California Dreaming

One Saturday morning when Catherine Mackey first moved to San Diego, she and some friends took a lesson in surfing—the city's signature pastime. The friends thought it was all right, but Mackey was hooked.

She's still there today, years later, stopping on her way to work to plunge into the (wildly misnamed) Pacific, paddling out through the foggy dawn, and riding the rolling breakers back to shore accompanied by seals and dolphins.

Riding a wave. At sea and in a fog. Surrounded by exotic life forms. In constant danger of wiping out.

Put that way, Mackey's leisure pursuit sounds a lot like her day job—and the jobs of 40,000 or so others who work just a few square miles from her office. They're all on the leading edge of biotechnology—Mackey as senior vice president of Pfizer Global Research & Development and head of the Pfizer La Jolla Laboratories, her neighbors as the researchers and entrepreneurs who make up the San Diego County biotech cluster, one of the largest and most productive assemblages of life science companies in the world.

The Boston metropolitan area may have bigger name universities and more funding from the National Institutes of Health. San Francisco may generate more patents and boast the biggest total life sciences market cap. But San Diego is home to more biotech companies than its better known competitors combined—400 compared with 152 in San Francisco and 141 in Boston. It has drawn more than $1.5 billion in Big Pharma research commitments since 2002, and was named by the Milken Foundation as the top biotech hotspot in 2004. The same year, Forbes magazine named San Diego the best place in America to start a new company.

Facts At a Glance

If the presence of Big Pharma is the signal that a biotech cluster has reached critical mass, then San Diego may be in for interesting times. Johnson & Johnson, Eli Lilly, Novartis, and Schering-Plough have all set up shop in the cluster. Novartis has spent $850 million for two research institutes, and moved its $100 million venture fund to San Diego as well.

And then there's Pfizer. The pharma giant has been a resident since 2000, when it acquired Warner Lambert, which in turn had purchased Agouron, a local biotech that evolved into Pfizer's HIV business. Over the past five years, Pfizer has poured half a billion dollars into developing a 33.5-acre campus of eight buildings, more than a million square feet of research space housing a thousand employees. Since January 2007, Pfizer La Jolla, as the new facility is known, has been the center for all Pfizer's oncology research.

"It's a great place to recruit people to, and there's quite a bit of churning in the community," says Mackey. "So you'll have someone who got their PhD at UCSD, and then they'll go to Scripps and get a post-doc, and then they'll come here and work for a few years. Then they might go somewhere else and start a company and then come back. This is a tremendous environment for R&D."

Or, as they say in San Diego, surf's up.

Are We There Yet?

To get to the center of the action, head north from downtown San Diego and travel 15 minutes up the coast. You'll reach the town of La Jolla ("the jewel" in Spanish), a small coastal town that classic crime writer Raymond Chandler, a onetime resident, dubbed "a place for geriatrics." But no more. Now stylish shoppers stroll in and out of the Rodeo Drive-like shops along Main Street, while down along the scenic cove, perfectly fit young people engage in all manner of physical activity. The breakers are thick with round-the-clock surfers. The only remotely sedentary residents are the seals, scores of them, basking on the sand.

A little further up the coast is an area called Torry Pines Mesa. There, amid acres of rugged coastline, canyons, and hillsides framed by lush landscaping, sit the stylish granite and glass buildings that house hundreds of biotech companies. All around them, like covered wagons circling a campfire, are the cluster's research institutions: the University of California at San Diego (UCSD), the Scripps Research Institute, the Burnham Institute, and the Salk Institute for Biological Studies, whose breathtaking building, designed by Louis Kahn, perches high above the Pacific.

It's these centers of science, of course, that made the biotech cluster possible. First came the Scripps Institution of Oceanography (SIO), founded in 1903 as the Marine Biological Association of San Diego. In the 1950s, it was joined by The Scripps Research Institute (TSRI). But the real push toward life sciences came in 1960, when TSRI hired a team of immunologists from the University of Pittsburgh led by Frank Dixon, and immediately became a force in bioscience. The city then donated 27 oceanfront acres for the Salk Institute, and the area finally got a full-fledged research university, USCD.

