Virtual Biotechs: No Lab Space, Few Employees; New Generation of Startups Aim to Keep Costs Low While Pursuing Lofty Research Goals

Virtual Biotechs: No Lab Space, Few Employees

New Generation of Startups Aim to Keep Costs Low While Pursuing Lofty Research Goals


June 3, 2014 1:37 p.m. ET

CAMBRIDGE, Mass.—Biotech startup Alkeus Pharmaceuticals Inc. has a lofty goal—curing childhood blindness—but its operating budget is anything but grand.

The company has zero full-time employees and no laboratory space. Chief Executive and co-founder Leonide Saad doesn’t draw a salary, and holds meetings in empty classrooms at the Massachusetts Institute of Technology or at an Au Bon Pain down the street.

Alkeus is one of a burgeoning new generation of so-called virtual biotechs, born of the need to capitalize on fast-moving science in today’s more frugal venture-capital environment.

These companies generally start with one or two partners seeking to develop a promising scientific breakthrough. They keep overhead down by hiring consultants and outsourcing lab work. Those that do maintain office space often share with other virtual biotechs in incubator-like settings.

“The cost-saving and flexibility advantages are numerous,” says Dr. Saad, 36 years old, whose company has begun testing a drug in a human trial. But “pitfalls loom continuously and are always on the verge of bringing the company to a halt.” Grappling with contractors that aren’t fully committed to the job is one of the biggest headaches, Dr. Saad and other entrepreneurs say.

Hundreds of virtual biotechs are estimated to be operating today, in tech hubs from San Francisco to Cambridge, England. Bruce Booth, a partner at venture-capital firm Atlas Venture in Cambridge, Mass., estimates that as much as a third of the $4 billion to $5 billion in annual U.S. venture funding for biotech goes to virtual firms these days. Atlas is funding about a dozen, most of which have one or two employees. Atlas and other venture partners invest $2 million to $3 million to fund the virtual firms’ first year.

“Those very lean budgets don’t afford the building out of big labs,” Mr. Booth says.

In past decades, biotechs such as Genentech Inc. and Gilead Sciences Inc. were founded as fully integrated companies with their own labs and scientific teams pursuing multiple projects. Often, they would start with venture-capital funding before raising larger sums through public stock offerings.

That sort of financing is harder to find today, in part because many expensive biotech bets didn’t pan out. “You just don’t have patient investors willing to invest the capital, either on the venture-capital side or on the public side,” says Kevin Kinsella, founder of Avalon Ventures, a La Jolla, Calif., firm that alongside drug company GlaxoSmithKline GSK.LN -0.72% PLC is investing in a number of virtual startups.

Big shifts in the pharmaceutical industry, meanwhile, have helped make the virtual model possible. Large drug companies have laid off thousands of scientists, many of whom formed or joined contract research organizations, or CROs, that offer drug-development services. Biotech startups can now call on these firms to perform much of their laboratory and clinical work.

Dr. Saad, who has a Ph.D. in tissue engineering from MIT, worked as a management consultant and venture capitalist before deciding to invest his savings in a startup. He homed in on a drug discovered by Ilyas Washington, an ophthalmologist at Columbia University, to treat Stargardt disease, a rare, genetic condition that gradually causes blindness in one out of 10,000 children.

Drs. Saad and Washington co-founded Alkeus in 2010, with Dr. Saad running the company and Dr. Washington serving as an adviser. Dr. Saad raised additional funding from family members and five private investors, but he declines to disclose figures or the investors’ identities. Dr. Saad says he himself is living off his own savings.

Alkeus hired a CRO to carry out experiments on the drug, to see how easily it would be absorbed in the human body. Two universities agreed to conduct some animal experiments for free, because the work was scientifically interesting, Dr. Saad says. Alkeus hired another CRO to figure out how to make large quantities of the drug for use in a human study, and worked with as many as 60 vendors to manufacture, bottle and label initial quantities of the drug.

Keeping on top of contractors who don’t necessarily feel invested in the project was tough, Dr. Saad says. “Each of those guys messed up once. The capsule guy put too much drug in the capsule. I said, ‘Go back and do it again!’ ”

“They don’t necessarily care about patients—they want to get your project completed and out the door,” he says. To foster camaraderie, he brings junior employees at his manufacturing CROs bottles of Champagne or $100 gift cards when they complete a key task.

After much badgering, Dr. Saad persuaded Joshua Boger, the founder and longtime chief executive of Vertex Pharmaceuticals Inc., VRTX +0.45% to sign on as executive chairman of Alkeus, with no salary but an equity stake in the company. Dr. Boger, 63, says he was drawn by the “elegance of the science” and by the chance to build a company cheaply and virtually.

“I wasn’t interested in helping someone hire all their vice presidents,” Dr. Boger says.

On a recent afternoon, Drs. Saad and Boger met for coffee at Au Bon Pain before heading to a nearby computer-science building at MIT, where a faculty member and friend of Dr. Saad’s books him classrooms when he needs a place to meet.

Drs. Saad and Boger moved a rickety table away from a whiteboard and started drawing up plans for Alkeus’s next clinical trial, which they hope to begin later this year. For now Alkeus’s drug is being tested in healthy volunteers to check for early signs of safety and efficacy. Next Alkeus wants to test the treatment in children with Stargardt disease.

When it was time for Dr. Boger to leave, Dr. Saad saw him out—and then returned to the classroom to find a graduate student with headphones and a laptop with his feet up on the table. “I’m sorry, but we actually booked this room,” Dr. Saad said. The student, who didn’t seem to notice the strategy laid out on the whiteboard, quietly shuffled out.

MIT says it encourages entrepreneurship and has an “open campus” policy allowing visitors to come and go without special passes, but adds that its facilities are “not available for commercial or industrial meetings.”

Virtual biotech entrepreneurs say they like not having to manage a permanent staff, but the lack of colleagues sometimes forces them to handle menial tasks.

Michael Gilman, former head of research at Biogen Idec Inc., BIIB -0.43% was trying to unjam the paper shredder one recent morning at Padlock Therapeutics, the virtual company he runs without full-time employees. The firm, which focuses on autoimmune disease, is housed in the Cambridge, Mass., offices of Atlas Venture, which gave Padlock part of its seed funding.

Dr. Gilman says he is getting better at managing his calendar after forgetting several appointments and standing people up during the first few months. Sitting in nearby offices are the heads of several other virtual startups, who swap tips on dealing with CROs. “I like the energy of it,” Dr. Gilman says. “People will just plop their butt down in the chair and say, ‘Hey, can you help me solve this problem?’ ”

Another company Atlas is helping fund, Rodin Therapeutics, works with contractors all over the world. It has a chemistry CRO in China helping it refine a molecule for use as an experimental Alzheimer’s drug.

Martin Jefson, former head of neuroscience research at Pfizer and Rodin’s chief scientific officer, emails molecular-design plans back and forth to China. Dr. Jefson says he handpicked the CRO scientists he is working with because he has “had some bad CRO experiences in the past.”

When the Chinese firm finishes a new version of the molecule, it sends it to another CRO in Germany, which tests the drug in human cells. Rodin has hired another CRO to conduct animal tests in Finland. Johnson & Johnson Development Corp. is helping finance Rodin and owns a stake.


About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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