Magazine Article | September 18, 2009

From The Garage To The Biotech Fast Track

Source: Life Science Leader

Alan Horowitz, contributing writer

Jonathan E. Lim, M.D., came to San Diego-based Halozyme Therapeutics as CEO in 2003, when the biopharma company was “four scientists in a garage.” (He was employee number five.) When he started, the company had three months worth of cash. Immediately, he began seeking venture capital, and after contacting 50 VCs without any luck, the cash ran out. Lim and the company’s cofounder, Gregory Frost, Ph.D., both stopped taking salaries, as a result.

About 3.5 months into his tenure, Lim met with a private equity firm. It was interested in investing in Halozyme, but only if the company was public; being public increased the liquidity of the private equity firm’s investment. Most companies go public through an initial public offering, or IPO. However, Lim decided to pursue another option: a reverse merger. With a reverse merger, a private company merges with a public company. This is not necessarily the most desirable way for a company to go public, but it does provide the advantage of minimizing the time and expense of going through the IPO process.

But reverse mergers have their shortcomings. For example, Lims says there is less visibility for a reverse merger company within the investment community, forcing management to work harder to raise the company’s visibility. That said, the reverse merger worked for Halozyme, enabling the company to raise about $9.2 million from the private equity firm and other institutional and high net worth investors. “It was a great strategy for Halozyme because it allowed us to access the capital markets at an opportune time, and we’ve been able to build the company [currently at 135 employees] from that,” he explains.

Consulting Experience Pays Off

Lim came to Halozyme after two years at the consulting firm McKinsey & Company where he chose to specialize in the healthcare industry due to his prior training in general surgery. His stint at McKinsey proved very valuable, as it gave him exposure to C-level executives. “Demystifying the boardroom,” is how he describes it. Being comfortable in the company of high-level executives was important because Lim was only 31 when he took over the reins at Halozyme.

When he first wrote up a business plan for Halozyme, he included what he calls “the three horizons” approach: short-, medium-, and long-term strategies, which he also learned from McKinsey. Pursuing multiple time horizons in parallel, says Lim, was done to generate value for both patients and shareholders. The first horizon included what Lim calls “low-hanging fruit.” These were the opportunities that were relatively easy to succeed with, such as Hylenex and Cumulase, and capable of generating near-term successes. Cumulase is now profitable and Hylenex, which is partnered with Baxter, will launch later this year.

Next came Horizon 2 strategies, which are medium-term. Here, the company is partnering with others to develop uses for its products. Its partnership with Hoffmann-La Roche is an example, where La Roche is researching the use of PH20 with up to 13 of its biologics. The company is also applying PH20 to the development and commercialization of its own proprietary products with potentially faster paths to market through expedited regulatory strategies. An example is using insulin with PH20.

Horizon 3 strategies are what Lim calls “swing for the fences,” where innovative products, which come with higher development and regulatory risks than the lowhanging fruit, are pursued. An example is PEGPH20 which is a technology platform that targets major oncology and nononcology indications.

He admits that such ambitious growth strategies carry their own risks. A lack of focus is one such risk. And going after multiple programs in parallel can stress an organization, he says. To control and focus its strategies, Lim relies on another important lesson he learned at McKinsey — hire the best people possible. “Early on at Halozyme, I adopted the mantra of recruiting people who were either much smarter than I am, much more experienced than I am, or preferably both. And I think that works very well,” he says.

A Hands-On Approach To Hiring
Before anyone gets hired at Halozyme, they must get Lim’s approval. One reason for this emphasis on hiring is Lim’s view of the importance of people. “I believe people are as critical if not more critical to the success of the business than the technology or product,” he says. “For instance, you could have a really good technology or product, but if you don’t have the right people to develop and commercialize it, then it really won’t go very far. But, if you have very good people, even if you don’t have the right technology or products, really good people can find a way to make a company successful. So one of my most important jobs is to put the right people in the right place at the right time.” Thus, when interviewing potential employees, he focuses less on technical competence (which others in the company can do as well as he) and more on cultural fit. “I’ll often spend more time assessing the person’s interpersonal skills than their technical ones, since the team does an excellent job of ensuring candidates meet our high technical bar first, before they see me,” he says.