The ground had been prepared—all that was needed was the seed. That was planted in 1978, when Howard Birndorf and Ivor Royston, researchers who'd been lured to UCSD from Stanford, incorporated Hybritech, a startup to pursue monoclonal antibody technology. Even before Hybritech was acquired by Lilly in 1986, it began spawning new companies, as Birndorf and other staff left to start enterprises of their own. In 2003, the San Diego Chronicle counted more than 50 Hybritech offspring, including such firms as IDEC, Ligand, and Amylin. (This brief history is drawn from "America's Biotech and Life Science Clusters: San Diego's Position and Economic Contributions," available online at www.milkeninstitute.org.)

The growth went on until 12 to 15 years ago, when "Pharma began to notice San Diego," according to Joe Panetta, head of Biocom, the region's biotech trade association. Along with another key organization—the nonprofit Connect—Biocom is glue that, in large part, holds the cluster together.

"Johnson & Johnson built their research facility around that time," says Panetta. "Not long after that, Novartis came and built [what is] now Novartis Genomics Institute. Lilly made some significant investments, including Amylin and Applied Molecular Evolution. Merck bought Sibia Neurosciences about six years ago, and built up a sizeable research group before they had to scale back. And of course there's Pfizer. They've made a major commitment."

But to support the growth of new companies, you need money. Panetta has spent the past several years encouraging venture capital to come to San Diego. "Instead of simply saying, 'Why don't you pick up and move here lock, stock, and barrel?' we'd say, 'Why don't you create an office here?'"

As an added incentive, BioCom opened a suite of offices for investors upstairs at its headquarters. "Ed Torres from Lilly Ventures is out here frequently," says Panetta. "He's got an office back in Indianapolis, and he has an office upstairs. We've got folks up there from all over the place who are affiliated with VC firms outside of San Diego. They spend a significant amount of time here, looking for opportunities to invest."

As Panetta looks around the country, he sees many areas attempting to stimulate economic development by creating biotech zones. To the Biocom head, though, there's no substitute for three decades of market-driven evolution.

"There are a lot of regions that are trying to fast-track the creation of a biotech cluster. You can try. You can create the semblance of a biotech cluster by pulling all the different elements together. But it took 30 years to build this [infrastructure]—30 years of people who've had experience running companies in the venture world and stayed here."

Pfizer in the 'Hood

When Jeffrey Kindler became CEO of Pfizer in 2007, the company underwent a massive reorganization, including laying off almost 10,000 employees (10 per cent of its global workforce) in an attempt to save over $1 billion by the end of this year. The company also announced its intention to move into biologics, with the goal of having that category account for 20 percent of its pipeline by 2009.

"Within the last two years, one of our major strategic initiatives at Pfizer has been to expand the science beyond our four walls," says Catherine Mackey. "We're really reaching out into the community and doing a lot more collaborations."

In San Diego, that has meant, among other initiatives, a five-year, $100 million research alliance with the Scripps Research Institute, announced last year.

Reaching out also includes the creation of the Pfizer Incubator, housed on the La Jolla campus in a modern, 28,000-square-foot facility that features chemistry and biology labs, as well as adjoining office space. Pfizer's plan is to invest $10 million a year in supporting life science startups.

"The incubator is a way for us to nurture ideas to a point where we can evaluate whether they're really going to be relevant to our pharmaceutical R&D," says Mackey. "If they are, then we'd want to bring that work in-house. If not, we could help that company get on their feet and launch it. Either way, it's a win for everybody."

The incubator has space for five to eight companies. As of March, it had three occupants:

Fabrus, launched by Vaughn Smider MD, PhD, an assistant professor at the Scripps Research Institute, to develop novel antibody libraries and ways to screen the libraries against biological targets.

