this is an actual case study I did at Wharton about fifteen years ago for Steve Sammut’s class on advanced patent portfolio management theory. This case is of interest because it concerns a biotech company, and because, re-reading it after a long time, it actually reads very well. Even before I had all the experience I do now, I actually had a good feel for what to do with the management of a biotech company even back then, so here it is. And yes, I did get an “A” in the class, of course. Dr. Sammut used to run the tech transfer office for Penn during the 1990s.
T-CELL SCIENCES, INC. CASE
by Arthur J. Kyriazis
MGMT 898 – PROF. SAMMUT
Wharton School (WEMBA)
University of Pennsylvania
April 22, 1994
T-Cell Sciences, Inc. (“T-Cell”) is a 1983 Cambridge, MA biotech/pharmaceutical startup sired by Patrick Kung, a “recognized pioneer in immunological research.” The main issue appears to be defining T-Cell’s ultimate market niche even as it undergoes the process of transition from a venture-funded start-up to a more mature publicly held corporation. Specifically, in the coming months and years, should T-Cell (1) concentrate upon basic across the board immunological R&D; (2) concentrate upon basic immunological R&D with a focus on diagnostic drugs and product(s); or (3) focus upon strategic alliances with large pharmaceutical companies with an eye cast towards the development and delivery of therapeutic pharmaceutical drugs?
It would appear that until the arrival of James D. Grant as CEO in November of 1986, the main issue might well have been a different one altogether, namely whether T-Cell would reorganize or liquidate. In early 1986, T-Cell was a company in trouble and one which was not being particularly well-run or well-managed, even though it had brilliant scientists and innovative technologies full of commercial promise. Even though startups might be expected to lose money at the outset, T-Cell’s losses in 1985 and 1986 totalled nearly $2 million, compared with $5.5 million capitalization from December of 1983 throught January of 1986. This apparently necessitated a public offering in May of 1986, which raised $11.1 million, followed by the hiring of Mr. Grant in November of 1986, and his hiring of a well-heeled financial CFO immediately thereafter.
In addition, up through Grant’s arrival, T-Cell had only developed two products of any consequence, ACT-T-SET, and CELLFREE, and only two joint venture/research alliances/R&D contracts of any consequence, the Syntex USA contract and the Pfizer contract, and had failed to show any revenue from product sales through 1986, and only $13 million in revenue from contracts in 1986.
In brief, one may surmise from the case study that a great deal of money was spent at T-Cell, until Grant’s arrival, on basic immunological research, without a very well defined sense of where the research was going, or how it would be profitable or generate a return to the company and to the investors. This might have been a result of Dr. Kung’s diffuse vision of the company’s market niche as somehow doing R&D better or faster, and perhaps a touch of the academic fondness for the intrinsic value of broad based academic research as opposed to targeted research and strategic alliances directed to product development and ultimate profit.
Grant’s arrival placed T-Cell on a radically different footing and he appears to have turned the company around. Losses were reduced by nearly a million dolars from 1986 to 1987, and for the year ending in April of 1987, T-Cell reported positive product sales revenue of nearly $400,000 together with contract revenues of nearly $2 million. In addition, Grant apparently negotiated the deal with Yamanouchi Parmaceutical, which as he characterizes it places T-Cell on a sound cash flow footing for the foreseeable future. In addition, Grant has introduced a sound line of command and professionalized the management of the company by hiring a financial officer and a regulatory affairs officer, paying attention to patent management issues, and spending time painting a sound, attractive picture to shareholders, potential investors and to regulators. Finally, Grant’s status an a former FDA head bodes well for the regulatory hurdles awaiting T-Cell’s products.
T-Cell’s strengths are many. First, it has a distinguished corps of researchers led off by Dr. Kung, who appears to be a leader in the field of T cell research. It is situated in Cambridge, MA, in the heart of the Harvard-MIT research community, and can be expected to easily draw upon an outstanding technical scientific staff for its research needs. Also, the scientific advisory board includes people like Dr. Mark Davis and others who are world-recognized scientific leaders.
Second, T-Cell has introduced two product lines in 1986, the ACT-T-SET and CELLFREE technologies, which assuming patent protection and FDA approval, are potentially product mainstays for the company. These two products are expected to have applicability in the diagnosis of various stages of immune system stimulation and white blood cell activity. Dr. Kung and Mr. Grant expect R&D to eventually identify other new products in the same T cell related vein with applicability in the diagnostic field.
Third, T-Cell has two joint ventures, with Syntex and Pfizer, and now a third, with Yamanouchi, which promise to focus on specific product development, with the obvious potential of delivering a drug to market which can be of wide therapeutic applicability and therefore be a cash mainstay for the company. The Syntex and Pfizer ventures aim to produce therapeutic drugs targeted at common medical ailments, including breast cancer, type 1 diabetes, rheumatoid arthritis and cytomegalovirus. The Yamanouchi venture aims to develop products to diagnose rheumatoid arthritis and lung cancer. An added benefit is the global ability to develop and market products and drugs in Japan and the rest of the world while awaiting FDA approval for their sale in the United States.
Fourth, T-Cell now has James D. Grant, who must be reckoned as an important asset of the company at this juncture. His management skills have put T-Cell on a sound business footing; his contacts have resulted in new joint venture(s); and his FDA expertise should translate into FDA product approvals.
Which Fields or Options are Most Attractive for T-Cell?
The basic R&D approach is wrong for this size company. What the company needs to do is ultimately make a decision between developing diagnostic products/drugs on its own, or on developing them with partners. Grant appears to be committed to a strategy of hedging his bets by pursuing both options. He is willing to commit some money to R&D and to diagnostics, while courting and signing deals with large pharmaceuticals for strategic alliance(s) aimed at delivering specific types of therapeutic products/drugs. Grant also feels that the diagnostic(s) division, once profitable, should be spun off because of the competition in that field.
Grant probably has it right. The therapeutic emphasis is the best way for T-Cell to go right now. The joint venture/strategic alliance approach is a sound one. If successful, the development of even one drug marketed to a patient population as widespread as the breast cancer or lung cancer populations promises immediate payoff for T-Cell’s efforts and a handsome reward for its investors.
With diagnostic drugs on the other hand, even if approved and even if proprietary, it is hard to see how T-Cell will be able to exploit the discoveries, so that Grant is probably correct when he surmises that this division or these proprietary discoveries will ultimately be spun off. Of course, licensing and franchising are options we have discussed which absent from Grant’s discussion(s).
The best way for T-Cell to go would be to continue to solicity these contracts and joint ventures. T-Cell has recognized, proven scientific talent and recognized expertise in this very specific area of immunological research.
One specific recommendation is that the company hire a patent portfolio manager and begin to concentrate on patenting more of its discoveries, as well as concentrate on getting products to FDA submission stage. This manager must also concentrate on getting the researchers to recognize when a discovery may or might be patentable or commerciable in some respect. These two steps will make the company attractive to investors and a steady stream of patent application(s) and FDA approval applications are evidence that a company has been doing its homework.
These steps, if followed, should result in a successful new round of equity financing and/or an invitation to buy the company out altogether. In either event, the company will have attained a substantial goal. Finally, T-Cell should keep Grant around. Given the company’s history, investors could get extremely nervous if he were to depart suddenly or unexpectedly.
–Arthur J Kyriazis, 1994
THIS WAS AN ACTUAL CASE STUDY I WROTE FOR THE WHARTON SCHOOL IN THE SPRING OF 1994.
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