A tale of two biotechs

A pair of promising firms from the Rockville incubator come to very different endings

Friday, Oct. 6, 2006

Click here to enlarge this photo Brian Lewis⁄The Gazette Tim Seeley, former chief engineer at Protiveris Inc., hopes to revive its diagnostic technology with his new company, Lakenheath Electronics Design, which he runs from his Bethesda home. Click here to enlarge this photo Naomi Brookner⁄The Gazette Sherri Bale and John Compton founded GeneDx Inc. for $28,000 and sold it this summer for $17 million. They plan to double their 7,000-square-foot quarters in Gaithersburg.

In Gaithersburg, Sherri Bale, co-founder and president of GeneDx Inc. was delighted to hear the news: BioReference Inc. of New Jersey wanted to purchase GeneDx for $17 million. Bale and CEO John Compton, former National Institutes of Health geneticists, had initially invested only $28,000 to create their company to test patients’ DNA for rare inherited diseases.

At about the same time, just down the I-270 Tech Corridor in Rockville, Julian Abery, the new vice president for business affairs at Protiveris Inc., was shocked by his phone call: Investment company B.F. Saul said it was pulling the plug on Protiveris, ending what had looked like a promising future for the diagnostic toolmaker.

Both companies showed much promise in 2000 when they set up shop in the Maryland Technology Development Center incubator in Rockville.

Both said they were targeting unmet medical needs.

Both relied on federally tried-and-tested technology. GeneDx used gene-based testing for human diseases from NIH. Protiveris used new protein detecting methods from Oak Ridge National Laboratory in Tennessee.

Both companies won early awards. Protiveris was named 2001 Maryland Incubator Company of the Year, an award sponsored by the Maryland Technology Development Corp. Bale and Compton were named Maryland Entrepreneur of the Year for 2003 by the Tech Council of Maryland.

How could these startups could begin with such similar potential and end up in such different places? The reasons help illustrate the hard-to-predict nature of business in the biotech world.

‘Start a company ... I need you.’

As GeneDx and Protiveris matured side by side in the Rockville incubator, their business outlooks were quite different.

Bale and Compton came into the incubator with a proof-of-market concept, while Protiveris decided on its market while still perfecting its first tool in the incubator, according to former Protiveris COO Robert Menzi.

Bale and Compton were colleagues at the NIH’s National Institute of Arthritis and Musculoskeletal and Skin Diseases in Bethesda, where they identified genes for rare skin disorders.

‘‘It took us about two years to finally make up our minds to do this. It came from our desire to give back to those patients who had actually been the material from which we built our careers. When you study rare diseases, you are dealing with families,” Bale said.

They failed to persuade NIH to set up a diagnostic service for rare diseases. They started to keep track of the families’ pleas for help.

‘‘The families said, ‘How can you help us? We want to have another child. Can you do prenatal diagnosis?’ But we were the government and could not,” Bale said. ‘‘I started to feel very badly about that.”

Bale called Duc Duong, director of the Rockville incubator, who told her and Compton to work up a business plan.

‘‘We knew nothing about business, but we knew very well what it costs to do what we were already doing at NIH,” Bale said. ‘‘We figured that we could go back to NIH if the plan didn’t work.”

But it did.

On their first day in the 440-square-foot incubator laboratory, they got a paying customer, in the form of a DNA sample from a desperate patient they had met at NIH. The pregnant woman’s 8-month-old baby had a rare skin condition and she wanted to know if her newborn would have it, too.

‘‘I remember she had said, ‘Get out of here. Start a company. I need you now!’” Bale said.

GeneDx was profitable and grew immediately. Physicians and outpatient clinics sent samples for testing, stemming from the reputation of Bale and Compton in the medical community, Compton said.

‘‘Many friends of ours in dermatology said, ‘Thank God you are doing this. You are going to make a mint,’” Bale said.

‘‘Actually, they had more confidence in us than we did,” Compton said.

Developing a nanotech tool

Meanwhile down the hall, Protiveris, with $3 million in private investment, had opened shop in a 1,200-square-foot laboratory, Menzi said.

Protiveris also scored a $116,000 grant from the Maryland Industrial Partnerships program for University of Maryland scientists to help fine-tune the company’s patent-pending biosensor system, later called the VeriScan 3000.