Wintherix, founded by a team led by Dennis Carson, director of the Moores Cancer Center and professor of medicine at UCSD School of Medicine, is searching for molecules that inhibit Wnt-related signaling pathways in cancer cells.

RGo Bioscience, co-founded by Dr. Alexander Chucholowski, former president of ChemBridge Research Laboratories, and Thomas Hermann, assistant professor at UCSD, to develop new ways to deliver RNA into the body.

"There's a nice little buzz in there," notes Mackey.

One advantage of the cluster is that it allows Pfizer to be proactive rather than reactive in its dealings with biotech. Says Mackey: "The reactive model would be: We sit in our office and let people do whatever they want. They come up with something and send us an e-mail saying, 'Hey, are you interested?' And we answer, 'No, but if you'd done it differently, we would have been.'

"This is a way for us to select areas where, if there was a breakthrough, we'd really be interested. Venture capitalists play guessing games, trying to guess what we might be using. But we know what we're interested in. So we make good choices. What we can't do is ensure success. Research is risky, but we know that if that research project is successful, it's going to be significant."

For now, that success is still somewhere in the future. "It's been just a year," says Mackey. "The real story will be when the first one comes through. I'm hopeful that we'll have something."

A Capital Idea

One goal of a cluster is to make it easy to start new companies by providing access to services, advice, and finance. In the San Diego cluster—as one entrepreneur put it—starting a company is like falling off a log.

Part of the reason for that is Duane Roth, who heads Connect, a kind of nonprofit incubator-without-walls and UCSD spin-off that helps entrepreneurs connect with everyone from angel investors to accountants. In the past eight years, it has helped 800 companies—in such diverse areas as clean technology, wireless–life science convergence, stem cells, peptide therapeutics, and sports innovation—raise $7.8 billion. These days, Connect starts about a company a week, and has 120 waiting in the queue.

Venture capital is an all-consuming challenge for these companies, says Roth. "CEOs know that their scientists will turn out new products, but they must constantly seek new funding to continue growing."

Roth knows from experience. After 13 years in the pharmaceutical industry, at Johnson & Johnson and Wyeth, he started the biotech that in 1987 became Alliance Pharmaceuticals, whose main focus was an artificial blood substitute intended for temporary use during surgery.

"We're one of those companies that get into the 'bet the ranch' mode, where you're in Phase III—first time anybody's done it—and you cross your fingers and hope you get it right. We got within 200 patients of the finish line, and had a side effect that derailed us, so we've been out of the clinic for six years."

Roth still heads Alliance, but most of his time is spent helping other would-be entrepreneurs find a better model than the one he pursued. "Most of the people I'm working with today have no desire to start a company," he says. "They want to see their idea commercialized, but they don't want to leave the university. They aren't generally money-driven, and they're frustrated. They want to see somebody who can understand what they have."

Roth works in multiple industries these days, and he thinks life sciences companies have much to learn from their high tech counterparts. "When these guys in technology come to see me to start a company, there is never a question about what they're going to do. They tell you the five people who are going to buy them, and at what point. They're investing small amounts of money to get the information they need, and they know there's going to be a market. We've got to start thinking that way in the life sciences area, because the high tech model means that nobody gets clobbered. A failure is not curtains."

His solution is a new model he calls the actively managed venture company, or AMVEC. "An AMVEC is a group of people who are not portfolio pickers," he says. "They're industry people who know how to take something in early phase, and work out the most important factors that are going to affect the opportunity to go ahead."

The goal is to create a team that will manage six or seven projects, investing $3 million to $5 million over a three- to five-year time frame, and then selling them to pharma at relatively low prices—tens of millions for a project instead of hundreds of millions for a company.

Can the concept work? We may get a chance to see soon. Roth plans to announce his first AMVEC in May.

