Editor’s note: BioWatch is a regular feature on Fridays.

RESEARCH TRIANGLE … “Failures are an inherent part of taking risks,” and the line between success and failure can be very thin, Max Wallace, president of the Arbor Group told The Indus Entrepreneurs this week.

This is especially true in the extremely competitive biotech environment, and Wallace is searching for ways to improve the changes of startup firms succeeding.

Wallace knows from first-hand experience how difficult the challenge is. He shared his experiences with than 100 people who attended the group monthly meeting Tuesday night on what entrepreneurs can learn from failure. Wallace helped found several Triangle-based, venture-backed start-ups, including Trimeris (Nasdaq: TRMS) and Cogent Neuroscience.

Later, he talked with Local Tech Wire about how he and his new consulting firm, The Arbor Group, are tackling the biotech challenges today.

“People look at my career and suggest that Trimeris is some monolithic success,” Wallace said. “But there were times when we were not sure it would be a success at all. The margin between success and failure is thin. There are forces you can’t control no matter how hard you work or how smart you are.”

Trimeris survived to become a public company and launch its first drug, Fuzeon, a new type of treatment for HIV, this year. But Cogent shut its doors in 2002 when its venture backers decided to forgo further funding of the company.

“At Cogent,” Wallace said, “we thought we built a good company with good investors, a good board, and good science. But then we ran into 9/11, Enron, accounting scandals engulfing our partner Elan.

Good company, wrong model

“You have to recognize that the companies we build are risky. You’re dealing with normal business and human factors that are risky enough, but when you add in market factors and technology factors, you can’t predict the outcome.” For example, Wallace said, “How is Mother Nature going to react your attempts to learn her secrets?”

In Cogent’s case, he explained, “We just didn’t fit the markets anymore. The type of company we built at the scale we funded it could not work anymore. We built a good company on the wrong model.”

Wallace still believes the genetic targets the Cogent sought, ones that conferred some protection against brain damage from stroke or disease, “are worth going after.” He and his former Cogent partner, Don Ho, who returned to academic research at Duke, continue to look for alternative means to pursue similar research, although apart from the proprietary data Cogent acquired.

But the whole experience convinced Wallace that, “We have to find new ways to do this. We’re in discussions with venture folks and universities about what new models can work now.”

Faustian bargains

In the current economic climate, venture capitalists and large pharmaceutical companies are reluctant to take on early-stage biotech or drug development companies. They look for late stage companies already in at least promising pre-clinical stages, but preferably already in human clinical trials.

“Investors don’t want to spend a lot of cash right now. They’re saying earn it,” Wallace said. “It’s hard to build a small company that earns its way to breakthroughs. Big pharma sells drugs to support its research and development. Almost all these start-up companies are under-resourced, and now you have two things that are under-resourced – R&D and sales.”

Venture capital, he noted, “has always been a way to inject massive amounts of rocket fuel into a company, like an afterburner on a jet, that lets you beat others to market. Time counts more than anything else.”

If a start-up can earn enough cash to sustain itself, Wallace asked, “Then why do you need venture capital? It can be a Faustian bargain” He said venture capitalists basically have two speeds: “Pedal fully to the floor or foot stomping on the brake.”

Wallace has been discussing potential alternative methods for new models of getting early stage cutting-edge work done in biotech since Cogent shutdown.

Moving the ball

Wallace’s current company, the Cary-based Arbor Group, a consulting firm, wrote a white paper for one of its clients outlining his summary of why he thinks new models are essential. It defines the problem via an extended football metaphor.

“At the university level,” he said, “researchers get the ball at the goal line. No one knows anything much about it. They do the work to get the ball out to about the 20-yard line. By then, it’s not the new new thing and needs applications developed.”

The university environment is not set up to do that and the professors and graduate students doing the early research have other professional interests, such as publishing their research and taking credit for discoveries to advance their academic and scientific careers.

“They would rather go back to the 10-yard line and pick up new things that play off what they’ve discovered. They’re promoted for finding new things.”

In the past two decades, the model has been that at this point the university technology transfer office “hands-off the ball.” It licenses out the research to a pharmaceutical company or venture-backed start-up to take it further down field. “Stock was the product and if you ever got to the goal line, you got a touchdown bonanza,” Wallace said. That model changed after the dot com meltdown, 9-11, and accounting scandals.

Now, the real challenge, he said, “is how do you get from the 20 to the 50? Ten year venture funds can’t pick the ball up at the 20. The path is too long in biotech. Pharmaceuticals used to be willing to pick the ball up at about the 50, where you have significant pre-clinical or even human clinical data, but now they want late-stage drugs. They’ll do a fourth generation Viagra where they know what they can get in earnings without any technology risk.

“Our idea is to do this through non-profits. The idea is to find hybrid institutions that do the developmental applied science at the cutting edge the way biotechs used to, then transfer it to pharmaceutical companies.”

Wallace said the need is pressing, and The Arbor white paper stresses that point: “Last year, the U.S Food and Drug Administration approved only 21 new drugs, marking a steady decline since the peak of 53 approvals in 1996. Notably, many of the world’s largest drug companies failed to win US approval for a single new drug in 2003.”

So why should the general public care? Because, Wallace pointed out: “What this means for all of us is that if we care about curing previously intractable diseases, we need a new and different approach for bringing innovative therapeutic discoveries forward.”

The Arbor Group: www.arborgroupllc.com