Contributing Writer

SAN DIEGO - Cautious optimism reigned at the inaugural BIOCOM San Diego Investor Conference, both for the future of the fledgling event and for the availability of financing as biotech business models continue to mature.

Biotech once held the monopoly on cutting-edge scientific innovation, but pharmaceutical companies have developed massive research and development engines, thereby invading historical biotech territory, and they are doing so with R&D budgets that dwarf what biotech can afford.

So what's a biotech to do?

Former executive chairman of Biogen Idec Inc. William Rastetter, who also is a new partner at Venrock Associates, addressed those issues in his plenary breakfast speech. He advised applying many of the same principles that helped him grow Idec Pharmaceuticals from a San Diego-based start-up to a multibillion dollar powerhouse, eventually merging with Biogen Inc. to form the world's third-largest biotech. His tips included protecting assets with strong intellectual property, fostering an environment of collaborative inquiry and implementing a focused strategy.

Internal diversification hedges are for "portfolio managers, not small companies," Rastetter said, but he added that a focused company can look to mergers and acquisitions to build out the pipeline, as Idec did following its commercialization of Rituxan.

Rastetter also advised companies to become the best in the world at something the "establishment" doesn't like or doesn't understand. At Idec's inception, that was monoclonal antibodies - specifically using a single antibody to treat a broad patient population. Today, he sees regenerative medicine as an area in which biotech may be able to excel while pharmaceutical companies hang back.

Yet the increased focus on R&D at pharmaceutical companies is having at least one positive side effect for the biotech industry: the discovery of more compounds than pharma is interested in bringing forward. While biotech research has long fed the pipelines of pharma, conference attendees discussed an increasing reversal of roles, especially as venture capital funding continues to focus on later-stage products.

"VCs are driven by what's already known and in the pipeline. They want what's ready for the clinic in one to two years and for an IPO or other exit in four to six years," Rastetter said.

In that climate, a biotech that begins with research and development is likely to run out of money before reaching the clinic. Hence there is an "enhanced appreciation" for a business model focused on commercialization rather than research, Rastetter said.

Yet the commercialization business model is not a new phenomenon. Idec used a similar strategy 20 years ago by first hiring the manufacturing group to make Rituxan and then bringing in the development team to improve it. R&D was the last piece of the puzzle.

Despite all the talk about products, it's a difficult task to find anyone in biotech who disputes the importance of R&D. Conference-goers voiced concerns over the recent shift in congressional power, specifically about price controls. While most attendees said they do not expect to see sweeping changes until after the 2008 elections, the pricing talk has them concerned about the future of innovation.

"It comes down to how much we value quality of life," Rastetter said. "The sad truth is that [the U.S.] subsidizes pharmaceutical R&D for the rest of the world. Does that mean we should stop doing it? Not unless we want our grandchildren to have the exact same treatment options we have today, which means cancer will still be incurable, diabetes will still be poorly managed, and they'll still get Alzheimer's."

Where will all this change take us? Rastetter used the analogy of the "Red Queen" to explain his views of the subject. In Alice in Wonderland, Alice notes that everyone in the Queen's kingdom runs without seeming to get anywhere. The Queen replies that they must run just to stay standing. Those who do not embrace change and keep moving forward will fall behind.

The presentation portion of the conference ended Wednesday with 38 companies presenting to a crowd of about 300 investors, analysts and executives.