It takes more than a lifesaving idea and deep pockets for a biomedical startup to become a winning company. A burgeoning business must learn to navigate the murky waters of constantly changing technology. And at times, management must have the foresight to take counterintuitive actions.

For biomedical startups looking for signposts to help keep them keep on course, management consultant Peter Cohan has some suggestions. As Mr. Cohan is president of his own consultancy, Peter S. Cohan & Associates, he has made it his business to isolate the factors that turn private high-tech and life science ventures into successful publicly traded companies.

He has also written several books on the subject of management and technology. In The Technology Leaders, published in 1997, Mr. Cohan looked at 1,300 large technology-based companies, including pharmaceuticals, to find out how companies can stay innovative and flexible.

The Technology Leaders

According to Mr. Cohan, many of the answers lie in a common thread shared by thriving businesses. He calls this uniting fiber the “four sources of advantage” executed by successful companies while in the private stage: hiring executives with an entrepreneurial spirit, building or licensing technologies to beat competitors, lowering internal barriers to develop quick prototypes, and swiftly cutting projects that are likely to become a drain on resources.

These strategies may sound obvious, but more subtle are his findings on how companies pulled them off. Mr. Cohan turns to biotech guru Genentech as an example: The company gave employees greater freedom to pursue their own research and publish their work, and it has helped Genentech’s bottom line. No statistic testifies more eloquently to his point than Genentech’s $105-billion stock market valuation as of December 5, 2005. “It exceeds Merck’s by $40 billion, a company with over four times Genentech’s revenues,” he says.

According to Mr. Cohan’s analysis, Genentech’s stock was up 14-fold in the decade ending December 5. In the last five years ending December 31, 2004, Genentech has reported an average annual revenue growth rate of 29.3 percent. And in the nine months ending September 30, the company says it earned a 20 percent net profit margin on total operating revenues of $4.7 billion. It doesn’t hurt that biotechnology was the top-performing segment in the healthcare industry for the decade ending December 5, with a 594 percent increase in stock market value, according to Mr. Cohan’s analysis. But it was still Genentech’s prospects that the stock market valued most, says Mr. Cohan. Genentech’s stock price to sales ratio was 17.356 ending December 5, according to the company.

Red Herring spoke to Mr. Cohan to find out what it takes to build a successful venture-backed biomedical company such as Genentech, and what venture firms can do to ensure such a future.

Q: What’s the most important factor a private biomedical company needs to have in place?

A: Entrepreneurial leadership. Instead of an entrepreneur working for themselves, you get them to work for you. An example of this from Genentech is CEO Arthur Levinson, who studied with Nobel Prize scientists. He could have had a successful academic career, and he realized the key to biotechnology is hiring as many scientists who are at the top of their field. And instead of having them work at a university, have them work at Genentech.

Entrepreneurial leadership. Instead of an entrepreneur working for themselves, you get them to work for you. An example of this from Genentech is CEO Arthur Levinson, who studied with Nobel Prize scientists. He could have had a successful academic career, and he realized the key to biotechnology is hiring as many scientists who are at the top of their field. And instead of having them work at a university, have them work at Genentech.

Q: What’s difficult about attracting entrepreneurial leaders to a biomedical company?

A: The challenge is there are many people who work in universities who look down on business. They think business is bad, money is bad, people who are pursing money aren’t smart and they don’t aspire to be that. They want to be people who are pursuing scientific truth. And the people they admire don’t work in business. If they are working in a university they have to go to the government and beg for money to fund their research.

The challenge is there are many people who work in universities who look down on business. They think business is bad, money is bad, people who are pursing money aren’t smart and they don’t aspire to be that. They want to be people who are pursuing scientific truth. And the people they admire don’t work in business. If they are working in a university they have to go to the government and beg for money to fund their research.

So they look at money as the worst part of their job. And what they want is to have a work environment where they will be surrounded by scientists that they respect, whose admiration they want to earn, and not have to deal with any kind of business issues like raising money to fund their research. So Levinson realized that if he created a business environment that had the best of academia without any of the bad stuff, then he could get the best people.

Q: Any surprising actions taken by a company to become successful?

A: The most interesting is that people who are very talented in science are highly motivated by peer recognition and also a desire to make the world better. So they want to work with the best people. They want to publish their findings as soon as they discover them and get peer recognition from their peers.

