“At Maxygen, just as this 'seed, select, and amplify model' was the antithesis of rational drug design, the company's predilection for 'sense and respond, learn, and adapt,' was the antithesis of traditional business planning.”
Life is characterized not only by death, but by reproduction, passing on the DNA, the thread that produces progeny and is the real essence of life. Most businesses are the genesis of another business. They may spin off another company, and the parent may die, but the spin-offs survive and succeed. I use the analogy not only of inevitable death, but of life’s continuous process of recreation.
While the above may sound more like the musings of a new-age guru, the words come from Russell Howard, CEO of Maxygen, a 10-year-old biotech company based in Redwood City, California, that was added to the Nasdaq Biotechnology Index last May.
Howard was speaking in 2001, when one of us interviewed him for a book called It’s Alive: The Coming Convergence of Information, Biology, and Business. That book, co-authored with Stan Davis, profiled Maxygen as the poster child for a new “biomolecular” way of organizing enterprise, a new paradigm based on biological principals such as breeding, adaptation, and cell division.
Even among biotechnology companies, Maxygen appeared much farther along this path than most. Its foundation was a platform of DNA shuffling and molecular breeding technologies, methods of rapidly creating gene variants and recombining them into novel sequences, then employing high-throughput screening as the agent of selection.
Maxygen’s initial business plan mirrored its technology. Based more on exploring new opportunities than on exploiting any specific market, its strategy produced innovative technology applications that were spun off as separate companies, with substantial accrual of cash for Maxygen. What the company has not produced are profit-generating products—at least not yet.
Six years after that first interview, we checked back to find Maxygen approaching a dramatic point of reckoning. After a time, for individuals and for companies, the “pluripotent” possibilities of youth fade. Eventually, even a stem cell has to decide what it wants to be.
It’s Alive focused on two propositions we found central to the notion that there was a new, Biomolecular Economy overtaking the Information Economy, which had, previously, overtaken the Industrial Economy.
The first proposition, distilled from the work of Stuart Kauffman and others at places like the Santa Fe Institute, is that the principles of evolution and natural selection apply to all sufficiently complex systems. Genetic algorithms, for example, evolve software in a process literally isomorphic to the way biology uses recombination and selection to evolve species. Laboratories spawn self-organizing systems—artificial tissue, self-assembling nano-assemblies, or software that learns from its environment.
The second proposition is that, in the years ahead, the most highly adaptive organizations will succeed by letting go of “command and control,” prediction-oriented models. Instead, they will follow the core principles of living systems—self-organization, recombination, selection, feedback, and emergence. We translated some of these principles into seven “Memes For Management,” a meme being biologist Richard Dawkins’ term for a unit of thought that can be transmitted just as units of genetic information can be.
For example, embodying the “Recombine” meme in an organization would mean bringing people of different disciplines or backgrounds into an organization to increase the diversity of ideas being considered, even if it reduced task-level performance. The meme “Destabilize” suggests that disrupting the status quo in which you were the leader could strengthen competitive advantage if your own organization were more adaptable than its competitors. In the military, this is called “getting inside your opponent’s OODA Loop,” OODA being an acronym that stands for Observe, Orient, Decide, and Act. Both suggest a more fluid business plan that allows for serendipity, and that, in some circumstances, even accepts “fail often” as a useful corollary to the drug discovery mantra “fail early.”
At Maxygen, just as this “seed, select, and amplify model” was the antithesis of rational drug design, the company’s predilection for “sense and respond, learn, and adapt,” was the antithesis of traditional business planning.
While the company’s recombinant technology was admired, its disavowal of “rational” management was not universally appreciated. For the first three years, “we had no formal regular senior management meetings,” Simba Gill, then Mayxgen’s president, told us. Planning was done on the fly, with executives running around like “madmen” or “headless chickens.”
More conservative board members wanted Maxygen to focus on pharmaceuticals. Instead, Howard and his colleagues continued to invest in their gene-shuffling program, spawning four very different opportunities. They probed each, and let natural selection determine the strategy. As Gill explains the approach, it was, “Tell us what you’d like to do with shuffling.” Howard describes this phase of Maxygen’s life as being like “an amorphous amoeba that has multiple pseudopods moving up different gradients, with a pseudopod out in the direction of agricultural products, another out toward chemical products, another toward protein pharmaceuticals, and another toward vaccines….” Or, as Gill explains, “We let the environment drive the initial focus.”
