Monday, June 18, 2007

Should Some of these Butterflies Get Eaten?

Last week, Oxford Bioscience Partners gathered its portfolio CEOs as well as some interested industry friends to its annual meeting in Cape Cod, this time to talk about “Adapting to Change.”

And change, the program argued, was necessary to success. The best managers adapt to changing circumstances. Caterpillars become butterflies (that was the picture on the program’s cover).

But unlike the relatively predictable lifecycle of that extraordinary insect, biotechs often go through many transformations, all of them expensive, and very few of them ever yielding the economic equivalent of the butterfly’s winged beauty. (See, for example, an interesting New York Times story on – to mix a metaphor – biotech’s zombies.) Instead, many companies continue to transform themselves into the next thing, somehow attracting hopeful new investors along the way to keep them alive.

To get the discussion started, Oxford had invited a group of executives who had taken their companies (Xoma, Enzo, Oscient, GPC and Alantos) through major business transformations. Most of the companies are impressively old—impressively because only one, the 30-year old Enzo Biochem, supports itself on its own cash flow. And Enzo has been at best a moderate success (a 9% compounded increase in its stock price since 1992 – our systems don’t allow us to go back to 1980, when the company went public at a market valuation of $10 million).

Take the changes sketched by Oscient Pharmaceuticals CEO Steve Rauscher and GPC Biotech CEO Bernd Seizinger.

Both companies dumped their original technology strategies, moving into in-licensing shortly after the genomics balloon deflated. Oscient has gone into primary-care marketing; GPC into oncology drug development, having in-licensed, in satraplatin, what has turned into one of the hottest anti-cancer candidates in biotech (and a relatively old compound, to boot). Seizinger was too politic to point out that in 1998 he had been abruptly fired as the CSO of Oscient, then called Genome Therapeutics. Nor did he point out the fact that Oscient, the company that kicked him out, was now trading at a market cap of just $60 million, despite having two marketed products and $32 million in cash. Meanwhile Seizinger’s GPC had a valuation of about $970 million.

You can argue that Oscient’s transformation into a primary care company was hardly the kind of transformation likely to yield a butterfly. Nonetheless, it follows a traditional storyline: it abandoned technology for products; it dumped its management. Panelist and Alantos CEO Keith Dionne dumped his company’s technology six weeks after he’d joined the company. He kept his German scientists; laid off many of the Americans. Enzo is bringing in new management right now to run its operating businesses (although the parent is still run by its founders). And while it has certainly made money on its inventions, it hasn’t made a lot – it only recently won patent priority in court cases over competing protein array and amplification technologies, both of which it developed in the early 1980s. That’s a long time to wait for a return.

But granted the ability and willingness to transform, the real question is why do it in the first place. That was the pertinent point Mark Carthy, an Oxford partner, asked the panel: given the longevity of some of these companies, the dismal returns from their original strategies, and their subsequent twists and turns, how does the investor make money?

“Timing,” was the general, unhelpful, response.

Meanwhile, Keith Dionne only had to show up to give his answer: he’d sold his company to Amgen for $300 million – rather than sticking around and probably having to change strategy again (it was founded as German Therascope AG in 1999, around a Nobel prizewinner’s combinatorial chemistry platform).

With Xoma trading at well below its 1989 price, let alone its nutty genomic-boom pricing, shouldn’t that company have been assigned to other managers – and more pertinently, other owners? Same for Oscient: the transformation led by Rauscher from discovery into primary care marketing is only one of several huge strategic changes since the company’s founding in 1961 as Collaborative Research. And nowhere has it found traction. But it’s always found investors.

Meanwhile, Xoma has raised more than $700 million of investor capital since it was founded in 1980, and will have soon gone through its fourth CEO. But for Pat Scannon, founder and EVP of Xoma, hope springs eternal: the up-tick in his stock price this year, from $2.16 to $3.40 may, he said, portend great things to come. Just like all the other upticks in his share price over the previous 26 years.

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