Medical school and residency training come into play when conducting job interviews. “Interviewing and examining patients really help develop a sense of where people are coming from because you learn to read eye contact, facial expressions, and other nonverbal cues to help make appropriate diagnoses and determine optimal treatment approaches. Effective physicians also use open communication with patients to build trust and rapport. I believe these people skills are portable from the medical world to the business world — whether interviewing prospective employees or establishing rapport with various stakeholders,” says Lim.

A Focus On “Chaordic” Leadership
This emphasis on recruitment and cultural fit comes from a broader vision that guides Lim — chaordic leadership, which he used since arriving at Halozyme, and before he learned it had a name. This is a management approach first written about by Dee Hock, founder and former CEO of Visa. Notes Lim: “Dee Hock described a ‘chaord’ as any self-organizing, adaptive, nonlinear, complex system which exhibits characteristics of both order and chaos. He was able to strike a balance between cooperation and competition amongst thousands of financial institutions that create and use the Visa products. At Halozyme, we use the chaordic leadership model to strike a balance between order and chaos, a strict process and entrepreneurship. We try to avoid having so much order that we become too rigid and bureaucratic, or so
much chaos that we have poor or confused execution.” And this is where Lim’s leadership vision and emphasis on hiring the right type of people come together. Rather than operate a traditional, fixed, hierarchical, command-and-control organization, he has created a highly flexible and dynamic one. People are hired based on the capabilities the company is seeking to recruit, rather than focusing on a job title or strictly defined job description.

Once hired, a person is not necessarily rooted to that first job for their duration at the company. People are moved around to take maximum advantage of their strengths and interests, observes Lim. For example, receptionists who have expressed interest in moving to other positions have become human resources specialists and clinical research associates. “We really try to match aptitudes and interests with where the person can best add value to the company,” says Lim.

A Unique Goal-Setting Approach
The application of chaordic leadership at Halozyme is not just theory. It has, for instance, altered how the company sets goals. “We used to have a fixed PMO [performance management by objectives] system,” says Lim. “At the beginning of
each year, we set some SMART [specific, measurable, achievable, realistic and timebound] goals, and what we found, especially in a very dynamic, rapidly changing environment like ours, was that these goals could become obsolete shortly after we wrote them because things can change so fast. For instance, at the beginning of the year, if we write a SMART goal to accomplish an objective for Program A but the team later decides to kill Program A and instead move forward with Program B that they developed later in the year — the SMART goal methodology would have penalized the team for making this decision because they were incentivized to accomplish their Program A objective and Program B didn’t even exist at the time the goals were written. The new priorities-based methodology not only allows teams to make these kinds of Go/No Go decisions, but it also rewards them for making decisions that are in the best interests of the company.”

The challenge here is holding employees accountable to goals that may no longer be relevant. That has prompted the company to move towards a looser system of setting priorities and goals. “We now set dynamic priorities, which can change in real time, and it’s a dialog that takes place between supervisor and employee,” says Lim. As employees sense new opportunities or new challenges within their work scope, they can alert their supervisor, with the reverse holding true. This allows the supervisor and employee to revisit priorities and change them as needed.

Says Lim, “As long as the priorities are in line with the overall corporate priorities, this approach provides a very effective way of staying entrepreneurial and fastmoving, accommodating change but also having enough guidance in terms of
prioritization to enable people to have the clarity they need to get their jobs done.”

As part of this approach, employees and teams create lists of all their achievements during the year just ended. The company then measures the effects those accomplishments have on the overall organization. This model has only recently been implemented at Halozyme and its benefits are too new to measure. Says Lim, “I think what it does is allow employees across the organization to embrace change, and that’s critical for rapidly growing organizations, especially in dynamic industries like biotechnology.”

The company also has a fairly comprehensive program of employee communication. There are biweekly “all-hands” meetings, which are attended by all employees. At these, says Lim, “We’ll talk about the state of the company at a high level and have departmental as well as program updates.” Lim also treats seasoned employees to an annual anniversary lunch with him where they can provide feedback. In explaining this emphasis on employee communication, Lim says, “My philosophy is, it’s easier for people to do their work if they understand the big picture context of what they’re trying to achieve and why.”

In addition, there are regular “deep dive assessments,” says Lim, of each of the proprietary and partner programs. Proprietary programs are products Halozyme is developing on its own, such as Chemophase, which uses the PH20 enzyme for local administration in bladder cancer. Partner programs are products developed and marketed with partners, such as the partnership between Halozyme and Baxter regarding Hylenex. So-called balanced scorecard meetings are also regularly held, where the priorities of proprietary and partnered programs, and departments, are tracked.

