Biotech struggles in market - another firm bites the dust

EXCERPTS: Biotechnology boosters predicted that it would revolutionize crop production. Voytas created a company, Phytodyne Inc., and state and federal government and private investors poured millions of dollars into the Ames-based biotech startup.

State officials touted Phytodyne as a poster child for the burgeoning biotech economy. Early in 2004, Iowa Gov. Tom Vilsack announced a three-year, $5 million financial assistance package for Phytodyne, saying the company had the potential to revolutionize agriculture.

By late 2004, Phytodyne had been dissolved, its workers laid off, its laboratories disassembled and its investors left holding the bag.

People who had championed Phytodyne's potential were crestfallen. Those who once had spoken with pride of Phytodyne's promise now pause and look down when asked about the company.

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A state official is quoted in this article saying biotech is booming. In fact, since its inception in 1976 the biotechnology industry has lost a combined $40 billion.

"This notion that you lure biotech to your community to save its economy is laughable," says Joseph Cortright, a U.S. economist who co-wrote a report on the subject. "This is a bad-idea virus that has swept through governors, mayors and economic development officials."
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Biotech struggles in market despite its promise in lab
Ames firm's collapse reflects troubles of an industry Iowa counts on for jobs
By ANNE FITZGERALD
REGISTER AGRIBUSINESS WRITER
Des Moines Register, January 15, 2006
http://desmoinesregister.com/apps/pbcs.dll/article?AID=/20060115/BUSINESS04/601150322/1033

Ames, Ia. - Dan Voytas' company has died, but his dream endures.

The Iowa State University professor wanted to market a faster, more precise way to genetically engineer crops - the holy grail of the $30 billion crop seed industry. Biotechnology boosters predicted that it would revolutionize crop production. Voytas created a company, Phytodyne Inc., and state and federal government and private investors poured millions of dollars into the Ames-based biotech startup.

But Phytodyne failed to get access to a key piece of patented technology owned by a California company. Financing fell through, Phytodyne folded, and Voytas returned full time to academia, taking three fellow researchers with him, including David Wright, co-founder of the company.

Phytodyne's story is a cautionary tale for those seeking to build businesses and create jobs based on biotechnology, an industry that Iowa and other states are trying to tap. And it shows how hard it is to turn a university researcher's biotech discovery into a commercially viable product.

Locked out of the marketplace, Voytas, 43, has joined with colleagues at Harvard University Medical School and other institutions to make the genetic engineering process developed at Phytodyne available to academic researchers around the world for a nominal fee.

"Scientifically, we met our objective and exceeded our expectations," Voytas said. "We and, unfortunately, our investors are not going to recoup their investment, but people will benefit nonetheless."

Meanwhile, the California company with the patent, Sangamo BioSciences Inc., has sold exclusive rights to use of its technology in plants and plant cell cultures for agricultural and industrial purposes to Dow AgroSciences in a $50 million deal announced in October.

Those disparate approaches represent two sides in a philosophical, legal and economic tug-of-war that has emerged in the decade since agricultural biotech products first hit the market. On one side are those who believe that scientific and technological discoveries belong in the public domain so that researchers at universities and not-for-profit organizations can make advances for the common good. On the other side are those who believe in the right to restrict access to new technology to the highest bidders.

Riches from research

The promise of combining Iowa's agricultural prowess with emerging biotech-based research at state universities has tantalized state leaders. Biotechnology could help turn Iowa's 23 million acres of cheap corn and soybeans - now used primarily for livestock feed - into a gold mine of food, fiber, fuel and pharmaceuticals, supporters say.

The possible risks and rewards are huge. The Battelle Memorial Institute, a Columbus, Ohio-based consultant, has recommended that Iowa spend $300 million over 10 years, mostly on the state's three public universities, to try to attract and retain premier scientists, develop research facilities, and turn ideas into new products and companies. Battelle predicts the investment would attract or create 130 new bioscience businesses and 5,100 high-paying biotech jobs, while indirectly creating another 10,950 jobs.

But nine out of 10 biotech startups fail. Voytas and Wright knew that going into their venture. So did investors and state economic development officials.

They believed the company could be the exception. The research team consisted of top-flight scientists, including Voytas, a molecular geneticist who had earned a bachelor's degree in biology from Harvard and a doctorate in genetics from its medical school.

