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21st Annual
JPMorgan Healthcare Conference

On the road for Info.Resource, publisher of Oregon-Bioscience.com

Value: the good, the bad and the scary Ė biotech

By Lorraine Ruff and David Gabrilska, Partners
Milestones, the critical thinking company
Seattle, WA

The H&Q brand and all that it stands for has been assimilated by the largest equity company in the United States. What better, more compelling vote of confidence could a major financial institution extend to an industry that has come of age?

Thirty years ago, there was a lot of money to be made in advanced technologies. A major challenge then was to communicate the value of technologies whose stories were buried in complexity, and to find ways to fund and nurture the emerging field of entrepreneurs with "E.E." and "Ph.D" after their names.

Bill Hambrecht, an experienced Wall Street banker with a yen for the West and keen eye for entrepreneurial talent, became intrigued with what was going on in Silicon Valley. Shortly thereafter he formed the technology investment bank Hambrecht & Quist (H&Q). H&Q was focused on advanced technology niche markets, which in those days held little or no allure for Wall Street. He hired a cohort of technically educated and technology business savvy young professionals who had themselves been schooled alongside a new generation of gene jockeys.

Working closely with emerging life sciences venture capitalists, Hambrecht and his team picked the technologies that they believed would form the foundation of a future industry. If this industry was to commercialize itself, it would need abundant cash. H&Q worked with its portfolio companies to create their underlying value propositions, which provided investors with a rationale to invest rather than merely asking them to suspend their disbelief long enough to place their bets in the earliest of bio-jackpots.

H&Q took public some of the most successful technology stories of the day: Adobe (then Aldus) and Netscape among them. Early advanced technology successes provided the bank with the growth potential and staying power it would need for the 10-15-year march to commercial relevancy of life sciences.

The decade of the 70s was marked by the discovery of restriction enzymes that clipped and sliced genetic material, opening the way for gene cloning; Stanley Cohen and Herbert Boyer perfecting techniques to cut and paste DNA (using restriction enzymes and ligases) and reproduced the new DNA in bacteria; the U.S. Supreme Court, in the landmark case Diamond v. Chakrabarty, approving the principle of patenting recombinant life forms, and the award of a U.S. patent for gene cloning to Cohen and Boyer (1).

In the late 1970s, recombinant human insulin was first produced and in 1976 Genentech -- the first commercial company to develop genetically engineered products -- was founded. H&Q took Genentech public in 1980 (2).

Genentech, Inc. was founded in 1976 by venture capitalist Robert A. Swanson and biochemist Dr. Herbert W. Boyer. In the early 1970s, Boyer and geneticist Stanley Cohen pioneered a new scientific field called recombinant DNA technology. Excited by the breakthrough, Swanson placed a call to Boyer and requested a meeting. Boyer agreed to give the young entrepreneur 10 minutes of his time. Swanson's enthusiasm for the technology and his faith in its commercial viability was contagious, and the meeting extended from 10 minutes to three hours; by its conclusion, Genentech was born. Though Swanson and Boyer faced skepticism from both the academic and business communities, they forged ahead with their idea. Within a few short years, they had proved their detractors wrong and invented a whole new industry. http://www.genentech.com/gene/about/corporate/history/

In 1982, with hopes of owning the life sciences investment banking space, H&Q envisioned and committed to an annual healthcare conference that brought together their portfolio companies with institutional and private investors, venture capitalists and the press at the St. Francis, located on Union Square in San Francisco. The 1982 event brought 21 companies together with fewer than 100 investors. The event cost H&Q $25,000. (In contrast, the 2003 event featured 260 companies, 2,500 public institutional investors, 1,000 private investors and venture capitalists and journalists from all over the world. J.P. Morgan kept the cost of the 2003 event to itself.)

Throughout 20 years of conferences, they have ensured that their guests were provided with both the stories and a context for investment. Over the long term we believe that this approach provided the seed bed for an evolving industry that needed to be evaluated from more than a quarterly earnings perceptive.

Without much fanfare, this year the "H&Q" brand has been assimilated into J.P. Morgan, the largest equity company in the United States. When asked why reference to "H&Q" had been removed, JP Morganís Vivek Jain stated simply that it was done "to consolidate the brands (H&Q, Chase and JP Morgan) and to avoid confusion. "And that certainly makes sense.

Mr. Jain explained that JP Morgan intends to continue with the annual healthcare conference and to continue to support all its portfolio companies. This year JP Morgan expanded the number of private meetings among portfolio companies, investors and company-to-company exchanges to 2,500, a significant accomplishment for four days. JP Morgan is in the business to make money and provides investment banking, asset management, private equity, custody and transaction services, middle market financial services, and e-finance. In other words, itís a financial services firm that serves companies in established business sectors.

This reality washed over us during Mr. Jainís opening remarks in the Grand Ballroom. Mr. Jain -- standing in front of a multimedia screen flashing "JP Morgan Healthcare Conference" -- compared the first conference in 1982 with this yearís 21st annual JP Morgan event. The H&Q brand and all that it stood for had been assimilated by the largest equity company in the United States. What better, more compelling vote of confidence could a major financial institution extend to an industry that has come of age?

In contrast to past years and for reasons we all know, the types of deals that are put together these days are ones that have had the risk ablated out, beginning at the companyís formation, according to Dennis Purcell, senior managing director at Perseus Soros BioPharmaceutical Fund, L.P. and an Advisory Director for Chase H&Q (3).

We [Perseus] are fiduciaries of large pension funds. We donít need to get the same return as we did in 2000. [Weíre content] with same return, less risk. Management teams that donít have a strategy for how theyíre going to commercialize their products, well, those days are over," he said.

The biotechnology sector has enjoyed a number of "rediscoveries" during the past decade, 1991 - 1995 and 1996 - 1999. "But this time itís different," he said.

"We see new types of deals including spinouts from pharma (including management teams), and company formations leading with product candidates in Phase III. Weíll make a $15 million investment in that," he said. Generally speaking, Mr. Purcell confirmed that there is money available for "very early or later stage companies."

The question is how do companies negotiate the middle stages of their development? For insights and support, Mr. Purcell observed that companies are looking to BIOís CEO and partnering conferences.

________________

(1.) Biotechnology Industry Organization (BIO), Time Line of Biotechnology, http://www.bio.org/er/timeline.asp

(2.) Genentech went public in 1980 and raised $35 million with an offering that leapt from $35 a share to a h igh of $88 after less than an hour on the market. The event was one of the largest stock run-ups ever. http://www.genentech.com/gene/about/corporate/history/timeline/index.jsp

(3.) Mr. Purcell was Managing Director of Life Sciences Investment Banking at Chase H&Q (formerly Hambrecht & Quist) when H&Q was acknowledged by BioWorld and other industry publications as the leading underwriter of life sciences securities from 1995 through 1998.


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