Magazine Article | June 9, 2011

Through The Eyes Of A Billionaire Life Sciences Investor

Source: Life Science Leader

By Cliff Mintz Ph.D., Life Science Leader magazine

The biotechnology industry is “alive and well and poised for explosive growth over the next 15 years,” says Randal Kirk, a little-known serial entrepreneur who may possibly be one of the most successful biotech investors of all time.

While he may not be a household name in many pharma and biotechnology circles, Randal Kirk has quietly started, grown, and sold three biotechnology companies in the past 25 years. A 2010 article in Forbes magazine estimates his current worth at $1.6 to $2.2 billion.

An economics major (Radford University) and lawyer (University of Virginia) by training, Kirk’s entrée into the life sciences industry began after he and a pharmacist founded General Injectables and Vaccines (GIV) — a next-day distributor of pharmaceutics and biologics to the office-based physicians —in 1983 in rural southwestern Virginia. With virtually no formal training in the life sciences, Kirk and his partners transformed GIV into a profitable medical supply company and, in 1998, sold the company to Henry Schein, Inc., for $125 million.

Along the way, GIV spun out King Pharmaceuticals, the Bristol, TN-based specialty pharmaceutical company that was recently acquired by Pfizer. Also, in the late 1990s Kirk founded New River Pharmaceuticals, a specialty pharmaceutical company that received FDA approval for Vyvanse (lisdexamfetamine), a pediatric ADHD (attention deficit hyperactivity disorder) drug. He also gained a controlling interest in Clinical Data, Inc., that earlier this year received FDA approval for Viibryd (vilazodone), a new antidepressant drug. In 2007, New River Pharmaceuticals was sold to Shire for $2.6 billion, and this past February, Clinical Data was acquired by Forest Laboratories for $1.2 billion.

In 1999, Kirk created Radford, VA-based Third Security, a management investment firm (currently with branch offices in San Francisco and Greenwich, CT) to identify and develop promising new opportunities in the life sciences industry. Although the firm and its affiliates are the largest shareholders of Halozyme Therapeutics, a San Diego-based biotherapeutics company, Third Security’s most significant current investment and venture is Intrexon, a privately held, synthetic biology company founded in 1998 by Thomas Reed, Ph.D., while a postdoctoral scientist at the University of Cincinnati. Kirk believes that Intrexon may be the best investment he has ever made. He thinks it has the potential to be the “Google” of the life sciences industry.

Intrexon claims to be the largest producer in the world of rationally designed complex synthetic transgenes that it believes may be utilized by its partners to produce better protein-based (biotechnology) drugs, reinvigorate gene therapy, develop biofuels and bioplastics, improve genetically engineered crops, and create some novel yet unspecified consumer products. Since 2006, Third Security has invested $200 million into Intrexon, which currently has 205 employees and laboratories in Blacksburg, VA; Germantown, MD; Foster City, CA; Burlingame, CA; and Research Triangle Park, NC. Kirk is Intrexon’s CEO and chairman of its board. Although Intrexon currently has no products on the market, Kirk contends that will likely change within the next year or so. Finally, this past January, Intrexon inked an “exclusive channel partnership” deal with Ziopharm Oncology, a speciality biopharmaceutical company developing novel small molecule and biological treatments for cancer, acquiring a 12% stake in that company.

When Kirk isn’t running Intrexon and evaluating new biotechnology opportunities, he spends much of his time on his 7,200-acre cattle farm where he keeps falcons and eagles and composes electronic music. He took time out from his busy and hectic schedule to chat with me about his investment and business strategies, some of the problems and challenges facing the biotechnology industry, the importance of science education and its relationship to innovation, and what it takes to be a successful life science entrepreneur.

Q: What personal qualities and business attributes have contributed to your success as a serial entrepreneur and life science executive?
I think that being intellectually rigorous, receptive, and open to new information and allowing the data to take you wherever it will is vitally important. Confidence is also critically important. Not the confidence that our ideas and beliefs are always correct, but the confidence that we did the best possible analyses and assessment with the data and information on hand.

To me, the most important part of intelligence is being able to recognize and acknowledge what you don’t know and what is possibly unknown by anyone. I think that understanding my own limits and acknowledging the things that I don’t know — as well as being able to discuss and interact with scientists to determine the extent of our current knowledge and understanding on a particular topic — has served me well as both an entrepreneur and life science executive.