The tool was built around a tidy bit of nanotechnology that Protiveris officials considered a can’t-miss deal, mostly due to its pedigree. Oak Ridge scientist Thomas Thundat, named one of the nation’s 50 leading scientists by Scientific American magazine, developed the technology. He said it could be used to detect defective genes that cause breast cancer, colorectal cancer and cystic fibrosis.

Oak Ridge awarded Protiveris a worldwide license to develop such medical applications and the company got help tweaking the machine at the National Institute of Standards and Technology in Gaithersburg. Later, Protiveris completed a $5 million venture capital round.

Forging ahead

In 2003, executives at GeneDx and Protiveris both decided they were ready to leave the incubator.

GeneDx moved into a 3,400-square-foot lab a stone’s throw from I-270 in Gaithersburg. Protiveris was ready to graduate into a 7,000-square-foot office and laboratory in Rockville.

GeneDx started with 16 tests for rare diseases, mostly skin disorders, then moved on and now tests for a wide range of more than 100 rare inherited conditions. It has expanded its quarters to 7,000 square feet and plans to double that soon, Bale said. She said the company has 38 employees and is hiring more geneticists because business is increasing and ‘‘we are always in the catch-up phase.”

Protiveris moved ahead too. It gathered testimonials from clinics testing the VeriScan 3000 at the Lombardi Cancer Center at Georgetown University in Washington, D.C., and at the University of Genoa, Italy.

In June 2005, Menzi spoke at NIST about the company’s success in partnering at the federal facility and its plans for marketing the VeriScan 3000 ‘‘very soon to Pharma.”

As a toolmaker, he said, ‘‘we can avoid the biotech valley of death,” referring to the often arduous and fatally expensive clinical drug trials. Menzi spoke of having met ‘‘the application milestone” to the market.

Investors saw promise, too.

‘‘Protiveris is the prototype of how a bio-toolmaker can succeed in the long run in a very difficult market,” Patrick Huddie, managing director of the Chesapeake Emerging Opportunities Club LLC, a Silver Spring investment group, said in July 2005.

‘‘They are taking the right approach.”

Or maybe not. Protiveris was still reporting no revenues.

The bell tolls

Doubt crept into Protiveris’ future in January, when investor B.F. Saul lost patience and notified Protiveris — ‘‘the day after Christmas vacation,” said Tim Seeley, chief engineer — that it was looking for someone to buy the company.

The sale never happened; officials at B.F. Saul declined to comment for this report.

Menzi theorized that venture capitalists in 2000-01 supported the likes of Celera Genomics of Rockville and Incyte Pharmaceuticals of Wilmington, Del., to develop instruments to mine the Human Genome Project data for drug discovery. But investors then soured on companies such as Protiveris developing instruments that delve more deeply into the data for proteins, he said.

Menzi, now CFO of the Jane Goodall Institute, said the Protiveris technology was too finicky for investors. ‘‘It had been a tool ahead of its time,” Menzi said.

On Aug. 29, Purdue University researchers published the results of new experiments that showed that the VeriScan 3000 worked far better than expected.

‘‘Well, there is quite a gulf between what those guys can do in a lab and a commercial application,” Menzi said.

But Seeley, who purchased much of the Protiveris equipment at auction earlier this year, said, ‘‘We still believe in this stuff.”

He and others, including some former Protiveris employees, have made plans to improve the company’s original idea for the biosensor. He has formed a new company, Lackenheath Electronics Design, housed at his Bethesda home.

But Protiveris was history.

‘‘Biotech companies are about creating value and then cashing out,” Menzi said.

Cashing in

Bale said BioReference, headed by CEO Dr. Marc Grodman and with 1,200 employees, was the right buyer for GeneDx because the company ‘‘was founded and run by a physician and Mark is interested in doing what we are doing. ... He is not in it just for the money.”

Bale and Compton received four-year contracts and $10 million up-front. They will receive the remaining $7 million in incentives.

Both parties agreed the timing was right. GeneDx projects $7 million in revenues for 2006, and a 38 percent profit margin, Bale said.

Grodman says he plans to keep GeneDx where it is. ‘‘I am very excited because they are a superb laboratory, a genetics laboratory run by geneticists,” Grodman said. ‘‘They do it the right way.”