• WisBusiness

Wednesday, August 17, 2011

For Wisconsin biotech firms, a perfect storm of financial challenges


By Tom Still
If you didn’t know that Exact Sciences was on the verge of a breakthrough in the war against cancer, you might conclude it’s a company on the ropes.

The Madison-based firm reported earlier this month that it lost about $6.6 million in the latest quarter and about $11 million for the first six months of 2011, numbers that could signal trouble for most publically traded companies of its size.

But for Exact Sciences, which moved to Wisconsin from Boston about three years ago under the leadership of president Kevin Conroy, the losses represent a common rite of passage for biotechnology companies – especially those savvy enough to develop game-changing drugs or diagnostic tests.

That rite is preparing for clinical trials, and it’s a guaranteed drain on biotech company bank accounts.

Exact Sciences has begun clinical trials, a three-stage process required by the U.S. Food and Drug Administration, for its non-invasive test to screen for colorectal cancer. The test, called Cologuard, could revolutionize how people are tested for colorectal cancer, a slow-moving disease that can be treated and cured if detected early. The trials, which will involve 10,000 patients over the next year or so, began in June.

If the trials pass FDA muster for safety and results, Exact Sciences could begin marketing Cologuard and start recovering the $100 million invested in the company over time. The company would likely grow by leaps and bounds and become Wisconsin’s next biotech star. If the trials fail, well… a lot of investors would lose a carefully calculated bet.

Such is the life of a typical biotech company, especially one aspiring to create the next blockbuster drug or diagnostic test. It’s a risky proposition, fraught with regulatory peril, technological hurdles, management challenges and uncertain financial rewards – even if all goes well.

Over time, and against most odds, Wisconsin has become home to a cluster of biotech companies such as Exact Sciences. They’re drawn here, or grow up here, because the ideas generated by Wisconsin’s academic research institutions can compete with any in the world. There’s plenty of talent here, too, thanks to those same schools. Wisconsin also has a small but experienced corps of investors who have learned how to pick and nurture more winners than losers.

Even with those advantages, Wisconsin’s biotech industry is caught in something of a perfect storm. Some of those clouds are much like those looming over biotech firms in California or Massachusetts, such as federal patent backlogs that can hinder innovation and FDA regulations that compound the problem. At least one threat, however, is more acute in Wisconsin than in most other biotech states: Lack of venture capital.

More so than most emerging companies, those in the medical biotech space require lots of capital to move through the stages of discovery to delivery. The potential payoffs are enormous, however, because tech companies can produce hundreds of high-paying jobs over time. The average tech job in Wisconsin pays nearly twice the statewide per capita average.

The continued growth of Wisconsin’s biotechnology sector, which already supports about 25,000 jobs statewide, is why state legislators and Gov. Scott Walker are considering a program to dramatically increase the supply of venture capital here. Wisconsin has 1.83 percent of the nation’s population, 2.15 percent of the nations’ academic research and development spending and 2.11 percent of U.S. patent filings – but only one-half of 1 percent of the nation’s venture capital investments. A state plan that attracts three or four times its weight in private capital could narrow that capital gap.

Venture capital is invested across a mix of industry sectors, so it’s not just biotech that would benefit from a state-leveraged plan that pays back taxpayers over time. But biotech is a sector where large investments are often required.

“We’ll have about $200 million in capital needs altogether before we’re done, and there are others just like us” said Conroy, who was formerly president of Wisconsin’s Third Wave Technologies. “That’s why I would dispute anyone’s notion that we only need small amounts of venture capital here. You don’t have revenues without FDA (regulatory) approval, and winning that approval is a very expensive process.”

Wisconsin has an edge over many states when it comes to tech-based development, but that advantage will be lost unless promising companies can attract the investments they need to succeed. It’s time to secure Wisconsin’s head start and keep the state in the lead.

-- Still is president of the Wisconsin Technology Council. He is the former associate editor of the Wisconsin State Journal in Madison.

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