Another thing I believe is important in my line of work is to understand which persons can (or cannot) work together to reach a common goal. In many ways, I view myself as something akin to a movie producer. That is, I am not especially adept at acting or an expert on directing, scriptwriting, or set design, but I am prepared to go to school in each of these subjects to learn and become conversant in each of them. This enables me to find people who are experts in each and to do what is in the best interests of the overall production.

Q: You tend to invest in fewer companies and stay involved much longer than the average venture capitalist or equity investor. Can you share your thinking behind your philosophy?
The short answer to your question is that I initially didn’t have much money, and I had no choice but to stay involved for long periods of time with the companies I started. But, in all seriousness, I was a serial entrepreneur — for lack of a better phrase — and by most standards had done pretty well for myself. However, it wasn’t until 1998 that I had my first two significant liquidity events that provided me with sufficient wealth to begin to think about how I could continue to enjoy the benefits of a serial entrepreneur’s focus, energy, drive, need, and determination, while not being ruined by the fact that we now had a ready supply of capital.

Luckily, both transactions took a lot of time to close and afforded me an opportunity to figure out how I wanted to go forward. It was never my intention to create a traditional investment or venture capital firm, but rather to identify opportunities where my team and I could add value through our considerable business skills and personal contributions.

I can unequivocally tell you that investing in life sciences companies and watching them fail or succeed from my Caribbean vacation home or on the golf course had absolutely no appeal to me. I realized I needed to be engaged and involved in a “hands-on” way with the companies that I invest in. This led to the creation in 1999 of Third Security, a firm of nearly fifty people, which sort of looks and feels like a venture capital firm but really isn’t. Unlike most traditional VC firms, Third Security is not in the business of “renting money” to companies. Instead, we look for business opportunities where we believe we can deploy our talents, energy, time, dedication, and substantial financial resources to make something great happen. Many times, the financial investment is really secondary to us; it is simply a vehicle by which we can get paid for our efforts and commitment to the ventures we take on.

As surprising as this may sound, our normal holding period for an investment is roughly a decade. And, each time we decided to sell a company, the decision was primarily based on the determination that we could no longer continue to add sufficient value to the enterprise. For example, when we sold New River Pharmaceuticals to Shire and Clinical Data to Forest Laboratories, we believed the new owners were in a much better position than we were at the time to add value to the products we had developed. The continued success of these products by their new owners suggests that our suppositions were well-founded and correct.

In business, knowing when to divest or sell a company is never an easy thing. We believe we have been successful in this regard because of our unwavering willingness to be open to new ideas, to rethink original ideas, and to go wherever the data takes us. Put simply, we are very willing to modify or readjust a company’s business model or plans based on newly acquired information or a more sophisticated analysis of the data that was responsible for our initial decisions. For example, the original investment in New River Pharmaceuticals was related to thyroid hormones, a discovery program that ultimately failed. But, the early difficulties we experienced forced us to look at other opportunities that were consistent with our core scientific capabilities and skills. This culminated in the development of Vyvanse (the ADHD drug), which allowed us to sell New River to Shire, a company that is well- known for its leadership and expertise in ADHD drug development. Likewise, one of the earlier ideas for Clinical Data was to develop drug/diagnostic test combinations, including a gene-based test for depression to be used in combination with Viibryd, the antidepressant that we were developing at the time. While this idea didn’t pan out (we ultimately sold our pharmacogenomics assets), it allowed us to focus on development of Viibryd, which I think will benefit millions of patients who suffer from depression.

Q: How do you and the Third Security team choose your next investment or venture?
Our decision to get involved with a company is primarily based on whether we think we can add value to an enterprise and how passionate we are about the opportunity. As strange as this may sound coming from an investor, money and financial considerations are secondary for us. After all, any project we are going to take on is likely going to be part of our lives for at least 10 years. And, we really have to “love” an idea a lot to make that kind of commitment to the project.

