Receptor Therapeutics Inc.: Finding Virtual Value

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By Shawn Lawrence

A virtual company is a company founded on an idea, but not having any other functional activities, no headquarters or office, and often, one employee, the founder and owner. In terms of its operation, all research and development, clinical studies, toxicology and production gets outsourced. The primary role of the virtual company is to monitor and manage these outsourced activities.

The idea of a virtual company model is not new, especially in the biotech
sector. In his 27 years of VC and business experience, Dr. Joseph Elliot has played a leading role with several virtual startups including as president and CEO of LymphoSign Inc.

Having come from a small entrepreneurial operating company, in the 80’s and early 90’s Elliot always questioned the view of the size of a company as a sign of success.

“Many companies measured success by how large they’d grown and the body counts they had. It really scared me to see these companies with such a large overhead and no product and no sales. All I could see was an unsustainable burn rate. A virtual company takes into account that head count is not a measure of a company’s success,” he said.

What’s most unique about this business model, explains Elliot, is that it is a company formed based on the right people rather than the right product. “Most companies are started based on a very early stage discovery and then capital is raised and management is put in place to try and move the discovery closer to clinical, market and finally, commercial success. The virtual company goes about it the opposite way in that you basically build the team and then look for a product opportunity,” he said.

Elliot’s most recent virtual company creation is Receptor Therapeutics Inc., a company seeking to in-license one or two late pre-clinical or early clinical development candidates in oncology or infectious diseases. The company is well funded, backed and supported by Growthworks, one of the largest venture capitalist groups in Canada. It also has a management and advisory team of leading experts in clinical development, medicine, medical research, product development and commercialization.

“We’ve assembled an outstanding group of drug development developers,” stated Elliot, referring to a list that includes Mike Gravestock, Ralf Brandt, Phil Schein, Anthony Man and Peter Traxler on the advisory board. Jim Rae, Joseph Regan and Charie Bishop will sit on the board of directors.

Elliot believes virtual companies need even more management experience than traditional startups to better understand how each contractor fits into the overall development plan.

“We’ve basically taken the expertise we had in LymphoSign transferred it to Receptor. They have knowledge of how to avoid some of the pitfalls and obstacles ahead. That’s the whole idea behind virtual companies in general; you bring together the expertise that de-risks the development program and rely on them to choose the product,” he said.

As such, the company has the ability to leverage the lessons that have been learned to make the right decisions.

“A lot of small companies are not aware of the pitfalls in drug development. You’ll see data from an academic laboratory or from biotech companies and everything looks good, but sometimes other things get overlooked, like what is the structure of the molecule? Does it get to the target tissues? Does it interact with other kinds of drugs? These are things that sometimes get ignored and in the end come back to kill your program. With a really good group of advisors, you can avoid those kinds of pitfalls.”

Another benefit of the virtual company is that it is easy to change personnel whenever the business plans change. In Receptor’s case, its skeleton staff (Elliot is the company’s lone full-time employee) not only gives it this type of flexibility, but also allows the company to devote nearly all of its spending towards drug development, giving it a distinct advantage over traditional biotech business models.

Receptor’s toughest challenge right now, unlike most traditional biotech companies, is not financing but rather it is finding the right development candidate.

“Our hopes are that other sources of capital will be drawn from all three levels of government, on the federal (IRAP, CIHR), provincial (MaRS, OGI) and local (UHN) levels and of course once a product is selected and licensed, more cash will be made available by Growthworks as we reach certain milestones.”

Obstacles aside, Elliot believes he can make the virtual model work with Receptor as it did before with LymphoSign. In LymphoSign’s case he was able to take a drug from a university laboratory right into the start of the clinical development of the compound when Aegera bought the company out. While Aegera eventually discontinued development of the LymphoSign drug, the drug development program itself was very successful. That was accomplished with mostly two people in the company. His hope is that Receptor’s progression will follow that same course.

In terms of the choosing the right product candidate, Elliot states it has to be in an area of an unmet medical need.

Receptor’s main interests are in cancer and infectious diseases, but they are capable in other areas as well.

“We want something where there is a market. The hope is that it will fall under oncology or infectious disease therapeutics to fit with the expertise of the boards and management, but we are not limited to these fields.”

He believes finding these technology opportunities shouldn’t be too difficult.

With current industry conditions as they are, coupled with the growing biopartnering climate Elliot expects an opportunity will eventually present itself. According to Elliot, the Receptor concept addresses the gaps in small-cap drug development and a solution to many issues on the drug development landscape.

Research budgets have skyrocketed while internal pharma output has declined. There is a gap and a backlog of unfunded early stage product candidates, which present an opportunity for a company such as Receptor.

“There are a lot of small companies out there with promising products that are running out of money hoping to out-license or out-right sell them. There are also large pharmaceutical companies that have realized that acquiring products for strategic reasons and letting them sit on the shelf doesn’t make sense anymore and are actively out licensing molecules and other product candidates that they don’t intend on taking forward. And universities are all filled with early stage opportunities that they haven’t been able to license because early stage has been out of favour with venture capitalist for awhile now. There is no shortage of attractive candidates, I think we’ve looked at probably one hundred plus companies thus far, we just have to find the right one or ones for us.”

Elliot states Receptor is really an open opportunity to find a development or product candidate that they can take and build value with.

“If something comes along that seems novel and has great potential, we can build a team around that. That’s one of the nice things about a virtual company, you can basically model the company to fit the opportunity, and you can remodel it all the time.”

The only stipulation is that all candidates will either have to be quick to succeed or quick to fail.

“There’s a saying, fail early, fail often.

You don’t want to spend a lot of money only find out that it’s not going to work.

You want it to fail early if it’s going to fail,” he said.

For now Elliot sees Receptor as a great opportunity to get it right in terms of taking a drug candidate through to pre-clinical and early clinical development.

As for his personal plans he admits this may not be his last virtual startup.

“People used to ask me what I do and my answer was that I was the startup guy. I think I enjoy the start-up phase and getting products to a point where it has the potential to move onto bigger and better things. Depending what happens with Receptor, as long as it makes sense for the company and the board I’ll keep it going. But if it reaches a point where we have something in three years and we can sell it, sure, I’d be open to start another opportunity.”