Founder Pem Stemmer told us that his board never thought that agriculture could be a promising area, and yet “it was two $100-million deals in agriculture [one with Pioneer/Dupont, another with Syngenta] that allowed us to go public.” This was followed by another serendipitous deal in industrial enzymes with Novozymes.
The first phase of Maxygen’s life led to 30 corporate partnerships, $35 million in government grants, publications in top-tier journals, and numerous patents that would generate royalties for years to come. The strength of that platform was recognized by a 2007 article in the Wall Street Journal, ranking Maxygen in the top 10 of all global biotechs for the impact of its intellectual property. But then Stemmer added, “There comes a point when that cell is going to divide.”
The second stage in Maxygen’s life cycle began with deciding “the area in which we wanted to be excellent—biosuperior proteins.” Differentiation led to “cell division” in the form of spin-offs, and it was here than Maxygen’s technology innovation allowed it to capture value for its shareholders. Codexis, the first of Maxygen’s progeny, emerged as a leader in the business of providing hard to produce, expensive molecules, compiled on demand. Maxygen retained 31 percent of Codexis and a liquidity event would provide about $40 million to Maxygen’s owners.
Maxygen sold Verdia, an agricultural spin-off, to Dupont for $64 million in cash. It also spun off Avidia, a company with a new protein technology, which was recently purchased by Amgen, infusing another $18 million into the mother company. Maxygen DNA continues in each of these cultures, and the conserved energy—in the form of cash—nurtures the main stem. Each of these past and expected liquidity events creates non-dilutive financing for Maxygen. Investors are earning their return on Maxygen’s technology development by maintaining their share of the increased potential of the parent company.
Which brings us to the third phase, which is where we find Maxygen today—working on clinical development of protein drugs, which requires a very different skill set and a very different way of balancing risk and opportunity. “We’re no longer at the stage of “wouldn’t it be interesting if?” says Howard.
A distinguishing characteristic of Maxygen’s first, most generative stage, was the diversity of the management team: a Uruguayan financier, a Dutch founder, a CEO from Australia, and a president born in South Africa of Indian parents. As Maxygen has become more focused, the expertise of the people at the top has narrowed, as well. “We’re clearly less adaptable than before,” Howard says. “We have lost the people who were technology inventors. They have gone out to Avidia, Codexis, or Verdia, where a bunch went with new technology that was built by Amgen.”
Three of Maxygen’s biosuperior proteins are on investors’ radars: One is Alphainterferon, a pure embodiment of gene-shuffling technology, partnered with Roche. Early-stage clinical trial results will be announced later this year, with a clinical trial launched in HPV (human papillomavirus) patients. Another is a wholly owned GCSF (granulocyte-colony stimulating factor, an agent used to encourage the bone marrow to produce more white blood cells) that has undergone multiple preclinical animal trials and will compete with today’s best-in-class drug—Amgen’s Neulasta. Called MAXY G34, it has just entered middle-stage trials in breast cancer. Then there’s proprietary Factor VII, MAXY-VII, which is in late preclinical testing and designed to go head-to-head with Novo Nordisk’s blockbuster Factor VII, NovoSeven, to treat hemophilia.
As Russell Howard said in 2001, “If an organization dies but the people and ideas go on to generate valuable products,” there’s little to mourn. But some investors have had their doubts. “I think it is absolutely fair to say that we have not yet delivered the commercial return,” Howard says. “We have leveraged the technology and created a fantastic cash war chest, and devoted shareholders…. Now we are dependent on the success or failure of the small number of highly invested protein pharmaceutical drugs. If they win, we’ll be heroes. If they fail, we’ll be in the dust…. Our value is no longer in the technology as a potential, but the reality of what will the products do in clinical trial. So it’s a big change—we’re now in the lap of the gods.”
Does Maxygen’s life history tell us something about the applicability of the evolutionary perspective to organization design and development? We would not say that Maxygen has “evolved” in the past five years. Rather, it has “differentiated” along a growth program that makes two kinds of evolutionary sense. First, Maxygen is itself the descendent of a very successful “cell line”—companies started by Alejandro Zaffaroni. Zaffaroni founded Affymax in 1988, which begat Affymetrix, Symyx, and then Maxygen—which, as we’ve seen, has sown another generation of seeds. It appears that Zaffaroni has created an organizational species for which the company is indeed an idea’s way to make another idea.
