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JANUARY 26, 2005
For Baby Biotechs, "a Dangerous Time" Veteran VC Bob Higgins explains why he expects failures among the crop of startups "caught at $200 million and $300 million valuations"
Bob Higgins co-founded Boston venture-capital firm Highland Capital Partners 20 years ago with a plan to invest equally in software, communications, and health-care startups. While each sector has had its ups and downs, Higgins, 58, has stayed the course. That patience paid off in December with the initial public offering of medical-device maker Conor Medsystems (CONR ). In 1999, Higgins invested in Conor, which makes stents -- drug-coated tools for propping open arteries and preventing reclogging. Despite stiff competition from Johnson & Johnson (JNJ ) and others, Conor now has a $455 million market cap, even though it reported no revenue in the nine months before its IPO. That's a big valuation for a young health-care business -- even more so for a medical-device outfit. Unlike biotech outfits developing new drugs, medical-device companies make tools used in surgery and other treatments. The businesses are cheaper and easier to build, but rarely make it to the public markets. Earlier this month, Higgins started a new venture: teaching a course on medical entrepreneurship at Harvard Business School. BusinessWeek Online reporter Sarah Lacy recently spoke with Higgins at the JP Morgan Biotech Conference in San Francisco, where he explained why he is cautious about biotech investments, and what a company needs to make a go of it. Following is an edited version of their conversation: Q: What was interesting about the conference? A: The number of people and the energy. It's largely a public-market crowd, with a large number of private companies and venture capitalists added on. There was general optimism. It has been 18 months since the biotech [IPO] window opened, and I think it has been a frustrating 18 months. People were reflecting more optimism than I expected. And there was a good bit of energy around medical devices. People seemed quite excited about the convergence of drugs and devices. Q: What's the outlook for biotech this year? A: It's surprising how many private companies there are that have raised $80 million to $100 million or more. I think it's going to be quite a challenge for this cohort of companies to be successful in the public market. It's surprising how many have raised substantial capital over the last 18 months -- and only a handful have high market valuations. Q: How does that affect you as a venture capitalist? A: It confirms my reluctance to do startups in the therapeutic area [inventing and proving new drugs]. It's a long road, and the ones that did go public had more money go in, and lower market caps, than at any time before. That's a cautionary note for any private investor who considers the long march of a therapeutic startup. There's more opportunity to be involved in later-stage deals. We, as a firm, like early stage, but it looks harder to get rewarded for that risk in biotech these days. Q: So, is it a bad time to be a biotech investor? A: It's a dangerous time, because there are so many companies that have large burn rates, and the public market isn't showing itself to be as forgiving as people are hoping. Companies are being caught at $200 million and $300 million valuations, and that's an uncomfortable place to be. It means they aren't getting good analyst coverage and their ability to raise additional capital is limited. Q: Are there any reasons it's a good time to be a biotech investor? A: The people with the cash, big pharmaceuticals, are looking for help, and they are willing to use those resources, whether it's to acquire companies or do strategic deals. It can be a good time if your companies have made enough progress. Q: What's the most important thing to look for in a biotech deal now? A: More and more, you need a chief executive that has all of the skills, not just a scientist who is a manager. That's one key difference in [biotech] companies now. Q: What are you teaching your MBA students about medical entrepreneurship? A: Health care is different. People do it for more reasons than to make money -- you want to change the world. Opportunity doesn't come from the same places. If you're going to be in biotech, you need to understand that the National Institute of Health is spending half of the money in research and Big Pharma spends the other $30 billion. You need to understand the university system, the NIH, and private foundations, and be comfortable with the FDA. And once you get going, you have to start worrying about strategic partnerships. It's very different from information technology. 
BW MALL
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