Biotechs' outsourcing produces `virtual company'


William A. Haseltine had a 55-acre, half-billion-dollar compound and a manufacturing plant built for his former biotech company, Human Genome Sciences, despite its having never brought a single product to market.

With a facade made entirely of reflective glass, the six-story corporate headquarters juts into the sky almost invisibly. Inside, an atrium-style lobby has a lush garden and a 100-foot-long sculpture that depicts the birth of a protein. The floor is made of fossilized stone tile, and light filters through panels in the ceiling.

But Haseltine's vision for a new company just barely includes four walls.

In a recent Ernst & Young global biotechnology report, Haseltine, who retired as chairman and chief executive officer of Human Genome in 2004, predicted that the biotech business model of the future would be all about outsourcing. Management would keep office space minimal and contract "almost all of their research, process development, manufacturing and clinical trials to specialty services companies."

In science circles, the concept has come to be known as the "virtual company" in which costs are kept low by maintaining only a handful of in-house executives to oversee development projects distributed across the globe.

"It used to be much more of a reality in the IT space where it seems like outsourcing is an easier thing to do, but [over the past few years] it has gravitated over to the biotech space as more and more good labs are created in China, Japan and Korea," said Mark Heesen, president of the National Venture Capital Association based in Virginia. IT is the industry term for information technology.

Ruxton Pharmaceuticals in Baltimore County has only one employee watching over its development of a treatment for ALS disease. RegeneRx Biopharmaceuticals in Bethesda has eight on staff, most of whom manage up to six contracts each with outsourcing companies. And Neuralstem Inc., a Rockville company using fetal stem cells to develop central nervous system treatments, is made up of a two-man team.

"We outsourced everything that could be outsourced," said Richard Garr, Neuralstem's co-founder, chief executive and chief financial officer. The company is a decade old and at one time had as many as 50 employees, but funding setbacks a few years ago led Garr and his co-founder and chief scientific officer, Karl Johe, to lay off the staff and reorganize in 2004 to its much-leaner form.

The explosion of "contract research organizations" capable of doing quality biotech work has led many companies to outsource at least some of their operations, but the extreme virtual version is relatively new, having begun about a decade ago.

At the time, it was largely frowned upon by investors, who were used to counting offices and factories as assets. But that perception has changed as it has become more expensive to bring a drug to market, and venture capitalists such as Heesen have learned to appreciate the idea of spending less on infrastructure and more on product development. CEOs say they like the flexibility of being able to change course on a dime if something goes wrong -- without having to lay off hundreds of employees.

"You're betting on science, and it's very difficult to schedule and predict what's going to happen," said Bruce Robertson, who lives in Maryland but splits his time between here and Atlanta, where he is managing director of the investment firm H.I.G. Ventures.

"The question is when you're wrong -- and you know you probably will be -- then what happens? What are the cons of that? If you've got a big in-house [operation] with a high burn rate, the consequences can be more severe. In general, it's more capital-efficient, you can use your capital more efficiently on an outsourced basis, particularly in the early days."

It is a stark contrast to the philosophy of just a few years ago, when investors were caught up in the excitement of a much-publicized race to map the human genome, reminiscent of the fervor for dot-coms. They gave hundreds of millions of dollars to developing biotechs, and the companies often turned around and used the money to elaborately outfit offices and construct manufacturing plants for treatments that frequently failed to materialize.

After it became clear that drugs based on a person's genetic code were years away from realization, much of the money dried up, and many companies were left with facilities and employees they could not afford.

That was the case for Rockville's Celera Genomics, whose founder is credited, along with the National Institutes of Health, as being the first to sequence human DNA.

"Celera and Human Genome are in the top 10 for the category of `build it first and then think about it later,'" said David S. Block, a former Celera vice president who has started a, for now, one-man company in Baltimore County. His business, Ruxton Pharmaceuticals, is developing drugs for neurodegenerative diseases.

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