Second, the three stages of Maxygen’s life to date are well-adapted for a founder population in a new environment: first use the inheritance (in the form of intellectual property, people, cash, and growth behavior) endowed by the Zaffaroni parent to expand the nascent capability and explore the available niches; second, migrate to the most hospitable niche while recovering the investment in the initial capabilities; and third prune what’s not needed.
In so doing, doesn’t Maxygen sacrifice its ability to adapt in the event of an invasive competitor or shift in its niche? Howard acknowledges that it does. But it has become accepted wisdom that as organizations age, they face “The Innovator’s Dilemma,” in which a company’s competitive strengths become its constraints. In It’s Alive, BP’s Chairman Lord Brown explained that, for an oil giant, “the creation of the capacity to respond is the essence of strategy.” The Zaffaroni growth program, in contrast, concedes the capacity for an organization to change itself in favor of giving the next generation a good upbringing, a creative education, and a small trust fund.
In the industrial economy, in which the creation of physical capital was a signal achievement, we have tended to look at the preservation of the organization as a life and death issue. But as economists we agree with Howard’s point of view—if companies can’t adapt, they should release their intellectual, human, and financial capital for redeployment. Perhaps in a Biomolecular Economy, we are developing a perspective in which companies are instrumental, rather than central, to both investors and individuals.
If in such an economy organizational death is seen as natural and productive, what of the individuals and their careers? In Maxygen, there has been acceptance that the company should contain different people at different growth stages. Perhaps people will learn to move among organizations of the type that suits them—“serial entrepreneurs” will seem as natural a population as “salarymen” in Japan. When I asked Howard how he’d managed to be the right CEO for the several seasons of Maxygen’s life so far, he said: “Is there a time when it will be right for me to leave the company? I could see that happening when we get to the commercial phase. I’m not particularly interested in being the CEO to get up and describe global earning every quarter—others would be better at that.”
In 2001, we profiled Maxygen because we had a theory that the seeds of the next organizational model would be found in a molecular biology company; in 2007, we’re convinced that we are seeing at least one possible future for organizations, one that, like the basic limited liability model developed for the capital-scarce industrial revolution, can give investors and individuals the chance to profit from a new set of economic opportunities. This time, the new challenge is not amassing vast quantities of financial capital, but focusing sufficient talent on exploring and exploiting opportunities that are developing faster than anyone can keep track of them. Maxygen may not yet have proven to be the next organizational paradigm, but it looks to be a new organizational haplotype.
If true, the adaptive enterprise is good news for those with new capabilities, but where does it leave the established pharma companies? And what of the Biopharma startups that enter at Maxygen’s stage three, with a target market in mind and an idea of a product to commercialize? When a new species starts feeding in your habitat, some adaptation is required. For large companies, as in other industries, focusing on the white space and getting fresh market input requires active attention—otherwise, the structures built to protect existing market positions will dominate management decisions. (As an example, one network hardware company we’re familiar with pursued innovation through several promising acquisitions, then proceeded to give their products away as a means of reducing prices for the core offering.) Large-scale research efforts—the first refuge of “not invented here” thinking—have not proven to be an effective answer.
But there is an approach that has worked in other industries and can work in drug development, as well. Large movie studios, for example, are opting out of producing their own movies, and now focus on marketing and distributing films made by others, Little Miss Sunshine, say. Even their most reliable sequel blockbusters—for example, Spider Man 3—are financed with partners. Such arrangements can be good for those developing the asset and those bringing it to market.
The rights to develop molecules are already bought and sold, though not yet traded in an efficient market. Perhaps they will be soon. Viewing the myriad opportunities as tradable options rather than corporate birthrights will help pharmas and biotechs alike understand their role in the evolving market and, as a result, do a better job of collaborating. Amgen, Roche, and others have seen the wisdom in picking up where Maxygen left off in exploiting its technologies. And venture capitalists have, to a degree, begun to act like investors in movie productions, investing, selectively, in biopharma startups.
The “studio” model has had successes in bringing targeted drugs to defined niches. The Zaffaroni/Maxygen model seems to revolve around the explore/exploit cycle for new capabilities. Whether the incumbents have a financially advantageous model—in contrast to, say, telecommunications companies overpaying for new net-related capabilities—remains to be seen.
Christopher Meyer is chief executive of Monitor Networks, a member of the Monitor Group management consulting firm based in Cambridge, Massachusetts. Joan Chu is a Senior Partner in the biopharma practice at Monitor Group.
October 26, 2007
http://www.burrillreport.com/article-a_turning_point.html