Phytodyne sought to develop plant engineering tools with global appeal and potentially enormous payoffs. And the company was located in the heart of the world's most productive grain-growing region, with lower operating costs than those found in such high-tech hubs as Boston or San Diego.

Phytodyne also had this in its favor: proximity to a major land-grant institution whose Plant Sciences Institute had a mission closely linked to Phytodyne's - discovering new and better ways to increase the productivity and uses of plants.

Initially, Voytas and Wright estimated that their method would shave two years off the time it takes to develop and commercialize new crop seeds - a process that typically takes six to eight years, with research and regulatory compliance costs averaging $50 million per product. Eventually, they developed an even better approach that enabled them not only to add genes to plants, but to change the DNA code of a plant.

State's high hopes

The announcement was welcome news to Phytodyne, which was struggling to pay its bills as it was trying to close a deal with Sangamo. The state gave Phytodyne about $300,000 in February 2004, on top of $200,000 given in 2002. Economic development officials saw other Iowa biotech startup companies succeeding, and they remained confident in Phytodyne's potential.

"We had a lot of support from the state and from individual investors and from institutions," said Wright, 40.

Voytas declined to specify how much private investment was lost. Iowa's Department of Economic Development sent notice to Phytodyne last year that it had to repay the nearly $500,000 because it did not fulfill its promise to create lasting, high-wage jobs. It remains to be seen whether Iowa will recover that money.

Biotech boosters worry that Phytodyne's failure may make investors and state lawmakers more cautious about investing in high-tech ventures. Phytodyne was the first company out of research conducted at Iowa State's Plant Sciences Institute.

"The unfortunate thing was that it was the first time that Iowa got brave enough to try something. . . . It just makes it a tougher sale," said Lisa Lorenzen, a former research scientist at Pioneer Hi-Bred International Inc. who is industrial liaison for ISU's vice provost for research.

She and others point to success stories, such as NewLink Genetics Corp., a six-year-old company, based at the ISU Research Park in Ames, that is using biotechnology to develop new cancer drugs and cancer diagnostic products.

State officials said Phytodyne's failure has not diminished Iowa's interest in expanding its biotech base.

"The biotech industry is still booming," said Jennifer Mullin, a spokeswoman for Vilsack.

Tina Hoffman, spokeswoman for the Department of Economic Development, defended the state's investment in Phytodyne, calling it "a calculated risk."

"This is a targeted industry that we have committed to," Hoffman said.

In fact, the state is pumping new money into such efforts. Iowa State, for instance, has received $200,000 to help its research park reduce costs for startup companies. In addition, the university has received $1.9 million from the state to help develop faculty researchers' discoveries that have commercial potential. There will be two rounds of awards annually at Iowa State, said Steve Carter, president of the research park. The first round has attracted 47 faculty proposals.

"For the first time, we've actually gotten dollars to help companies get started and to speed up the process," Carter said.

Talks, but no deal

Phytodyne's financing, as for many biotech startups, depended in large part on securing intellectual property. Wright had discovered retroviruses in plants while a graduate student at Iowa State. He and Voytas, his mentor, developed a way to use them to genetically engineer crops. After Iowa State secured patents on the discoveries, the scientists gained exclusive access to them and set about forming Phytodyne.

When retroviruses proved more difficult to use than they had first thought, Voytas and Wright instead focused on an alternative. That method enabled them to closely target where to alter a plant's genetic makeup, slice into DNA wherever genes need to be added, deleted or changed, and repair the break after the modification. The University of Utah held a patent on the process, and the Iowans gained exclusive access to its use.

But they also needed access to technology owned by Sangamo, a publicly traded biotechnology company based in Richmond, Calif. Established in 1995, Sangamo employed fewer than 60 people, but they included renowned molecular geneticists. Sangamo had built a formidable bank of patented zinc fingers ”” DNA binding proteins used in the ISU scientists' process. The California company also controlled zinc finger technology that could be used to target particular genes and turn them on or off, rather than breaking DNA to alter it.

Sangamo had reduced its agricultural biotech efforts, focusing more on the human health arena. Voytas wanted to build Sangamo's ag-related business, with Phytodyne leading the effort. He gained the help of key investors, including Equity Dynamics, owned by Des Moines venture capitalist John Pappajohn.

