The Fallout: What Happens When Biotech Companies Fail?

CAMBRIDGE, Massachusetts -- Mark Findeis surveys a grassy field where the company he co-founded once rented lab space. It was in the corner of a one-story factory that has since been torn down. Findeis hasn’t returned here since the last time he walked out the front door of Satori, the biotech company where he served as head of research for eight years.

“My office was right about the third telephone pole,” he said, pointing.

But there is nothing much left to see. A woman tosses a ball to a dog. Passersby cut across the field on their way to desks and workbenches at other companies in the throes of fundraising and drug discovery.

Satori sought to develop an Alzheimer’s treatment based on a plant extract whose rights Findeis licensed from the Mayo Clinic. A few molecules derived from the extract lowered the level of the brain's beta amyloid peptide, which builds up into a harmful plaque called amyloid and which is known to accumulate in the brains of Alzheimer’s patients. The company raised $47 million from investors from 2008 to 2012. But monkeys that took the drug in early trials suffered impaired function of their adrenal glands, which are key in regulating hormones. In the spring of 2013, Satori closed forever.

Failure is an unwelcome but necessary force that shapes the industry. Biotech executives often lure early stage investors with visions of blockbuster medicines but -- statistically speaking -- failure is far more likely. There were 34,523 biotech firms dedicated to research, drugs or medical devices in 2012, according to the latest figures from the industry group BIO. The organization doesn’t maintain statistics on bankruptcies or closures but acknowledges only a fraction of companies ever will generate a Food and Drug Administration-approved treatment or product. Only one in 10 drugs that start the first of three phases of clinical trials required by the FDA eventually will complete all three stages and earn the agency's final approval.

Still, daily headlines shout progress and company valuations surge. Findeis' field of dashed dreams is less than a mile from Kendall Square, the beating heart of the nation’s biotech industry. Behind him, a new building filled with office and lab space awaits tenants. Even so, the amount of available lab space in the city hit an all-time low in September. Just a block away, a man power-washed the facade of the shiny headquarters of Alnylam Pharmaceuticals, a company focused on finding new treatments by altering gene expression through ribonucleic acid, or RNA.

But it's companies like Satori -- as they burst loudly or slip away quietly -- that reveal a more nuanced portrait of innovation while challenging more traditional ways of looking at failure. To outsiders, a company's collapse is a failure and the loss of $47 million seems an egregious waste. Industry insiders, however, embrace failure as a guiding light. Every discarded drug candidate brings researchers one step closer to a cure; every business closure redistributes employees to companies with the strongest ideas, and every bankruptcy frees up valuable real estate.

“I think the essential part of failure is it's part of this creative destruction process that is alive and very thriving in this industry,” said Bernard Munos, a biotech analyst and consultant at InnoThink Research for Biomedical Innovation. “It basically helps redeploy resources, whether it's financial resources or assets or people from failed attempts, to more promising opportunities.”

The Rewards Of Risk

Strangers to Findeis or biotech would reasonably assume the demise of a business can lead to a marred reputation for the founder and perhaps even the death of a career. Max Jacobs, a biotech analyst at Edison Investment Research, said that’s not the case.

“It doesn't leave a permanent black mark with most people in the industry,” he said. “I think compared with other industries, you learn a lot more with failure.”

In some cases, failure may even be worn as a badge of honor.

“If they do good science, there's no stigma,” Munos said. “In fact, they'll probably attract sympathy because they went out on a limb, and they pursued a really interesting idea. It didn’t work out in the lab but at least they had the guts to do it.”

After Satori, a former co-worker introduced Findeis to Agenus Inc., a Lexington, Massachusetts, company that focuses on immunotherapy. He began consulting for the company and it eventually hired him as a strategic adviser. He now also consults for two other biotech companies in addition to his work at Agenus.

During a recent panel on the campus of the Massachusetts Institute of Technology, Peter Parker, director of a nearby biotech launch facility called LabCentral, said employees of failed firms have little trouble landing new jobs in the area. He suggested failure is a subjective concept that takes on new meaning within biotech.

“These people tend to get recycled. The demand for high-quality people is really high,” he said. “There is no failure. You sort of get the experience and move on.”