There are also company picnics, holiday parties, and other social events, including “First Friday,” held on the first Friday of each month. Each month a different department plans a companywide social event that begins in the late afternoon and is usually held in the corporate kitchen/dining area. Each First Friday has a theme, usually related to a holiday or an event that occurs during that particular month. For example, a First Friday in May had a Cinco de Mayo theme complete with chips and salsa, refried beans, fajitas, and other Mexican fare. The venue provides an opportunity for informal interaction among employees across department lines and responsibilities. “We like to have fun, but we also like to keep things ‘capital efficient,’” says Lim.

The Company’s Products
Founded in 1998, the company describes itself as a biopharmaceutical company developing and commercializing products targeting the extracellular matrix for the endocrinology, oncology, dermatology, and drug delivery markets. Delivering drugs through the fiber and gel-like matter that exists between cells, the extracellular matrix is a challenge. For many years, agents derived from animal extracts containing extracellular matrix-degrading enzymes have been used to facilitate the absorption and dispersion of anesthetic drugs into the eye during ophthalmic surgery.

The active molecule is an enzyme called hyaluronidase, and its target is hyaluronan. By degrading hyaluronan, hyaluronidase temporarily opens channels through the extracellular matrix. This allows larger quantities of drugs and fluids to be administered through the skin more rapidly and with less tissue distortion or inflammation. Halozyme has developed a soluble recombinant human form of hyaluronidase, which it calls rHuPH20 or PH20 for short. This, the company says, overcomes the supply, purity, and consistency issues of animal-sourced preparations. With the ability to administer more enzyme with a higher degree of confidence in product safety, larger volumes of drugs may be delivered through the skin and reach the bloodstream more quickly. The benefit: Drugs that had to be administered intravenously now can be delivered subcutaneously, which is easier and less costly than intravenous delivery.

Andrew Vaino, who follows Halozyme as a senior research analyst at Roth Capital, comments, “These guys were smart enough to see the value of a humanized hyaluronidase, and they signed some very nice commercial deals [as a result]. ”
PH20 received FDA approval in December 2005. It is used as a drug delivery technology for both Hylenex, which is used with generic small molecules and fluids, and Enhanze Technology, which is used with proprietary small and large molecules. Halozyme licensed the commercial rights for Hylenex to Baxter Medication Delivery. Enhanze Technology is being developed via partnerships with Hoffmann-La Roche and Baxter BioScience.

Halozyme also has FDA approval for Cumulase, which is considered a medical device for the treatment of oocytes (eggs) prior to intracytoplasmic sperm injection. It received a 510K clearance for a Class 2 medical device because the enzyme is applied outside the body. Says Greg Wade, senior vice president, healthcare equity research, at Wedbush Pac Grow Life Sciences, “They’ve moved the development of their proprietary drugs along. It takes a great deal of effort and skill to get drugs to this point, which reflects well on Dr. Lim’s leadership of the company.”

Big Pharma Partnerships
Small companies like Halozyme can sometimes have a love-hate relationship with large pharmaceutical company partners. For Halozyme, its partnerships with Hoffmann-La Roche and Baxter have proven beneficial. The benefits, says Lim, include leveraging the expertise of these larger companies, benefiting from their effectiveness at late-stage development, as well as their sales and marketing prowess. Access to capital, through upfront, milestone, and royalty payments, is an additional benefit. “The big pharma companies in our partnerships cover development and commercialization costs, so all of that is very helpful,” says Lim.

Of course, there are downsides to such partnerships. One is loss of control. Another is a potential clash of cultures. “As a smaller company, we may be a little more entrepreneurial and fast-moving versus big pharma companies that may be slower or more deliberate in their decision making,” says Lim.

Because of the potential for friction, Halozyme gives a lot of importance to alliance management. “The key to success [in partnerships] is maintaining open and honest communication,” says Lim. The company has an alliance manager for each
partnership and technical leaders who interact with their partners’ counterparts. Regularly scheduled face-to-face meetings are held, too.

In the six years since he became Halozyme’s CEO, Lim has developed a strong track record — FDA approvals, raising money ($180 million, which came from payments from partners as well as from investors), and a strong pipeline of products. Notes analyst Vaino regarding Halozyme, “I think it is as well-run as any biotech company.”