When Epitomics launched seven years ago, its founder and CEO Guo-Liang Yu had what he describes as a “one stone and three birds” strategy. The company, which has proprietary technology for generating rabbit monoclonal antibodies and humanizing them, uses its platform for generating reagents, diagnostics, and therapeutics. The plan for the Burlingame, California-based biotech was to build a revenue-generating business from the start and to fund drug-development efforts, rather than relying on investors to provide funding as needed.

 

To date, the strategy appears to be working. The privately held company has been rapidly growing its revenue-generating reagent and diagnostics business—now doubling year over year—and has been able to fund preclinical work on its lead candidates. To keep the need for cash modest—it’s raised less than $20 million since its inception in four rounds of funding—it has partnered with pharmaceutical companies in China to move its two lead monoclonal antibodies into the clinic.

 

Yu says many venture capitalists were skeptical about the strategy, preferring to fund, he says, “a highly focused business.” Even today, he gets approached by some deep-pocketed investors who are interested in putting money into the technology. But in return, they want to see the company split, with the reagent business and the drug-development business funded separately. “They don’t like the diversity,” he says. 

 

“Given the high risk nature of technology and drug development, I think the industry as a whole has been more aggressive than it should have been,” says Yu. “A lot of that is driven by the excitement of something new and the potential and promise. In reality, when things go wrong, it’s not that promise that went wrong. It’s a lot of small things. Biotech is about survival. If you can make yourself self sustainable, you always have a better chance of getting out of the tunnel.”

 

There are now some 135 public biotechnology companies trading on U.S. markets that have less than a year of cash—57 of these have less than 6 months of cash. Companies that have built revenue sources outside of their drug-development activities have the ability to weather financing droughts such as the current one. The idea is not new. There have long been companies that have sought to accelerate their time to revenue by in-licensing late-stage or marketed products. Others, like Epitomics, have filled the gap by establishing related business, such as using their platform to develop a tools or diagnostics business. But given the difficulty companies face raising money today, it’s a strategy that many may be exploring going forward.

 

Stem cells is one area in which several companies are using such an approach. These companies are pursuing a dual strategy of creating drug-development tools using stem cells to generate revenues today to help fund development of their own therapeutic candidates.

 

Most recently, Palo Alto, California-based StemCells, a developer of stem cell-based therapeutics, in April completed the acquisition of Stem Cell Sciences, a London-based maker of stem cell-based technologies for drug discovery and regenerative medicine research. StemCells CEO Martin McGlynn at the time said the deal would allow his company to “pursue near-term commercialization opportunities while continuing to develop our cell-based therapeutic products.” 

 

South San Francisco, California-based VistaGen Therapeutics, which is developing stem cells as tools for drug development, is using these same tools to develop its own small molecule drugs. In May 2008, the company announced it licensed its customized stem cell-based drug discovery assays to Sanwa Kagaku Kenkyusho, a Naogya, Japan-based pharmaceutical company as part of a joint research and development agreement. The deal involves three customized embryonic stem cell-based beta-islet differentiation assay systems. In the near term, such deals are expected to help the company advance into the clinic its lead small molecule compound, which is being developed to treat neuropathic pain, Parkinson’s disease, and epilepsy.
 

“We don’t really know how long this dry spell is going to last,” says Snodgrass. “In the absence of sufficient equity capital coming in to support the company, finding other revenue streams is crucial for companies of our space.”

 

But companies that embrace a dual business strategy may face some difficult questions, says Paul De Stefano, a principle in the Silicon Valley office of the law firm Fish & Richardson. “It’s a viable strategy in terms of keeping the lights on and it’s a viable strategy in terms of plugging forward,” he says. “I don’t know that it’s a viable strategy in terms of adding the amount of value that is going to be required, either to get to public markets, or take your own product even through phase II, let alone to the marketplace.”

 

De Stefano says while there are examples of companies that have built successful businesses to help support their own drug-development efforts, backing into this strategy for the mere sake of survival may not make a whole lot of sense. He says if a company thinks it has valuable technology worth preserving a company around, executives should ask themselves some difficult questions.

 

“I’d want to challenge what it is about your technology that is interesting and why it belongs in a stand alone company. Chickens are famously bad judges of their own eggs,” he says. “Then you’d look at that question where that technology best advanced and what is going to provide the greatest value for shareholders. One can argue there are far too few biotech companies that dissolved and gave money back to shareholders.”