Michelle Dipp, CEO of the fertility startup OvaScience in Kendall Square, agreed. She spoke of lab and clinical failures that characterize the exhilarating and frustrating process of drug development. “If you don’t fail, you won’t succeed,” she said. “You actually incentivize people to fail but you incentivize them to fail quickly and completely.”

Findeis is reasonably certain all but one of Satori’s other employees found employment in biotech within a few months in the Boston area after the firm collapsed (the one who didn’t took an academic appointment elsewhere). And people within the Cambridge biotech scene still think fondly of Satori.

“Even in its later stages, maybe even after it had folded, I was talking with our patent attorney,” Findeis said. “And she told me: 'You know, Satori is considered a really good story in town even though it didn't work out. A lot of people were really interested in it.' ”

The Unlucky Ones

A failure in biotech can mean an official proclamation of bankruptcy, but it can also mean a company simply closes its doors and its assets evaporate. Often, businesses simply transform. If a clinical trial for a leading drug candidate fails, a company’s stakeholders pick up another idea and morph into something new or shift focus to a backup molecule and quietly revise their website.

To be sure, employees sometimes lose out. The nation’s biotech and biomedical companies employ slightly more than 1 million people. The industry may profess a fondness for failure, but just like other areas of business, a company’s downfall can dramatically affect workers' lives. This is particularly true if they don’t have enough notice to plan their next steps, or if they weren’t getting paid in the first place.

That happened to Ian McRury. In 2009, he joined NuOrtho Surgical Inc. formerly based in Fall River, Massachusetts, as chief scientific officer. A year later, the company won FDA approval for a surgical instrument that uses low radio frequencies to minimize damage to healthy tissue while repairing damaged cartilage during knee surgery.

“I thought the company had a good chance to succeed, or at least, the product did,” McRury said. “We had very good scientific backings. We had all of the ingredients -- peer-reviewed papers, surgeons who liked the product. These are typically indicators that you have a successful product.”

But NuOrtho struggled to sell the instrument nationwide. The company had only raised about $2 million up to that point, and the product's launch was throttled by insufficient funds and poor management. McRury realized he was in trouble. He had been working for free or minimum wage for more than a year, buoyed by his belief in the instrument’s value to surgeons. When he resigned from the company in 2012, he left behind “close to six figures” of unpaid salary.

After NuOrtho, McRury, who is 45, struggled to make ends meet. He accepted a position with a medical device distribution company he didn’t expect would advance his career, but could pay the bills. “It left me in a bad state,” he said. “I needed cash.”

He said his expertise worked against him. Younger employees may have a better chance of rising from the ashes of a fallen startup either because employers assume they carried less responsibility for the experiment gone wrong or because they are more versatile.

“If you’re an entry level engineer, you can leave a startup pretty quickly and get another job,” he said. “At my level when you’re a midlevel manager, it's harder to pick back up where you were prior to that.”

NuOrtho filed for bankruptcy earlier this year, and ex-employees have filed claims for $2.1 million in unpaid wages. McRury is not optimistic about his chances of recovering the money he lost. The company only lists $280,000 in assets and last year sold just $41,600 in product.

Investors weigh risks when they choose to back a company, but employees also make a gamble when they accept a position. They can be lured by equity and the promise of a large payout if a drug is approved by the FDA and becomes a blockbuster. But even here in the nation’s gleaming capital of biotech, where the world’s top medical minds are supported by seasoned CEOs and savvy investors, most companies do fail. McRury said CEOs and boards of directors should always offer standard pay and benefits, and be transparent with workers when the writing is on the wall.

“There's a tendency for CEOs and other management to try to keep morale up and they try to hide some of the issues. The problem is -- you're influencing people’s lives,” he said. “And when the end comes, there's nothing there. There’s no funds to give someone when they walk out the door. You're just gone and there’s no check coming.”

After his experience with NuOrtho, McRury is wary of working at another biotech with fewer than 40 or 50 people on staff. That’s a sign to him a company is too early in the process. But Findeis said it is exhilarating to launch a company with a small team and is nostalgic about his days at Satori. He remains up front about the risks in advising others.

“When I'm hiring people, I give them a speech that says, when you look at the average biotech, it takes about five years to kill one,” he said. “If you come to a place that is starting out, it'll be around for long enough for you to get ready for your next job. You'll be able to show something for your time and that you've grown personally and professionally.”