Phenex Pharmaceuticals AG was established in Heidelberg in 2002. The company develops pharmaceutical substances that target nuclear receptors. In the following interview with Christoph Bächtle, the company’s managing directors, Dr. Claus Kremoser and Thomas Hoffmann, describe the rocky road to success, highlight the differences between America and Germany in terms of company foundation, and cast a critical eye on many company foundations.
Phenex is not a classical start-up company spun out of a university or a research institute. What gave you the idea to establish Phenex?
Thomas Hoffmann: Phenex is not the result of a single idea; it was really the situation that we found ourselves in that led us to consider spinning out Phenex. At the time, we were working for a company that decided to close down its drug research business for economic reasons. So the question arose as to what to do with this particular department. Was it best to just close down the department or was it better to use the existing know-how for a fresh start? Claus Kremoser: Our former employer saw drug research as a long-term project. However, in reality the business did not develop as expected. In addition, the Neuer Markt, Germany's stock market for technology shares, collapsed. In 2002, the company was faced with the need to save costs and decided to sacrifice the one area that it initially predicted would have huge potential over the long term - namely, drug research. At the time, around 90 people were employed in this field, 60 of whom worked in Heidelberg and 30 in San Diego. In addition, between 2000 and 2002, we had developed a very interesting platform involving nuclear receptors. Most of the key group leaders in the department including myself were of the opinion that it was worth keeping this platform. A lot of money had been spent on its development and we considered it worthwhile attempting to transfer this platform to a new company.
It goes without saying that it must be difficult to leave an existing company and take along technologies and even patents. This does not happen overnight. How did you go about setting up the new company?
Claus Kremoser: Thomas Hoffmann and I initiated and were responsible for the establishment of Phenex. We both became managing directors with equal rights. The leading scientists from our department joined the company, and also contributed in terms of capital. Phenex was initially established as shelf company. We then made use of private money to buy the parent company's technology, laboratory equipment and patents. This meant that we had barest essentials in terms of equipment required to set up a company.
The only problem was that we did not have any financing. Phenex was established at the end of 2002. At the beginning of 2003, the business become operational with a team of around 15 people, equipment, patents, but no money. At the time it was impossible to obtain funds, because the willingness of investors to invest in a start-up company after the collapse of the Neuer Markt was basically zero. Any investments that were made were directed towards clinical projects, which was not our field.
Therefore, we made a virtue out of a necessity and between 2003 and 2006 established and ran a service business on the basis of our technology platform. Initially we were involved in a major cooperation with Roche, but we soon attracted new clients, in particular from Japan. We had maintained excellent contacts with Japan from our previous jobs.
Does this mean you were able to generate money quickly?
Thomas Hoffmann: We were able to make some profit and keep afloat, but we were unable to expand. The little money that we earned with our services was invested in our own projects that we were thus able to develop slowly. The idea was to set up our own drug discovery project, i.e. develop a pharmaceutical substance. Our overall goal was to focus on drug research. We did not want to expand the service business and become a big service company.
Based on the progress we made with our own research projects and molecules along with the stable service business, we were able to convince the first investor in 2005: the Venture Capital Rheinland-Pfalz Fonds (VRP) provided us with one million euros. In addition, KfW provided another million from the ERP Capital for Start-Ups programme. These funds helped us to come up with the first drug candidates. These drug candidates showed interesting effects in animal experiments and put us in a position to convince potential investors to provide follow-up financing in order to advance the molecules to the stage of clinical development, which would eventually mean that they could be licensed to pharmaceutical companies.
At the end of 2008, a second financing round provided us with around 8.5 million euros. In addition, we will also receive around 1.5 million euros from the BioChance programme. Therefore, we will have a total of around 10 million euros for carrying out drug research. Our goal is to advance our lead candidate, an anti-diabetic substance, in order to reach the early phase of clinical development and then license the substance to other companies.
What role did the experience you had in the biotech sector play in the establishment and advancement of your company? I am sure you were ahead of other start-up companies that are spun out of universities.
Thomas Hoffmann: Yes, we were. We learned a lot from our previous company; we knew the environment, and the entire game of financing, planning and presenting projects to investors. I am sure excellent Bioregions stand out thanks to the participation of people with experience in several companies who are able to bring this experience to other companies.
Another important aspect is clients and contacts. The contacts we had with a marketing company in Japan enabled us to take part in a roadshow. We scraped together our last cents and bought Claus Kremoser a ticket to Tokyo. This trip led to our first revenues in Japan.
What are the typical difficulties for biotech start-ups?
