Investing in biotech can be scary. Only one out of 10 new drug candidates ever makes it through the gauntlet of clinical trials to become an FDA approved product, and it usually takes hundreds of millions of dollars and a decade or more of research to separate the winners from the losers. Investors usually can’t bother asking serious questions about profit-and-loss statements, or price-to-earnings ratios, until a company is 15 years old or more. And the hype—from gene therapy, to stem cells, to you fill in the blank—can be quite distracting.
So Christopher Henney, 68, who has seen it all in a 30-year career in biotech as co-founder of Immunex, Icos, and Dendreon, knew he had his work cut out yesterday. He was trying to convince a crowd of 100 financial pros at the CFA Society meeting in Seattle that biotech, the classic boom-or-bust industry, is really a good place to invest.
“I want to de-mythologize the scariness,” Henney said at the outset.
Henney started off his talk by reminding the audience how he and Steve Gillis, a pair of immunologists at the Fred Hutchinson Cancer Research Center, went on to start Seattle-based Immunex, one of the members of what he called “the class of 1983.” These were the second-generation companies, following industry pioneer Genentech, that all went public back in a great wave of enthusiasm for biotechnology. The class included Amgen, Biogen, Cetus, Chiron, Genzyme, and Immunex. Seven of the 10 to 12 biotech companies (Henney didn’t name the losers) that went public in that early wave went on to create market valuations that exceeded $1 billion, Henney said.
But even during that great wave of optimism about the power of new genetic engineering technologies for creating new drugs, there were prominent skeptics. Henney told the story of how he and Gillis had a meeting in the early days of Immunex with “one of the doyennes” of the Seattle investment community, whom he didn’t name. Henney and Gillis told their story with great enthusiasm, and got a rude awakening.
“At the end, I remember him saying, ‘I don’t think it’s a scam, but I won’t introduce you to anybody, either,'” Henney recalled.
Both of them were academic scientists who “had a fair amount of hubris about our self-worth. To be told that what we’re doing was a scam, it wasn’t something I wanted to tell my Mom about,” Henney said.
He added, “It was our welcome-to-the-NFL moment.”
Still, the investor taking that position would have been right for the first 15 years or so. It took 17 years from Immunex’s founding before it struck gold with etanercept (Enbrel), a drug for autoimmune diseases that now generates more than $7 billion a year in worldwide sales for Amgen and Wyeth. It took much longer, and hundreds of millions of dollars more than industry pioneers like Henney thought it would, to create blockbuster drugs like that. “If you had thought about that beforehand, nobody would have given us any money at all,” Henney said.
But they got the money, and learned a lot of lessons along the way. In his talk last week, Henney distilled them into six hallmarks of a successful biotech that investors should look for, along with five red flags to watch out for as well (which I’m going to save for another story).
So, here are the six hallmarks to look for in a successful biotech
