Special To BioWorld Today

WASHINGTON _ In 1991, as venture capital began getting evenharder to come by, the fledgling StressGen Biotechnologies Corp., ofVictoria, B.C., decided that research into breakthrough therapeuticswould have to wait. Instead, StressGen began making and sellingreagents to researchers around the world.

StressGen, like any number of cash-starved start-ups, recognized ittakes money to raise money. Rather than relying on venture capital,however, StressGen used the first $400,000 it raised to start amoney-making enterprise, which could then help support thecompany's biotechnology efforts.

Although unusual, the company's strategy is not unique. Still,StressGen's innovative approach illustrates the creative tacticsemployed by many biotechnology firms _ particularly new ones _to raise money needed to develop promising, new recombinantproducts.

"If you look at the biotech industry, it has always been extremelycreative in raising capital. That's because of the significant expenseof developing new drugs, said Denise Gilbert, vice president andchief financial officer of Affymax, of Palo Alto, Calif.

StressGen decided to focus on reagents for a couple of very differentreasons, said Richard Glickman, the company's co-founder andCEO. "We saw an opportunity to generate revenue _ and enhancedirect contact with researchers around the world _ by becoming thedominant supplier of molecular tools for the stress-responseresearcher."

Research into stress-response molecules, which are produced bycells in extremis, is a burgeoning research arena which holdsparticular promise for vaccine research, among other things.

The gamble paid off, Glickman said. Within three years, thecompany's revenues had reached $650,000. In 1994 alone, therevenues are expected to top $1 million, when the final numbers aretabulated. Gilbert, who studies innovative financing mechanisms inthe biotech industry, said StressGen's approach, like all of the othersshe has studied, has pluses and minuses.

"It's an excellent strategy, but its success is going to depend on thedynamics of the business you want to generate profits from," shesaid. "The theory is, you take all profits from the diagnostic side ofbusiness and pour them into the therapeutic business.

"But you have to ask whether the diagnostics business will generateenough profits to fund your therapeutics research," Gilbert said. Headded, the strategy only works if the ancillary business will continueto generate revenue without additional funding.

Glickman concedes that the reagent business is not likely to supplyall of the funding that StressGen needs to bring new products tomarket. Only a profitable product can reduce a company's need forventure capital, he told BioWorld.

But the approach has other, critical advantages for a start-up withlimited funding, he said. "In these hard times, companies that haverevenue clearly have a competitive advantage. And our operatingexpenses are reduced by 40 percent by having the reagent division.Still, it is a modest contribution overall, but it has made a bigdifference for us.

"It gives us staying power through difficult times," Glickman said."That's what it comes down to."

Gilbert said that companies also rely on other types of businesses togenerate a revenue stream: diagnostics, generic and niche-marketdrugs and service-based concerns.

The case of Quidel, of La Jolla, Calif., provides an example of a firmthat turned a successful diagnostics business into a thrivingtherapeutics enterprise, now known as La Jolla Pharmaceutical Co.

In 1989, Quidel's then-chairman and CEO, Joe Stemler was buoyedby the company's success in "cranking out a strong niche in fertilityarea _ pregnancy and ovulation tests." Then the company'sscientists discovered a novel approach to the treatment ofautoimmune diseases, those caused by renegade antibodies whichdestroy the body's own tissues.

But, Stemler said, "we didn't think we could raise the money tofinance both [businesses]. We spun off our pharmaceutical arm andturned it into La Jolla Pharmaceutical Co." Stemler, who took overas chairman and CEO of La Jolla, said the move had anotheradvantage as well _ it shifted the risk of financing onto one segmentof the company.

"We hoped that the therapeutics was attractive enough to raisemoney _ 1989 was difficult time to raise money, although not asdifficult as today," he said.

Stemler needn't have worried.

La Jolla raised $12 million. "We've been ducking and weaving in thefinancial world for the last several years. We've gone public twice_ once by acquiring a company, and the second time through bridgefinancing," Stemler said, drawing on Quidel and La Jolla for hisexamples. "Some of our richer cousins in the industry have not hadthis problem, but the future is somewhat of a question mark now."

