Oncolytics Biotech Inc. (ONCY)

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Five Red Flags to Watch Out For in a Biotech

From Dendreon Co-Founder Chris Henney
Luke Timmerman 10/15/09

Yesterday, we provided a rundown of the six hallmarks of a successful biotech company, according to Christopher Henney, the biotech pioneer who co-founded three of Seattle’s top biotechs—Immunex, Icos, and Dendreon. He made his remarks to an audience of about 100 investing professionals at the CFA Society meeting on Oct. 8 in Seattle.

Today, we follow up with the five red flags Henney advised investors to watch for when they evaluate biotech investments. Here’s what he singled out as warning signs:

—Top management without a scientific background. It’s not impossible for a biotech to succeed with a non-scientist at the helm, Henney said, but a smart investor must ask this non-scientific manager where the science comes from at the company. “The good answer would be, ‘It comes from my team of wonderful scientists who I recruited.’” A bad answer would be something like, “It comes from my scientific advisory board, which has two Nobel Laureates.” Henney added, “If you need to make an appointment to meet the guy who’s bringing you your science, then you don’t have much of a business.”

Henney wanted to make sure he wasn’t making a broadside attack against all non-scientific managers. One of his favorite biotech CEOs isn’t a scientist, but he adds, “You wouldn’t know it from talking to him.”

—No worries. An investor should ask what the management loses sleep over. “If they say, ‘I sleep like a baby,’ that’s a big red flag,” Henney said. All companies have their problems, and top management had better know them inside out.

—Hard-to-understand science. Ask the management to explain the science of their product in detail. “If they say something like the science is hard to explain, they can’t really explain it to you, that’s a big red flag.”

—Geographic remoteness. This provides some insight into Henney’s thinking on why two of the companies for whom he serves as chairman—Oncothyreon and AVI Biopharma—recently moved their headquarters from Edmonton, Canada, and Portland, OR, respectively, to the Seattle area. “You need a quorum of players,” Henney said. “You need access to talent, you need to be able to recruit people.” Seattle has more talent than the other places, and an ability to recruit more people, he said.

—Too many VCs. The board should be loaded with people that have experience running companies. “You shouldn’t have a board full of venture capitalists,” Henney said.

—Family members in key roles. “These aren’t family businesses. If you see a board dominated by siblings, or a couple of siblings in key management roles, I’d run, not walk.”

While those things might scare people away, Henney was hoping to drive home the message that investing in biotech actually isn’t that dangerous—if people know the right questions to ask. Despite the industry’s tough odds, he says he knows of people who make money in biotech year in and year out. He may have already been preaching to quite a few of the converted—I saw more than a few familiar biotech investors in the room—but Henney was hoping to light a spark for at least a few money managers to try their hand at something new.

“It’s a space that I wish more people would look at as an investment opportunity,” Henney said. “It can be really rewarding, and a lot of fun.”

Luke Timmerman is the National Biotechnology Editor for Xconomy. You can e-mail him at [e-mail], call 206-624-2374, or follow him on Twitter at http://twitter.com/ldtimmerman.