Claus Kremoser: In Germany, the big problem is that private venture capital is no longer available, at least not for companies that are still in the early stages of establishment. Other private capital is also very scarce. This does not mean that no money at all is available, but it is definitely very scarce. In addition, the well-known patrons who used to invest in biotech start-ups no longer invest in early-phase companies.What is the solution? I think that potential company founders with an excellent idea should contact existing biotech companies and ask whether they have any contacts with people who are willing to invest money. I am sure money is still available for excellent ideas, although it is no longer as easy as it was to acquire. Government funding measures are a good thing, they are particularly important at the beginning, but they only get you so far.
This situation is very critical for a country such as Germany that depends on knowledge and technology. Does biotechnology depend on business angels and private investors?
Thomas Hoffmann: Firstly, I must say that the German biotech entrepreneurs were more flexible than expected. Although money is scarce, there are very few companies indeed that have been obliged to cease operating. Most companies manage to find ways to survive the difficult periods.Nevertheless, lack of capital is a problem because long-term projects cannot be carried out without investors. The real money is made in drug projects on the back of which an industry can be developed. This requires the kind of money that is currently not available in Germany, either at the outset of company establishment or later on. And in my opinion this is a major handicap.Claus Kremoser: As a biotech entrepreneur you are always reliant on money. There is no way around it, financial investment is essential. The question is: where does the money come from? I do not think it is a good idea to increase government funding, although some people would disagree with me. Nor do I think it is a good idea to develop research institutes to the extent that they carry out pharmaceutical projects involving both academic research and clinical development. I believe that this is a very inefficient way to go about things, and those who work within research institutes would not want to work like this either, as they have other goals and ideas revolving around the publication of results, rather than bringing their own projects to fruition.I believe entrepreneurship and private capital are required. Investors must be encouraged to have the impetus to spend private capital in real biotech companies. I do not necessarily mean private capital from private individuals. Anglo-Saxon countries also face financing problems, but they have pension funds that are prepared to spend a small percentage of their capital on risk companies.In Germany, many people are very afraid of losing money and security is seen as paramount. If just one percent of the capital deposited in all life insurance policies at Allianz and other insurance companies was invested in high-tech companies, there would be no financing problem. And investments like this should also attract tax breaks.
Would you have established Phenex if you had not had the service business and if pharmaceutical development had been your only perspective?
Claus Kremoser: It is very difficult to take the decision to just focus on drug research. This needs money. If we had had somebody to finance the establishment of Phenex, it would not have been necessary to establish our service business in the way we did. For example, if we had been in the USA, where the service business is worth nothing, we would not have done what we did. It is frustrating and only takes up time which could be used for more important things. In the USA, the attitude is more "here's the money, get on with it". And entrepreneurs either sink or swim. In Germany, there is no 100% established business model. Everybody does what suits him or her best and each person follows his or her own particular strategy for obtaining money, generating revenues, and reaching the ultimate goal. This requires entrepreneurial spirit. This is not a bad thing, because the people who have managed have done a lot better than those who are just burning money in the USA.
Does this mean that the sector faces a tricky situation? If company founders fail to develop a drug quickly, investors are reluctant to invest. And if investors are reluctant to invest, founders are unable to turn their projects into reality.
Thomas Hoffmann: In my opinion, company failures are a very bad thing. But they are normal in this industry. Of every ten companies who start a business, only one needs to succeed as far as the economy is concerned. This creates industries. It only takes one drug to be able to generate revenues of between 500 million and 1 billion euros per year. Some companies will fail, and we just have to accept this. The philosophy that all companies need to be helped to succeed is very typical in Germany. The Americans are far more relaxed. The Americans see it as a race between the hare and the tortoise. And the winners have successfully created entire industries in the USA such as Amgen, Genentech and Biogen. The German pharmaceutical industry did not believe that these companies would succeed. And thirty years later, the very same companies have stock quotations several times higher than those of German companies, and in many cases the German companies have been swallowed by the American companies.This is the big difference between Germans and Americans. The Americans have the theory that everything works, because those who succeed are enough to feed entire industrial sectors.
Company founders therefore need to be aware of possible difficulties and failure. And would you say that they must also have the mental wherewithal to be able to pick themselves up again and carry on?
Claus Kremoser: You need to be able to put up with frustration, but this is usually the case with scientists. And not shying away from risks is an indispensable trait in this industry. Unfortunately, this mentality has not been encouraged in Germany over the last few years. In Germany, people have a very conservative, security-focused approach. Outstanding university graduates prefer to start their career in big companies or in public office. Although this might be understandable from an individual point of view, it is fatal in economic terms because it means that our annual cake is gradually getting smaller.
