Andrew Sheldon describes it as a "Nirvana moment": Sitting across the table from a group of investors with extremely deep pockets and seeing enthusiasm for your pitch spread across their faces.
The CEO of Medicago, a biotechnology startup based in Quebec City, experienced this entrepreneurial bliss during an impromptu meeting with two senior executives from Philip Morris International. It happened in February of 2007 during BioPartnering North America, a conference in Vancouver that connects pharmaceutical and biotech companies with each other and with investors. The giant cigarette manufacturer had sent two of its top R&D people to seek out "adjacent technologies" for the tobacco plant - ventures that could benefit from PMI's decades of research, while yielding a more wholesome product than a pack of Marlboros.
It happened that Medicago's niche is making vaccines using the tobacco plant. The company had raised several rounds of financing before going public in 2006, but aside from some fee-for-service research work, it was chewing up cash on developing its product and technology.
Next year, Medicago hopes to start clinical trials on an avian flu vaccine produced by injecting a common bacterium into tobacco and harvesting a resulting protein from its leaves. The global vaccine market is expected to grow dramatically in the next few years, with influenza vaccines the fastest-growing adult category, expected to reach $4-billion in sales by 2012. But the PMI executives had never heard of Medicago, and the fact the company's name is Latin for alfalfa (the plant on which the startup originally focused) didn't suggest a good fit.
Mr. Sheldon, a veteran of the pharmaceutical industry who had joined Medicago as CEO in 2003, was at BioPartnering seeking financing to develop that first vaccine. The company, which went public on the TSX Venture Exchange in 2006, has faced a difficult funding climate. Early stage biotech is a difficult sell to investors because it takes five to 10 years and many millions to attain a commercial product. But in recent years, both public and private funding has fallen off a cliff, Mr. Sheldon says. "In 2008, total cash invested was 80 per cent less than 2007 - and 2007 was not a good year."
But Mr. Sheldon figured he had a good pitch. While biotech companies use everything from yeast to E. coli bacteria to cultivate medicines, most influenza-fighting agents are made using eggs as the medium. Medicago had honed in on the tobacco plant instead for two reasons: It's cheaper and much faster at generating the vaccine. "In the case of a pandemic, speed is critical," Mr. Sheldon says.
Once he realized PMI was at the conference, Mr. Sheldon immediately scheduled a meeting. Everyone quickly saw partnership potential, he says. "That company knows the genomics [of tobacco]and is very motivated to do something beneficial with the plant."
Before the tobacco giant would invest, it wanted proof Medicago could do what it claimed. Within two weeks of the meeting, a PMI contingent descended on Medicago's offices to verify the science, vet management's credentials and check that the facilities could handle a ramp-up of production. In December, 2007, the company contracted Medicago to manufacture a specific molecule. "You could say they were testing us and our abilities," Mr. Sheldon says. The following January, PMI licensed Medicago's technology.
Then, in September, came the third deal: For $16-million, PMI offered to acquire 49.8 per cent of Medicago. PMI gets only one seat on Medicago's board, but it has the right to swap warrants for additional shares of the company, which would take its stake up to 58 per cent. Mr. Sheldon says he's not concerned about losing control. "[PMI]has made a major investment at a time when investments are rare," he says. "Their scientists will be available to us, and they have tremendous resources at their fingertips."
He points out that the deal, which closed in November, got a 99.9-per-cent shareholder approval. Considering the timing, that's not surprising: By early October, when Medicago was reviewing PMI's offer, the stock markets had tanked and the deal valued Medicago's shares at twice what they were worth on the open market. What's more, Mr. Sheldon says, PMI didn't try to renegotiate the price to more closely reflect Medicago's new valuation.
The avian flu vaccine is expected to enter clinical trials in 2009 and be on the market by 2011, all via the tobacco process.
Were it not for the PMI deal, Medicago would be struggling to meet that timetable. "We would probably have found the money, but the pricing wouldn't have been as good," Mr. Sheldon says.
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SNAPSHOT
THE VITALS
Founded in 1999 by Dr. Louis-Philippe Vézina, a researcher at Agriculture and Agri-Food Canada, Medicago's primary expertise is in the genetic engineering of plants. Its 45 employees include 20 PhDs, and it owns more than 130 patents. Last year, Medicago earned just $74,000 from research agreements, and reported a $6-million loss, half of that amount spent on R&D.
KEY DECISIONS
In 2006, Medicago made a dramatic shift in business model. Instead of using alfalfa plants to generate drugs and proteins, it decided to focus on the vaccine market, and to use tobacco as the manufacturing medium. "Alfalfa is a great plant for making large volumes of product, but it's not very fast to test product," says Sheldon. An alfalfa line can take up to eight months to perfect, while tobacco can produce results within four weeks. Meanwhile, fears of a flu pandemic had by then boosted government spending on vaccine research. "That was a critical moment," Mr. Sheldon says. "It took us down the path to a much bigger market."
THE OVERSIGHT
"I honestly can't think of any," Mr. Sheldon says. "There isn't anything I'd do differently."
NEXT STEPS
Medicago will use the new capital to expand its manufacturing facility to ensure it can support development of its vaccine through to commercialization. The company is now hiring, and hopes to have 10 to 15 more people next year. If the influenza vaccine proves successful, Medicago intends to apply the tobacco-harvesting technology to make vaccines for everything from malaria to HIV.
THE MARKET
The global vaccine market, currently at less than $10-billion, is expected to reach about $42-billion by 2015. Medicago's avian flu vaccine would be sold primarily to governments. The company is also working on a seasonal flu vaccine, for which it would need a marketing partner, probably in the form of a license deal with a large pharmaceutical company. Additionally, Medicago expects to work for PMI's R&D division on a fee-for-service basis. "That will lead to some interesting revenue possibilities," Mr. Sheldon says.
THE INTRIGUING IDEA
Other companies are experimenting with using tobacco - one of the world's best understood plants - as a living factory for the production of medicine. Researchers at Stanford University, for example, have used tobacco leaves to grow components of what may become a treatment for a type of lymphoma, essentially developing a cancer vaccine from the world's most notorious carcinogen.
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By the numbers
26
Percentage by which the market capitalization of Canadian public biotech companies dropped in 2007.
12
Percentage by which research and development costs rose in 2007
$343-million
Amount, in U.S. dollars, of funding raised last year by biotech companies in Quebec, the most of any province.
4 weeks
How long it takes to generate a vaccine in tobacco.
8 months
How long it can take to harvest a vaccine from eggs, an alternative method.
Sources: Ernst and Young,
Medicago