Paradoxically, the passion we need to get involved with a venture also, in some cases, allows us to determine when it is time to exit or sell. A good example is the recent sale of Clinical Data and Viibryd to Forest Laboratories. We had developed our own launch and marketing plan for hViibryd and had a pretty good idea about how well the drug would do if we chose to “go it alone.” However, once Viibryd received FDA approval, we had to consider whether we or a more established market player, like Forest, could add more value to the product. And, in my view, if the other guy can add more value than we can, then we owe it to everyone to step aside. I think Viibryd is a good drug and that Forest will do very well with it.

Q: What factors have contributed to the financial woes and thinning drug development pipelines of many pharmaceutical and biotech companies?
For many years now, life science executives have lamented dwindling drug approval rates and shrinking development pipelines. However, if you examine drug approval rates and the percentage of therapeutics that advance from preclinical to various phases of human clinical trials over the past 25 years, careful analysis reveals that these percentages haven’t changed much at all, and they remain largely fixed. Interestingly, what clearly has changed over the same period is the cost of new drug development, which continues to skyrocket.

Many life science executives blame the burgeoning costs of new drug development on increased regulatory scrutiny. But, increases in regulatory burden alone cannot explain the almost 50-fold increase in new drug development costs over the past 20 years. We believe big pharma’s current woes are natural for most discovery-based industries where, despite large, incremental infusions of capital, there invariably comes a point of diminishing and even negative rates of return. And, because biology may be one of the most complex subjects ever addressed by mankind, it is perfectly understandable why the life sciences industry has remained in discovery mode for as long at it has. Further, there is very little collaboration among drug makers, which is characteristic of most industries that rely on discovery as the primary source of new products. Not surprisingly, this hinders sharing of scientific and medical information, which negatively impacts new product development.

By way of analogy, if you and I were panning for gold in California in the late 1800s, how collaborative are we really going to be with regard to sharing where the good gold seams are? This is a natural characteristic of most discovery-based industries that I can think of and largely responsible for the decline of the pharmaceutical industry over the past decade. In our view, the life sciences industry will only be able to reinvigorate itself by adopting an engineering approach for new product development, a transition that, while just getting under way in the life sciences, is a longstanding feature of mature engineering-based industries, including automotive, semiconductors, and software. Moreover, historically, most major public policy concerns — like today’s skyrocketing healthcare costs and consumer satisfaction issues — have been ultimately resolved by technological and engineering advances. For example, at the turn of the 20th century, one of the greatest political and environmental problems in New York City was horse manure. And, the problem was solved — not by the city officials who endeavored to tackle the problem by limiting traffic — but by Henry Ford after he began to mass produce inexpensive automobiles.

Luckily, things are beginning to change in the life sciences industry. We believe that with the advent of synthetic biology, the life sciences industry has an ideal opportunity to transition from a discovery-based industry to one based on engineering. I believe that if synthetic biology can be leveraged correctly, it will allow us to create safer and more cost-effective drugs, which are exactly what governments, third-party payers, and consumers are demanding and want. Further, industrywide transitions from discovery to engineering approaches have almost always been accompanied by a rapid and steady turnover in industry leadership. This trend began in the life sciences industry during the early biotech days and appears to have been accelerating ever since. If Big Pharma is unable (or unwilling) to appropriately react to the challenges and opportunities offered by new technologies like synthetic biology and personalized medicines, then I believe they will ultimately render themselves obsolete. And, I suspect that most of them will be unable to make the transition.

Q: What are your thoughts on the current state of the biotech industry, and is now a good time to start a biotech company?
My understanding of the biotechnology space informs me that the next 10 to 15 years in the life sciences industry will likely resemble what we saw with semiconductors, computers, and software from 1984 to 1999. That said, I think we need a few exemplars of success before the biotechnology renaissance I am predicting will be more popularly acknowledged or known. By way of analogy, this will likely happen when Craig Venter becomes to the life sciences industry what Bill Gates became for the software industry.

Despite the recent economic downturn, I believe it is a great time to start a company as long as its focus is on some aspect of bioengineering or a way of doing something that is important (or about to become important) and is better/faster/cheaper than what can be done today by anyone else. Conversely, it is a horrible time to start a discovery-based company that focuses a single cellular pathway or particular drug target. However, if a bright scientist or team of scientists has actually figured out how to do something that is unique or better than what currently exists, then I would urge them to consider a start-up. There is an awful lot of venture money out there that needs to be invested. That said, I would be very encouraged and optimistic if I were a life scientist in today’s market.