"People are still holding onto the old model because it's what we know," he says. "But we need to switch to thinking about a real, distributive partnership. There are always one or two things that are critical to move a project ahead. [You have to] figure out what they are, spend the money, do the work, and then sell it. But don't try to make $100 million—make $10 million or $15 million. Then do it over and over and over again."

First in Line for Second Chances

Randall Woods is all about doing things over and over. For one thing, he's a serial entrepreneur. Since leaving Big Pharma in 1996 (after 23 years in the industry, concluding with a stint as president of US operations for Boehringer-Mannheim), he has headed three young San Diego–based firms. The first was Corvas International, an ambitious company pursuing anticoagulants and cancer therapies, which was sold to Dendreon in 2003. Next came NovaCardia, which was sold to Merck in a $364 million stock deal last fall on the strength of KW-3902 (rolofylline), an experimental treatment for congestive heart failure. As part of that deal, Woods got to spin off a new company—appropriately named Sequel—to develop another of NovaCardia's drug candidates. Sequel is a stripped-down operation, with just nine employees, most of them old NovaCardia hands.

But serial entrepreneurialism is just one way Woods' taste for repetition manifests itself. He's also a fan of second-chance drug development. Rolofylline, for instance, was licensed from the Japanese drug company Kyowa Hakko, which had developed the drug as a chemotherapy adjunct, then abandoned it. But NovaCardia's founder and chairman, Eckard Weber (who is also on Sequel's board, and a partner at the venture capital firm Domain Associates), saw a better way to put the molecule to work.

"Eckard has an uncanny ability to find drugs that have been abandoned," says Woods. "He's such a brilliant clinical pharmacologist that he can see utility in therapeutic areas that other people can't."

Sequel's current lead candidate, K201 (JTV-519), a drug for atrial fibrillation, came to them in a similar fashion "We actually found that drug ourselves," says Woods. "But we sort of mimicked what Eckard did as best we could."

To Woods, the appeal of this way of doing business is its efficiency. "What would have been tens of millions of dollars down the drain, on a drug that would just sit on a shelf somewhere and never see the light of day, now we can leverage. We get the benefit of all the money that's been spent; it's far less risky for us," he says. "The problem with companies with larger infrastructures is that if you get a trial that's delayed, you're still paying the rent, and you're still paying 100 PhDs, so you're burning through a lot of money. We don't have that."

Woods is less sold than Duane Roth on the idea that selling out early is the best way to go. He has plenty of experience in cardiovascular commercialization, and if the numbers work out, he's not averse to going that way again. "When we create these companies," he says, "We create them with the goal in that we will raise more money, continue the development of these drugs, and perhaps go public. We could create a small specialty sales force and take this thing all the way to the marketplace ourselves."

At the moment, that decision is still a long way off. Sequel has enough money to take it through the middle of next year, Woods says. Efficacy data on K201 should be available this fall. "Pharmaceutical companies are already lining up," says Woods. "They saw what we did with Merck. Now they're saying, 'OK, they'll probably do this again.'"

Signals and Stem Cells

Drugs pulled from a dusty Big Pharma shelf may be efficient, but for many in San Diego, there's nothing to match the thrill of cutting-edge science.

Count in those ranks Alan Lewis, CEO of Novocell, a nine-year-old company dedicated to producing therapies derived from stem cells. Lewis is yet another biotech exec who traded a big title in Big Pharma for a more entrepreneurial life. A pharmacologist, he spent 15 years at Wyeth-Ayerst, the last six as vice president of research. It was a good job, he says, "But I realized that the exciting research wasn't being done in the pharmaceutical industry, [it was] in biotechnology."

He was offered a job in Boston, but turned it down. "It didn't have that entrepreneurial, California Gold Rush mentality." When a San Diego company called Signal Pharmaceuticals came calling, Lewis went from being a VP responsible for 500 people to a CEO in charge of ten.

"That was an immediate shock," he says. "I thought, 'Well, hell, I've got to raise money. And I've never done that before.' But the science—signaling, signal transduction, gene regulation—was exciting, and it was clear that Signal had some top-drawer scientific founders."

