Cogent Neuroscience sent its 48 remaining employees home Tuesday as the company’s board and investors explored ways to “configure Cogent to survive in this market,” says Chief Executive and co-founder Max Wallace.

Wallace tells Local Tech Wire that Cogent told its 48 remaining employees to come back Monday. Wallace holds out the possibility the company may yet weather what he calls “the perfect storm.”

But he admits the possibilities include “a downsized Cogent or no Cogent.” The company trimmed its staff to 48 from 85 as it tightened operations this year.

Wallace says the company failed to land a much-needed fourth round of from $15 to $25 million.

Sources outside the company say potential new lead investors offered valuations one-quarter that of previous rounds. As negotiations proceeded, the economic climate soured even further for research biotechs without a product anywhere near market.

Cogent’s partner has own troubles

The company can no longer depend upon support from its major corporate backer, the Irish drug giant Elan, which is suffering its own problems. Elan invested $10 million in the company and had committed a like amount to its research.

“We’ve been running under our contracts with them and you can’t believe that will continue,” Wallace says. “We thought it best to confront this and make some decision with our investors on whether they can continue to support the company in this environment.

“I will have an answer from investors by Monday and we will have a plan one way or another.”

He notes, however, that the company’s current investors say they do not have the kind of money Cogent needs. “But you have to survive to thrive,” he says.

Founded in 1998, the company raised $20.4 million from investors. They include Durham-based Aurora Funds; Eno River Capital; and Intersouth Partners; Franklin Street Partners, Chapel Hill; Kitty Hawk Capital and the Wakefield Group, of Charlotte; and Cordova Ventures in Atlanta.

Most invest primarily in early-stage companies and may contribute several million collectively to a large round, but they seldom lead the type of fat fourth round Cogent needs.

Dollars for donuts

“We’re at the foot of this hundred-foot wave and I’m confident we can get over the top – but I also saw the movie,” Wallace says, continuing his Perfect Storm metaphor.

He cites the economic winds that blew Cogent’s fund-raising off-course. “We started just before Sept. 11, then we had Enron, now Elan – the largest biotechnology company in Ireland is having trouble.”

He adds that with a weak or nonexistent market for initial offerings of public stock, venture capitalists no longer have a great incentive to invest in research companies such as Cogent. They want to see returns on their money within a few years, not in a decade.

“Venture investors are amoral. They’d put money in Krispy Kreme donuts if they thought it would provide a good return on investment quickly,” says Wallace, an audible irony coloring the words.

Winston-Salem based Krispy Kreme, (NYSE:KKD) has been one of the sweet spots in an otherwise sour state and national economy. It traded at $32.18, up 68 cents Wednesday, and has rewarded its public and private investors handsomely.

Wallace, a well-known serial entrepreneur regionally, helped launch three other area biotechnology start-ups: Sphinx Pharmaceuticals, purchased by Indianapolis-based Eli Lilly in 1994 and Sarco, bought by Wilmington-based PPD. He also helped start Trimeris (Nasdaq:TRMS), where he served as its first president.

Fundamentals are different now

“I don’t think you could build a company like Trimeris again,” Wallace says. “It went public in 1997 and their first product is coming out in 2003. It took 10 years and $400 million, $350 million of it public money.

“Without an IPO market for discovery companies, the fundamentals are different now.”

Getting biotechnology research start-ups through the decade-long process of drug development “is nearly impossible under the best market conditions,” he says.

Wallace adds that if Monday’s answer is “no Cogent,” the company’s assets, including its unique tools and gene library will belong to its investors and creditors. “But it’s the engine that’s worth a lot,” he says.

“If you run that engine, you can learn about disease pathways and find your way to drugs. If you take it apart and say, ‘Here’s a carburetor, here’s a manifold,’ you have to find someone who needs that specific carburetor.

Cogent originally used technology developed at Duke by co-founders Don Lo, Ph.D., and Larry Katz, Ph.D to hunt for genes that protect the brain from stroke, Alzheimer’s and Parkinson’s Diseases. Cogent switched strategies to find potential drug compounds when gene hunting lost favor with investors.

New model needed

“We have some neat compounds in a very early stage. They would be revolutionary if we have the right amount of time to drive them forward,” Wallace says.

Although he says he’s not likely to desert the entrepreneurial path if Cogent should fail, he does think it may be necessary for biotech start-ups to forge new ways to finance that ten-year march to drugs.

When Wallace left Trimeris the day it filed for its IPO after 18 months with the then start-up, he indulged his love of photography by shooting 260 rolls of film in Ireland. Then Ho and Katz described their unique gene-hunting technology, and he returned to his entrepreneurial ways.

About Cogent, Wallace says, “I feel terrible. But I don’t feel terrible, you know? We’ve done everything we can to make it work. We’ll continue to do that. It’s a worthwhile thing to do, but sometimes forces work against you and you can’t overcome them.”