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Wednesday, February 29, 2012

Truth in Advertising

When you are in the business of selling Widgets, you have a physical product. If they are broken you have to replace them. If the Widgets don't operate as advertised you may have a hard time making money. It behooves you to have a high quality Widget.

In Biotech you are often times selling intellectual property or the promises/claims contained in a patent. I have an example of false promises being sold to RBC Capital Market participants today. Is it a crime to tell people you can select drug candidates quickly and manufacture them in an economically superior manner when in fact neither claim is true? There are claims made on a press release that one particular biotech can have a drug candidate in 5 months which can be ready to manufacture easily scaling from 1 to 50,000 liters. Since this is in the press release, and this is being presented to investors, is this legal if the claims are false? Are biotech companies protected by due diligence laws?

I'm quite certain the claims on the website and the press release are not true. With no real money, the company quickly selected a drug candidate. Luck was on their side and the drug candidate turned out to generate promising data. They received series A financing, hired a CMO to make the drug and they obtained early clinical data that led to a partnership that put the company on stable ground. After the partnership was solidified the big pharma partner soon found out that the small biotech company did not actually have any usable drug.

The data obtained from the small biotechs only drug candidate came from third world clinical trials where the manufacturing details were not closely scrutinized. The small bioech did not have the expertise to make the drug, thus they had to rely on their CMO for process development. They forced their CMO to move fast, with no consideration of future manufacturing processes at a larger scale. The scale listed on their website is 50,000 liters. As a result of the hasty leadership decisions, they were ensuring that the scale up would be disastrous. Ultimately they scaled DOWN from 2,000 liters to 1,000 liters, 49,000 liters short of the scalability claim on the website. If the 50,000 liter scale is ever acheived it will be due to the expertise of the CMO. No one at the small biotech has ever worked in manufacturing.

The claims made at RBC today, by the small biotech, are false. I have not mentioned the other claim that the drug discovery process only takes five months. Also false. The small biotech spent 5 years in between the first and the second drug candidate. The second candidate was mentioned a few years ago without any partnerships lining up. There is in fact, no screening strategy other than the usual methods using ELISAs and FACS analysis looking for drug and target binding.

Why would anyone question the sincerity of the small biotech CEO? If an investor gets excited by the promises and decides to invest, it will be up to them to do their due diligence. The term "due diligence" first came into common use as a result of the United States' Securities Act of 1933. This Act included a defense, referred to as the "Due Diligence" defense, which could be used by broker-dealers when accused of inadequate disclosure to investors of material information with respect to the purchase of securities.

During the partnership between biotech and big pharma, due diligence reviews are undertaken to identify and assess the business risks. In this case, the big pharma company did not do a good job during their due diligence audits of the manufacturing processes. The long delay in providing material for clinical trials was costly, but entirely the fault of the big pharma company. The investors listening to the small biotech CEO today don't know any of this. They are watching people talk. As all investors consider themselves savvy, they are starting the due diligence process as they are listening.

The business model of biotech thus does not require honesty. It requires due diligence on behalf of those we can get to listen to us. The same must go for those looking for that place Feynman speaks of.
So I have just one wish for you--the good luck to be somewhere
where you are free to maintain the kind of integrity I have
described, and where you do not feel forced by a need to maintain
your position in the organization, or financial support, or so on,
to lose your integrity. May you have that freedom.

I can neither confirm nor deny any affiliation with the small biotech I speak of here today. They are a Cargo Cult, experienced at promising cargo, with no expertise on how cargo gets delivered.

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