Six years later, in 2000 (the year of the genome bubble), Celgene made an offer that, given how far Signal had to go to reach profitability, was too good to refuse. The biotech went for $275 million, and Lewis stayed on to build Celgene's pipeline.

At Celgene, he got to dip his toe into one of the most exciting new technologies available: stem cells. "It was based on what they call umbilical or placental cells, which are fascinating," he says. "But I started to realize that the power of stem cells was not just in oncology, which is what Celgene was interested in, but it had lots of potential in other disease areas—diabetes, cardiovascular disease, CNS."

In 2006, Lewis got the chance to pursue that interest when he signed on as CEO of Novocell. By biotech standards, Novocell was a venerable old company, dating all the way back to 1999. It had sought a cure for diabetes, and in 2004 merged with two other small biotechs, CyThera and Bresagen, with the goal of creating an unlimited source of insulin-producing cells.

"If you're a Type 1 diabetic," Lewis explains, "Your pancreas, which is the source of your insulin and your insulin-producing cells, is unfortunately destroyed by the immune system. So we are trying to replace those cells with our stem cell–derived, insulin-producing cells. The interesting thing is, they don't need to be in the pancreas—they can be somewhere else."

The trick, he explains, is to ensure that the immune system doesn't kill new cells the way it killed the patient's original set. To protect the cells, Novocell uses a coating of polyethylene glycol (PEG). "It's permeable to things like oxygen, glucose, and nutrients," Lewis says. "And it allows the secretion of hormones. But it won't let immune cells, such as T-cells, get in."

Novocell has demonstrated, in animal studies, that encapsulated cells are protected from immune rejection after implantation—and can function and produce insulin in mice. It has also produced preliminary evidence of safety and function in a Phase I/II proof-of-principle trial in patients with Type-1 diabetes.

Those are noteworthy achievements, but they've taken nine years, and a marketable product is still ten years away, in Lewis's estimate.

"If you've been investing your money for almost 10 years, you're starting to think, 'How do I get a return on investment?' What we have is incredibly valuable, not just for cell therapy, but also for creating models of disease, for use as assays and other aspects of research," says Lewis. "A big company might say, 'We would be interested in acquiring you to be our stem-cell enterprise.' That's what happened over the years with antibody companies.

"I think innovation is what the industry should be all about," Lewis continues. "And with healthcare reform probably getting underway in the next 12 to 18 months, you're going to get rewarded for innovation. I don't think three multiple generations of the same drug are going to be quite as exciting. And I don't think you're going to get the return on it."

In Golf We Trust

"Areas like San Diego that are rich in entrepreneurial activity are more likely to gain as Big Pharma looks for innovative technology to fill their pipelines," says John Wetherell, co-head of Pillsbury Winthrop Shaw Pittman's life sciences industry team.

"This is a year of opportunity and major decisions for both the industry's titans and newly minted players," he continues. "With venture-backed and acquisitive entities seeking the lead in a finite number of promising areas, researchers are weighing the best business plans and merits of partners and alliances."

That said, any enterprise benefits from a little effective marketing. And 2008 is looking like prime time for the San Diego cluster to pitch itself with BIO '08, the annual meeting of the Biotechnology Industry Organization, bringing 20,000 industry types to the city from June 17 to 20.

In the meantime, there's an even rarer opportunity—the US Open golf tournament will take place smack in the middle of the biocluster, at the Torry Pines Gold Course starting June 9. "We're working with the San Diego Economic Development Corporation to put out invitations to as many prospects as possible," says Panetta. "They'll spend time getting to know the mayor, getting to know us, and having an opportunity to interact with other CEOs. Hopefully it will give them the flavor of what we have here, because it is unique.

"We've got so many companies that can go out and talk to people all over the world in pharmaceutical companies, and entice them to take a look at what's here. This year is really going to be a time of growth for the industry here."