biotech,” says Lichter — venture capital fundraising in life sciences tumbled after 2007-08 — Avalon’s 25-year emphasis on early stage development suddenly became fashionable. Late stage expensive Phase 2 and 3 companies, “were picked over like sweaters in Filene’s Basement” (the famous Boston department store); big pharma had drastically cut their own discovery groups; and one of the very few venture firms with a portfolio of innovative companies — but not purely academic— was Avalon. (Lichter praises Domaine Partners as “absolutely fantastic,” but points out that Domaine is headquartered in Princeton, N.J., and Avalon makes some 80 percent of their life sciences investments in San Diego.)
Ironically, says Lichter, “What’s been wrong with venture lately is that there has been too much money in it. It is a cottage industry and you have to make the shoes, have to shine the stones. The only way you can increase it is to have more cottages. You can be a village, but you can never be a city. That is how we look at it.”
He explains, “We don’t put $30 million in. If you put $30 million in, you have to sell the company for a $100 million up front to make a venture return. The problem is, to sell for $100 million up front, there are probably only 10 or 15 companies on the planet that can buy. But if you only need to put $5, $6, $7 million dollars in, a $10 million upfront payment with milestones is interesting. And there are probably 200 companies that can do $10 million up front.”
I’m puzzled by one thing, though. Months before he collapsed in his car from vertigo, Lichter had had trouble sleeping from the tinnitus, the ringing in his ears.
Why didn’t he go to a doctor earlier?
“Oh, that? That was probably a guy thing,” he laughs.
Cy Bates of the Jacobs School of Engineering contributed research to this article. Steve Chapple’s Intellectual Capital covers game-changing people, ideas and perspectives. He can be reached at intellectualcapitalchapple@gmail.com
