Prudent: Biotech start-up exec says now may be good time to invest
By Brian E. Clark
It may seem counterintuitive in the midst of the current economic meltdown, but one Madison executive says now is a good time to invest in start-up diagnostic or drug discovery companies.
“The overall marketplace is in turmoil now” and the biotech industry has not escaped the fallout, says Jim Prudent, co-founder and CEO of the drug discovery company Centrose. He is the former chief scientific officer at EraGen.
But he senses an opportunity to woo investors because many have no interest in putting their money in the extremely volatile stock market.
With a start-up company like Centrose, if its drugs are successful, the potential return could be 8 to 16 fold over four to five years. With the Dow or NASDAQ, some of the companies listed may no longer exist by 2013, he said.
“The conservative person may say ‘I know people are going to need drugs,’ so if I put my money into four or five small companies that have a good management team, a small burn rate and can survive this environment we are in now for a few years, maybe that’s not too bad of an investment,” he said.
Prudent’s company, Centrose, is making drugs for non small-cell lung cancer, which he described as a “huge, unmet need."
“The majority of everyone who dies in this country from cancer dies from non small-cell lung cancer because there are no drugs for non small-cell lung and that’s why there is such a big push to get people to stop smoking,” he said.
Usually, he said, biotech companies are almost immune to economic downswings, though they have benefited from the good times.
“We are often buffered by the fact that biotech is in things that people absolutely have to have,” he said.
“We’re not talking about making a new electronic game that a family could put off or a fancy phone or an Xbox,” he said. “Those are the things people can cut.
“But in biotechnology, it’s usually food products, diagnostics or new drugs. Those are the kind of things you don’t put off because the economy is looking kind of iffy.”
Prudent acknowledged that biotech company executives in Wisconsin are not as optimistic as they were a year ago, a fact echoed in a recent Wisconsin Biotechnology and Medical Device Association survey.
Prudent said even well-run major pharmaceutical companies that have had excellent test results and plenty of cash in the bank are getting hammered in the market and have seen their stock prices decline significantly, he said.
“They are looking like the rest of the economy, which is strange,” said Prudent, who argued that VC groups looking for IPOs or selling young firms may have to be patient for another year or two.
“The IPO market has basically shut down now,” he said, citing a report by Sequoia Capital.
He said many VC groups are now wondering if they can keep the companies they have invested in afloat for 24 months or if it’s wise to invest in a new company.
More worrying, he said, if something bad happens to the biotech industry in Boston or California, it may hit the Midwest even harder.
“Typically Midwest VC groups have been a lot more conservative in their investing, meaning they do not typically take on a new start-up until the risk is a lot less than a VC on the coast would see as fundable.”
Prudent predicted the creation of far fewer VC funds in the next few years until the overall economic situation in the country improves.
But will some pull the plug on some existing start-ups?
“They will have to look at their entire portfolio, how much money they have in the bank, ask how much they are willing to risk, and then decide that exact question,” he said.
“It will depend from VC to VC,” said Prudent, who suggested some start-ups may be merged or that some VC groups themselves may join forces.
For a company like Centrose, he said, the question is “where do we go get money now?
“We’re pretty much focused on looking at angels (individuals or groups of individuals with so-called "deep pockets") who still have discretionary funding and would rather not put it the financial markets right now.
“I don’t think anyone is too concerned that in four or five years – which is how a drug discovery company looks at things – that the market will be like it is today. It will bounce back, especially in the biotech sector.”