Baylor Eyes Biotech Deal
Promising vaccine leads health care firm to ponder licensing technology or forming startup
By Staff Writers Stephanie Patrick and Jeff Bounds
Dallas Business Journal
9-1-2003

Baylor Health Care System is considering forming its first commercial spinout to capitalize on promising research into a vaccine for one of the most severe forms of skin cancer.

The Dallas-based health care giant expects to make a "preliminary decision" in the coming months about creating a biotechnology company. The new company would attract funding for the estimated $200 million to $300 million that could be needed to bring a melanoma vaccine to market.

The more traditional route to commercialize intellectual property is to license it to another biotech or pharmaceutical company.

But Baylor officals said that while forming a company would require $3 million initially -- and would entail a greater risk of financial loss -- the Dallas nonprofit's research into metastatic melanoma is so promising that it might be worth taking that risk.

Dr. Michael Ramsay, president of Baylor Research Institute, confirmed the "analysis for a biotech startup," but declined to estimate when a decision would be made, or to discuss details about how such a biotech company would operate.

More than 50,000 Americans will be diagnosed with melanoma in 2003, and 7,600 will die from it, according to American Cancer Society statistics. Despite advances in treating the condition, the melanoma mortality rate has increased by 50% in the past 30 years.

While metastatic melanoma -- where tumors form in the lymph nodes, brain, lungs, gastrointestinal tract or liver -- is a relatively rare skin cancer, it's the most deadly.
A research team led by Jacques Banchereau, director of the Baylor Institute for Immunology Research, may be stemming the tide.

In clinical trials, a vaccine based on what are known as "dendritic cells" --which initiate and control the body's overall immune response -- may have helped keep alive a number of patients who were thought to be facing death. A few are even in remission.

Banchereau's team isn't the first to attempt a cancer vaccine, and isn't alone in making a weapon out of dendritic cells, which chop bacteria and viruses into pieces and then train what are known as "T" cells to fight them.

But Banchereau said his approach could have fewer and less-severe side effects than current treatments. It could also be more effective than standard chemotherapy, as cancer cells often develop immunities to chemo, mutating into forms that are more difficult to treat.

If the vaccine proves successful with melanoma, more testing could lead to advances for other cancers and diseases such as AIDS, lupus and rheumatoid arthritis, Banchereau said.

Clinical trials were launched in the late 1990s on patients with advanced melanoma cancer, and Banchereau already has received what is known as "investigational approval" from the federal Food and Drug Administration, meaning the vaccine can be tested on patients whose cases are the most severe.

More funding is needed to complete additional trials and further develop the vaccine, however. Banchereau, who favors forming a biotech company, said he's hopeful a vaccine could be commercially available in a few years.

Baylor's problem is finding the best answer to the difficult question of how best to make that happen.

Experts say the two main paths -- licensing and creating a commercial spinout -- each have pluses and minuses.

Could be lucrative
If a university or health-care system creates a company, it generally receives an equity stake in the company, along with possible royalties for the use of its patents and other intellectual property. Most of the company's equity generally goes to the researchers who created the technology -- the amount depending on how active they are in the organization -- along with outside investors.

If a company is successful, the equity stake eventually can be lucrative. But that can take years to happen. Meantime, the high failure rate of startups means there's a substantial risk that the equity could turn out to be worthless.

Lisa Kurek, managing partner at Ann Arbor, Mich.-based Biotechnology Business Consultants L.L.C., said one key to a spinout's success is getting the right people to run it. "It's usually the entrepreneur that is the driving factor" behind a company's success, she said.

Finding good executives for a spinout could be a challenge in North Texas, where a scarcity of biotech and other health care startups has meant a dearth of executives with experience in those fields.

There also are few local investors experienced in backing companies in those fields.

In addition, there aren't many local vendors like law firms and consultants who have worked with life sciences-related companies.

Licensing -- which Baylor has done before -- essentially transfers the risk of developing the drug to another party. That generally means an organization like Baylor gets some sort of up-front fee, along with royalties or other "downstream" payments if the drug ever makes it to market.

Kurek said intellectual property can be licensed and then left sitting on a shelf, however, generating little or no income.

William Paiva, general partner in the Tulsa office of the Oklahoma venture firm Chisholm Private Capital, said many startups succeed even though their core technology fails, as outside technologies that originally are brought in to bolster the central product wind up being the most valuable.

Paiva, whose firm invests in health care and life-sciences companies, said it's possible to sell a company to a larger pharmaceutical organization for a big price -- even though the buyer may never wind up doing anything with the technology it buys.

In both scenarios, an organization like Baylor would do much better by creating a spinout than by licensing, according to Paiva.

There are things Baylor could do to maximize its chance of success, whether it chooses the licensing or spinout routes. The more the drug can be developed before either trying to license or spin it out, the better, experts say, as it reduces the risk for outsiders -- meaning Baylor can reap more money from it.

One factor working in Baylor's favor: If the core technology is as good as it's cracked up to be, outside investors likely will not need to pour $200 million to $300 million into bringing it to fruition. In that case, "it will usually be absorbed into a larger company," Kurek said.

Talk of another local biotech company has attracted the interest of Art Bollon, founding partner of the new Dallas-based investment advisory firm Biogress L.L.C. While there have been no formal discussions with Baylor officials, Bollon said, he has expressed interest in helping with the venture and possibly adding it to Biogress portfolio companies HemoBioTech and Biological Targets Inc.

Bollon chairs Dallas-based HemoBioTech, a company developing a blood substitute based on research done at Texas Tech University in Lubbock. Biological Targets, which was formed in Delaware, operates out of laboratories at the University of Texas at Dallas. The University of Texas Southwestern Medical Center is now working on its third spinout, a Richardson company called Reata Discovery Inc.

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