Thoughtleader: Small Cost, Big Win

You don't get much leaner than RegeneRx. The company's headquarters in Bethesda, MD, houses just six executives and two support staffers. In the past five years, it has spent just $15 million of the $30 million it raised through venture capital funding.

J.J. Finkelstein

But those half-dozen people and $30 million have been producing results. RegeneRx's lead compound is thymosin beta 4, a synthetic version of a peptide found in most mammals' cells that contributes to healing and regeneration. In animal trials, it is active both topically and systemically, and the company expects it to be useful in a wide swath of indications, including burns, diabetic ulcers, ocular surgery, and colitis. The company currently is conducting three Phase II clinical trials to test whether it promotes the healing of skin wounds, and another to test thymosin beta 4 for ophthalmic wound healing. Clinical trials for cardiovascular indications should begin later this year.

The key to getting so much done with so little, says CEO J.J. Finkelstein, is outsourcing. Though the buzz about "virtual pharma companies" has died down in the past two or three years, the concept is far from dead. And RegeneRx is one of a growing number of companies using the strategy—outsourcing any function it can, from R&D to clinical trials to manufacturing—to conserve operating cash and bring products forward at remarkably low costs.

Here, Finkelstein discusses why outsourcing suits RegeneRx, how he manages to stay in control of operations, and why he's still able to sleep at night.

Pharm Exec: Why did you turn to an outsourcing model?

Finkelstein: When we first started, this company was very small, and we didn't really have the ability to raise large amounts of capital—which was a good thing, because we weren't tempted to raise a lot of capital and build up a huge infrastructure.

What we thought, based on our technology and based on my history in the industry over the past 25 years, was to build an outsourcing model, where we raise just enough capital to get to the next set of milestones. Assuming that we were successful in attaining those, we would raise the next amount of capital and build that way, presumably with higher and higher valuations.

That's what we've done; we've raised about $25 or 30 million or so in the last five years, mostly at higher valuations. By not building up a large infrastructure, we don't have a huge amount of capital investment, making us more flexible and, I think, nimbler. Thus, we've been able to outsource just about every task that is necessary to develop a pharmaceutical product—from clinical trials to manufacturing to formulation, even R&D.

Are there concerns that you lose the direct oversight and control that you'd have if those functions were in-house?

Yes, always. It makes me a little nervous, but we've hired some really good in-house people at high levels, and they manage the vendors and contractors. You have to manage outside companies more closely than you probably would internal staff. Just because they're experts does not mean everything will happen exactly the way you want it to. If your contractors aren't working out, you have to get rid of them and find someone else. There's a lot of oversight. That's the biggest effort, I guess, involved in outsourcing.

Do you see outsourcing as a trend—will more companies move in that direction? Or do you see this model responding to the business environment of a fixed point in time?

I think it's a trend for a couple of reasons. First, there are a lot of contractors out there, from CROs that manage clinical trials to companies that manufacture all sorts of biopharmaceuticals, lots of small companies that didn't exist 15 or 20 years ago.

I tried to implement an outsourcing model in the 1980s, and it wasn't easy because there were just so few contractors to manage the work. Now there are many companies to pick and choose from, and they actually bid for our business as opposed to having to beg them to work for us. And so it can be done, and it can be done well.

The second thing is that Wall Street was not receptive to this kind of model, and if Wall Street's not receptive, good luck raising capital. And the reason Wall Street wasn't receptive is because they were unfamiliar with the idea and figured that if you're going to be a bio company and ultimately a pharmaceutical company, you had to have a big infrastructure in order to do it. Now Wall Street embraces it. Even Big Pharma is outsourcing to some degree.

Is it more attractive to venture capitalists?

I can only guess, and I would say that venture capitalists are attracted to whatever works best. And if each of their dollars goes more toward development, and not the requisite bricks and mortar, then yes, they can be happier doing it that way.

The real issue is that it doesn't work for every biotech company. In our case it works beautifully because we have a discrete technology; we have a lot of IP that covers it; it's multifaceted so we can expand the platform; and there's a lot of outside interest in collaborating with us.

So there are many researchers and others who want to help us, even though we control the IP. That's why it plays well into our hands. Whereas, if you were strictly in early-stage research, you might not want to outsource too many functions because you could lose control of the IP, and that's always an issue to consider. Or if you were building tools or accessories for the industry, then that might not lend itself to outsourcing. If you want to be a laboratory that tests DNA, you're not necessarily going to outsource that.

Is this a long-term strategy or one you'll use until you commercialize your first product?

We will continue to do what we're doing as long as we can create value. We don't want to become a multinational pharma company. It's unpredictable where this company will be in five years.

Would you say outsourcing has cut down on the time and cost it's taking to develop T-beta-4?

It's given us a lot of flexibility. People always ask how I sleep at night. You're able to sleep at night knowing that you don't have this big infrastructure that you've got to support tomorrow, with no revenue coming in. Because with contractors you know what your costs are, and you know that if your capital markets allow it, you can turn those costs up easily, and if the capital markets get tight, you can turn them down almost as easily. But with an infrastructure, you're talking about hiring and firing people and selling assets.

Have you ever done the calculations to see how much you're actually saving?

If you look at the past five or six years of operations, and how much we've spent, I think it's probably only around $15 million. We have about $13 million in the bank, so in total, we've probably raised about $30 million. We're now in three Phase II trials and getting ready to start two more in very important indications. That's a pretty good bang for your buck over five or six years.

RegeneRx was founded in 1982 as Alpha 1 Biomedicals. At the time, Allan Goldstein, now the company's chief scientific advisor, was working on a treatment for hepatitis B and C using a molecule he discovered, thymosin alpha 1.

Alpha 1 BioMedicals would ultimately license thymosin alpha 1 to SciClone Pharmaceuticals, which then commercialized the product abroad. The drug currently does about $30 million in sales, mostly in China, under the brand name Zadaxin.

A dispute with SciClone caused Alpha 1 BioMedicals to lose control of the product, and the company was dormant for a short time in the mid-1990s.

Current president and CEO J.J. Finkelstein returned in 1999 with an investment group and bought up about half the company. He then implemented its current outsourcing business model. With a new identity, RegeneRx, the firm would go on to develop another molecule also discovered by Goldstein: thymosin beta 4, which is being tested for both large-market and orphan indications.

J.J. Finkelstein has served as CEO of three early-stage biomedical companies, and has raised $60 million in capital over the past two-and-a-half decades. He was CEO of RegeneRx from 1984 to 1989 and vice chairman from 1989 to 1991. He returned to the company in 1999 to develop its current lead molecule, thymosin beta 4.