Genzyme Corp., of Cambridge, Mass., also has been ducking andweaving financially, but for different reasons, said DavidMcLachlan, the company's chief financial officer.

Genzyme Bought Ancillaries For Different Reasons

Indeed, in Genzyme's early days, the company relied on a strategysimilar to StressGen's _ using ancillary businesses to achieve itstherapeutic goals.

Unlike StressGen, Genzyme did not start these peripheral businesses,it purchased them. Both of the companies were British; one, likeStressGen, manufactured reagents, the other fine chemicals that areused to formulate pharmaceuticals.

"We knew we had to raise venture capital," McLachlan says. "Wefelt it was easier to do that if we could demonstrate to potentialinvestors that we knew how to run a business and that we were notjust an R&D boutique."

Genzyme had a critical advantage over StressGen, however. Thecompany got its start in the early 1980's when Tufts Universityresearcher Henry Blair learned that his institution would not fund hiswork into Ceredase, a protein replacement therapy for Gaucher'sdisease.

Blair, who had funding from the National Institutes of Health,founded Genzyme _ and took the grant money with him,McLachlan said. In essence that meant that Blair already had corefunding for his research, and Genzyme did not need to acquire theBritish companies to generate money for research.

"To the extent that they could help share overhead and fundresearch, that was all well and good," McLachlan said. But Genzymemade the purchase "more to develop the overall strategy of thecompany than to fund research."

The strategy worked. Ceredase has been on the market since 1991,and the company raked in $170 million in sales in 1994. "We'll do$200 million in 1995," McLachlan said. In addition, the companynow has a recombinant product, called Cerezyme, which won FDAapproval in 1994.

When Genzyme finishes scaling up for large-scale manufacturing,Cerezyme will replace Ceredase, made from human placental tissue,which is in short supply.

Ironically, four years ago _ as StressGen was getting its start _ aGenzyme subsidiary established another ancillary business, this timeto bolster its R&D funding, an approach that McLachlan says is "nottoo dissimilar" from StressGen's strategy.

The subsidiary was Genzyme Transgenics, a company founded tofind ways to use animals as a source of human proteins. In 1991, thecompany purchased TSI Inc., of Milford, Mass., a money-losingcompany which nevertheless earned $45 million in revenuesannually by designing clinical trials.

McLachlan said the corporate goal was to "combine the twocompanies, and fix the clinical-lab business to create a cash flow thatcan be used to fund R&D." The process of fixing the business isunder way.

Avid, Terrapin Follow Suit

Similar examples abound. Avid Corporation Inc., of Philadelphia,recently purchased a biosafety testing service, which generatesrevenues by carrying out checking biologics, including gene therapyproducts, for viral contaminants. The sideline fits well with thecompany's core business, which is the molecular biology of viraldisease.

And Terrapin Technologies of South San Francisco, Calif., has builta profitable business by screening compounds for their potentialusefulness as new drugs _ a natural endeavor for a company aimingto develop its own roster of new drugs to combat diabetes, cancerand inflammation.

As for StressGen, Glickman said the company still must seekinvestor financing _ and is about to enter a new round of fund-raising. "One of our advantages is that we have a reduced burn ratebecause we have cash flow and a revenue base that is growingrapidly," he said.

Gilbert said that the most profitable biotech companies _Genentech, of South San Francisco, Calif.; Amgen Inc. of ThousandOaks, Calif.; Genzyme Corp. of Cambridge, Mass.; Biogen Inc., ofCambridge, Mass.; and Chiron Inc., of Emeryville, Calif. _ all havedifferent strategies.

"The point I'm making is that there isn't a right or wrong strategy forbiotech firms. There are a lot of different ways to get there." shesaid. n

Editor's note: For more on how small companies raise funds, seeBioWorld Financial Watch, Dec. 19, 1994, p. 1.)