Phytodyne tried to strike a deal with Sangamo. Jon Leafstedt, then Phytodyne's president, led negotiations for the Ames company.

Talks occurred over more than a year and took place in Iowa and California, officials said. Sangamo's chief executive, Edward Lanphier, traveled to central Iowa twice for discussions, including one meeting at the governor's mansion.

But the two sides could not agree on terms of a licensing arrangement that would have given Phytodyne access to Sangamo's patented technology. Sangamo wanted 50 percent ownership of Phytodyne - a demand Voytas and his team initially rejected but eventually agreed to. Getting that, Lanphier sought an even greater interest in the company, Wright said. Lanphier was acting like a "high stepper" - someone who raises the stakes after winning a concession, he said.

"It didn't matter what we agreed to. He just wanted more," Wright recalled.

Sangamo "wanted too much of everything - money, control, power," he said. "There was no deal to be had."

Voytas, a scientist at heart, said the experience was a real eye-opener: "When everyone's cards were laid on the table, you really saw greed."

An article by Christopher Thomas Scott in the August issue of Nature Biotechnology, a scientific journal, said: "Sangamo says it must control its IP (intellectual property) to maintain value and to ensure its survival; making the IP freely available to academic laboratories relinquishes that control." The article also called Sangamo's response "a familiar refrain at the interface of industry and academia."

But Sangamo officials said the company had worked hard to make a deal with the Iowans.

"We wanted to do the deal," Lanphier said. But Sangamo and Phytodyne couldn't raise the $5 million to make the project go, he said.

He also said Sangamo had sought "a significant minority interest" in Phytodyne, not majority control.

In the end, Lanphier said, it came down to money. Dow AgroSciences paid Sangamo $7.5 million in cash up front to license its technology, and the giant agribusiness committed an additional $42.5 million that included a $4 million equity investment in Sangamo.

"As a business person, if I offered you $2.5 million in stock in a private company versus $7.5 million in cash, just in the up-front deal, which would you take?" Lanphier said. "The numbers are unambiguous."

By late 2004, Phytodyne had been dissolved, its workers laid off, its laboratories disassembled and its investors left holding the bag.

People who had championed Phytodyne's potential were crestfallen. Those who once had spoken with pride of Phytodyne's promise now pause and look down when asked about the company.

Carter, the ISU Research Park president, said Phytodyne "involved very talented people and appeared to have tremendous potential. . . . But in this arena of technology businesses and startups, they don't all make it. They don't all survive."

Carter said he hoped the principal players would start another company one day.

Phytodyne's founders feel the disappointment.

"It would have been a fantastic technology if we could have gotten a deal," Wright said. "It would have been just a huge deal for Iowa."

The public path

Voytas had time to reflect. After Phytodyne failed, he took up exercise, hired a personal trainer and lost 20 pounds. He also spent time pondering the science and technology that had generated so much excitement about Phytodyne. Voytas decided that the work would continue ”” not in the commercial sector, but within the university.

In July, he returned full time to academia, hiring Wright and two other former Phytodyne scientists to work in his laboratory at ISU's Plant Sciences Institute. He also got a $2 million National Science Foundation grant to move Phytodyne's work to campus.

Voytas and his team are tackling ways to advance their discoveries. In addition, he is teaming with Keith Joung, a Harvard Medical School scientist with expertise in zinc finger engineering, selection and design. Voytas calls Joung, who is leading the Zinc Finger Consortium, "my academic Sangamo." The researchers hope to develop their own zinc finger technology and to give public-sector researchers access to Phytodyne's process for engineering plants.

The goal is to get information into the public domain, so that when Sangamo's patent protection lapses, the technology will be widely available. The Iowa State researchers also hope they will make discoveries that will revolutionize plant genetics.

In November, the Plant Journal published a paper by Voytas and his now-scattered Phytodyne team in which they described the use of zinc finger nucleases to engineer plants. For the scientific community, it was a breakthrough. For Voytas, it showed that Phytodyne's science had worked, even if the venture had not.

"I feel bad that despite our best efforts, we could not make this work," he said. "The wound still is not fully healed, but this story isn't over. It's just a new chapter now."