The most interesting is that people who are very talented in science are highly motivated by peer recognition and also a desire to make the world better. So they want to work with the best people. They want to publish their findings as soon as they discover them and get peer recognition from their peers.

To me, one of the most interesting things is that this means to satisfy these scientists, the company has to allow the scientist to publish their findings before the company has patented everything. So they give away a lot of their best work when they publish. And in theory competitors can use it, which I find very counterintuitive. It’s very groundbreaking. Genentech does this. Pharma companies want to keep proprietary their findings until the findings are patented. So it’s almost like Genentech is the Linux of cancer research.

Q: Any other interesting findings?

A: They allow their scientists at Genentech to spend 25 percent of their time on projects of their own choosing as compared to a 10 percent industry average. And this paid off for Genentech because one of the scientists was personally interested in anti-angiogenesis [a process of preventing the growth of blood vessels that feed cancer tumors]. And his research led to a drug called Avastin, which was approved in 2004 for colorectal cancer treatment, and is expected to reach $3 billion in peak sales.

They allow their scientists at Genentech to spend 25 percent of their time on projects of their own choosing as compared to a 10 percent industry average. And this paid off for Genentech because one of the scientists was personally interested in anti-angiogenesis [a process of preventing the growth of blood vessels that feed cancer tumors]. And his research led to a drug called Avastin, which was approved in 2004 for colorectal cancer treatment, and is expected to reach $3 billion in peak sales.

Q: What gets in the way of companies being able to develop quick drug or medical device prototypes?

A: The problem in a lot of technology companies is biomedical researchers will develop a product without working with other business functions such as manufacturing. If you have developed a new drug and it too expensive to manufacture, or a new biomedical product that is too expensive to manufacture, then you can’t make money on it.

The problem in a lot of technology companies is biomedical researchers will develop a product without working with other business functions such as manufacturing. If you have developed a new drug and it too expensive to manufacture, or a new biomedical product that is too expensive to manufacture, then you can’t make money on it.

What I call ‘boundary-less product development’ helps to avoid those risks. Boundary-less product development means building quick prototypes and getting fast feedback from earlier-adopter customers through the work of cross-functional teams. They are teams of people with skills such as science, finance marketing, and manufacturing.

Q: What other problems bog down a biomedical company?

A: Closed technology is huge problem. Closed technology means that you only use what comes out of your own lab.

Closed technology is huge problem. Closed technology means that you only use what comes out of your own lab.

Companies have to be open to forming partnerships in order to obtain the technology that customers need.

There is also a common problem of companies investing for too long in new product development that is never going to succeed. And they waste shareholders’ money when a more disciplined approach would have been better for the business.

Q: Anything else?

A: It’s a huge challenge just managing the growth if it’s a successful firm. When you’re a small company and you are at the point where you just have some scientists that are developing new technology you are usually in good shape, until you are to the point where you have to start, for example, manufacturing the product, and selling it, and striking partnerships with other companies.

that are developing new technology you are usually in good shape, until you are to the point where you have to start, for example, manufacturing the product, and selling it, and striking partnerships with other companies.

When you start doing all these new activities, sometimes the scientist that started the company may lack management skills to address all these other business challenges, beyond just the design of the product.

Q: Biggest mistakes done by biomedical startups?

A: A lot of them go public way too early. I’m amazed how many of these companies are losing money. Companies often underestimate the amount of money they need given all the costs and risks.

A lot of them go public way too early. I’m amazed how many of these companies are losing money. Companies often underestimate the amount of money they need given all the costs and risks.

The time to bring a drug from the lab to market can be 12 or 14 years and can cost $800 or $900 million dollars.

Q: How can venture firms help their invested companies make it?

A: The key is to set very specific milestones for the CEO about what they have to accomplish by when. They have to work with the CEO to help take away any roadblocks that might keep them form achieving those milestones.

The key is to set very specific milestones for the CEO about what they have to accomplish by when. They have to work with the CEO to help take away any roadblocks that might keep them form achieving those milestones.

Q: What are VC firms’ fatal flaws when helping companies?

A: They become personally attached to the CEO. And if the person is not performing they will give them another chance and another chance, and they keep pouring more money into it, and the person still doesn’t perform.

They become personally attached to the CEO. And if the person is not performing they will give them another chance and another chance, and they keep pouring more money into it, and the person still doesn’t perform.They don’t have a clear prenuptial agreement which specifies the conditions under which they will be able to terminate somebody.