We need to increase per capita value creation and this is only possible via investment in new technologies. This also means that we must try out new things. And this is where we run a huge risk of failing. But it is important not to stigmatise certain individuals, and I am not referring to judgement by newspapers and the media here. I am referring to the judgement by investors. I believe that company founders who have failed must be given a second chance. We have all experienced situations where we have felt like giving up.
Is founding a company based on luck?
Thomas Hoffmann: I have never seen a business plan that was implemented 100 per cent. That would be impossible. What is important is application and hard work. You cannot predict what the final outcome will be. Research cannot be forced to generate certain results. Nature can be cruel and it can limit the possibilities of achieving certain goals. Whilst luck must not be overestimated, it is part of the business in the field of biotechnology.Claus Kremoser: But it has to be said that luck is on the side of those who are well prepared. If there is an obstacle blocking the way, the true entrepreneur stands out thanks to his or her ability to find a way to solve the problem. This is where the real challenge lies. That’s where the fun comes in, because not everything turns out as planned. People that are looking for security are in the wrong business. But if they want to turn their own ideas into reality and if they enjoy challenge, then biotech companies are the right type of company for them.
Where there is no luck, there is more risk. Do you think it is a good idea to warn people who are seeking to establish a company about the potential risks?
Claus Kremoser: No, because the risk is manageable, but it must be based on something real. Biotech and other high-tech sectors are excellent examples of this. The establishment of a company in these sectors is associated with risks, but the goal is nevertheless the production of something real, something that is useful, i.e. the possibility of developing drugs that can provide real help to patients. And this should motivate us to invest in the establishment of a company with courage and with the willingness to take a risk.
As entrepreneurs, we do not have a double-tiered net to catch us if we fall. We've been running this company for more than five years. As managing directors of the company, we do not pay social security contributions. If something goes wrong, we are not eligible for unemployment benefit. There is nobody to stop you from falling. So one has to be willing to take on the risks associated with company establishment. And this willingness to take risks also requires support. If we succeed in achieving revenues and making profit, I would be very angry if Oskar Lafontaine said to us: "And now we'll take this money from you, because it is not fair that you are earning so much".
No, it is not unfair. We were willing to take the risk, other people are not. We've encountered some financial difficulties, that is why I believe any risk must be worth the effort. And I also see this as a message to our politicians: taking risks must be worth the effort and if the company succeeds, the people behind it should be allowed to take their wages home.
What roles do company foundations play in the future of biotechnology?
Claus Kremoser: Several aspects need to be taken into consideration. There should be more ways of acquiring private, institutional capital. Several billion euros are deposited in life insurances or in container ships. This is dead capital as far as Germany's future is concerned. The government should be willing to create incentives that encourage the investment of at least a small percentage of this money into risk ventures. And this should not just be directed at biotech, it should also apply to other high-tech sectors, in fact all sectors in which the future is created.
If this does not happen, we will be faced with a problem that is already apparent in the USA: there will be fewer and fewer people interested in following technical and scientific studies. Nevertheless, technical and scientific academic backgrounds are a major requisite for high-tech company founders. In addition, entrepreneurs of this kind need to be ready to take risks. At the moment, there are two major hindrances: there are fewer and fewer people who are willing to take risks, i.e. to become entrepreneurs, and there are fewer and fewer people who are prepared to work with the awkward numbers in university mathematics courses. Thomas Hoffmann: I have been working in the biotech sector since 1997 and feel I am in a good position to make a potentially controversial statement on the issue of whether we have a sufficient number of company foundations. I have seen too many company foundations that were meaningless. There have been too many company foundations rather than too few, although this reality was lost in the hype of wanting to become number one in Europe.
Something that has had a devastating effect is the all-too frequent company foundations by professors who just want to add another success to their long list of achievements. There have been company foundations based on a smart, perhaps even substantial idea that were also based on excellent science. But that's as far as it went: a professor decided to establish a company on the basis that that is what one does next to earn some extra money, but nobody was willing to take the necessary risks.
There always have to be people who want to move company establishment onwards and upwards: this is the decisive aspect. Company foundation does not happen by itself. The idea is only the starting point, after which there is a long road towards the sought-after success. I have seen many university spin-offs where the founders' drive to be entrepreneurs was non-existent. It seems they just wanted to be part of a game called "company establishment". There was no willingness to take risks, they did not want to leave their ivory tower, preferring to remain at the institute and send a scientific colleague out as cannon fodder. This type of company foundation is nonsense, it is no good to anyone and will not survive for long.