Helmut Kessmann has been involved in the life science startup scene on the Rhine from the beginning. Today, the native from North Germany is Head of Business Development at Polyphor. Previously, he was co-founder of Discovery Technologies and a member of the executive management of Santhera, both IPO companies.
In the interview with i-net he talks about the development of the Life-Sciences-Standorts Basel and the success factors for biotech startups.
Mr. Kessmann, how do you rank Basel as a location for biotech companies?
North Western Switzerland is one of the best locations for biotech startups globally and in Europe amongst the top three. However, we must not rest on our laurels; otherwise we risk ending up back where we were in the early 90s.
Wasn’t Basel already a pharmaceutical and chemical city at that time?
Yes, but no one wanted or could establish a biotech startup company here. The normal career path of people was that they joined one of the large corporations like Ciba, Sandoz, Roche, after studying and remained there until they retired. Then, in 1996, the merger of Ciba and Sandoz to form Novartis happened and suddenly there was a very active and successful biotech scene. This transpired within a few years - an experience that still fascinates me today.
Did you immediately jump on the bandwagon?
I was employed by Ciba-Geigy, but I have already played with the idea for a few years to start my own business. At that stage no one was willing to finance projects in Basel. This changed immediately after the merger of Ciba and Sandoz in 1996 when the Novartis Venture Fund was founded. Suddenly we were in the game. Discovery Technologies was among the first startups in which they invested. Our advantage was that we had a complete business plan in our pocket.
The Novartis merger was therefore the trigger for the startup scene in Basel?
Yes, but that alone was of course not enough. A fund needs to be managed by the right people. Jürg Meier and Ruedi Gygax were exactly the right people. In addition, there were many more important initiatives in the regions. If you summarize you’ll see that, in just two years, more than 20 companies were in the starting blocks, ready to move. Since then, a lot has happened and now there are extremely successful companies such as Actelion, Basilea, Evolva and Polyphor. More have since been acquired such as Speedel or Glycart. Today, there are not only many ways to gain access to funding, but also support networks such as that of i-net innovation networks. Without the positive environment for Biotech startups the establishment of a new company is very difficult. Also, one should not forget that globally there is active competition for new companies.
But Discovery Technologies, co-founded by you, then relocated to the USA?
Not quite, we opted for the IPO to go to the US, but the operational activities remained and continued unchanged in Allschwil. For this purpose we merged in 2000 with a US chemical company and created Discovery Partners Ltd. headquartered in San Diego. I think our company was one of the last with a successful IPO before the crash in the fall of 2000. Then the market lost 75 percent of its value in just a few months. Fortunately, Discovery Partners was profitable before the IPO and did not have to rely on further funding. Later, Discovery Partners became Infinity Pharmaceuticals through another merger, which is still successful today, especially in drugs for oncology.
Your next venture, Graffinity, did not proceed exactly as planned?
I had learned that investing in the life sciences sector is done in waves and the preferred areas for investors can quickly change. With Discovery Technologies, we were able to ride on the height of the investment wave in the late `90s. However, Graffinity in Heidelberg, found itself at the end of this cycle, even though the technology was very innovative and actually fitted the needs of the "genomic era" perfectly. Thereby, we could record 30 million euros in April 2001, which was at least the second biggest round of funding in Germany that year. But only months later, and as a result of the biotech market crash, the interest of the investors in "platform companies" decreased to zero and people wanted to see clinical products.
How did you continue with Graffinity?
We had to be creative. After some searching we found an ideal partner namely MyoContract located in Basel. MyoContract was the first spin-off of the Biozuntrum in Basel and was established due to the great vision and initiative of the founder and CEO, Thomas Meier. The company had a product candidate but no money, and we had money but no product candidates. The result was Santhera. Graffinity was leached out of the new company through a management buyout and now supplies the old technology to the service business. Thereby Graffinity could survive without further venture capital.
But after the great start Santhera is still waiting for the breakthrough?
Biotech is rarely straightforward, but I am convinced that Santhera will also be commercially successful. Their focus on rare diseases, for which there is virtually no treatment, was correct in any case. In 2006 the company made a successful IPO and we received outstanding support from investors, researchers and patient organizations. Unfortunately, the most important product demonstrated later in the clinical Phase III that it did not have the effectiveness we hoped it would have. At one stage over 80 percent of the goodwill was gone. But that is how it is in biotech - a real roller coaster ride.
Was there a Plan B?
Yes, the company is currently trying to obtain the European market approval for the treatment of sudden blindness, a rare hereditary disease. The decision will probably be made in 2015. For me, personally, there was not much to do at Santhera in 2011 and I accepted an offer from my present employer, Polyphor. I have been the Head of Business Development since 2011.
How do you see the local biotech startup scene today?
We have already achieved a lot, but I would like to see many more young companies. Basically, Biotech is one of the most profitable investments, but there are big ups and downs. Many investors show interest - but there is also uncertainty. This is manifested in the new financing models. Private capital plays an increasingly important role. In Polyphor, investments were made almost exclusively by individuals. These are usually wealthy individuals from the surrounding area with a great affinity for pharma.
What is the most difficult phase for a startup?
Once the effect of a drug in humans is demonstrated, the financing is often easier, although you then really need large amounts of money. At this time good deals with interested pharmaceutical companies are also usually possible. It is very difficult earlier, as well as between the early pre-clinical development and proof of concept phases. Here more money needs to flow and this is where the private investor plays a key role - not only in Switzerland. In Germany, for example, a large part of all biotech investments were made by three individuals: SAP founder Dietmar Hopp, and the brothers Thomas and Andreas Strüngmann who sold Hexal to Novartis. Nevertheless, another early-phase innovative fund with an investment strategy similar to the Novartis Venture Fund of the `90s would be very helpful.
What alternative funding models are currently becoming important?
Non-dilutive financing, which means you acquire financing without relinquishing shares in the company, is making its mark. These include, for example, the US Department of Defense and the National Institutes of Health, which are no longer bound to their investments in the United States. Local companies such as Evolva, Santhera and Basilea have already benefited. Patient organizations also play an increasingly important role as they have lots of money. The French Association for muscle diseases, the Association Française Contre Les Myopathies, has an annual budget of nearly 100 million Euros as a result of their famous Telethon. Also joining are organizations such as the Cystic Fibrosis Foundation in the US or the Bill & Melinda Gates Foundation, which has already invested billions, especially in the research of drugs for tropical diseases. The extent of these investments did not exist 10 years ago.
So, is the philanthropic sector strengthening?
Yes, the trend towards alternative financing models, including the Venture Philanthropy (VP) model, is clear. However, little is known about the latter in the biotech scene. Although it is profit-oriented work, in this financing model the profits are reinvested in non-profit organizations for research. In other words, the donors of these funds aim to keep their assets, but not to increase it such as has been customary, but to support a charitable cause. The European VP Association recently had a meeting in Geneva with 700 participants and I was impressed by the professionalism and presence of many bankers and venture capitalists who wanted to learn about this concept or are already active with VP models.
Would Venture Philanthropy also be an approach for North Western Switzerland?
Why not, after all there are already many biotechs that have received funding from such alternative models. It will however not be sufficient for the next wave of startups here in Basel. It also requires an intelligent infrastructure, better early-stage financing, and support organizations and networks such as i-net. It would be a shame if we now just await the next crisis; if it happens we must be one step ahead. Today we can operate from a position of strength and we must exploit it.
Interview by Christian Walter and Thomas Brenzikofer
A short CV of Helmut Kessmann can be found here