By Michael A. Greeley

July 20, 2005 | In my recent discussions with CEOs of emerging bio-IT companies, several key themes became apparent. After much commiseration about what ails this industry, these CEOs are expressing sincere optimism that they have “figured it out” and configured their companies for the proverbial long haul.

Chaos still reigns, but in the face of extraordinary R&D budgets generated by biopharma industries, bio-IT companies must refine their value propositions in the hopes that meaningful — read predictable and repeatable — revenue streams can be created. The limitations of the data around physiological processes are readily apparent, which undermines many of the bio-IT tools available today. Customer cynicism remains high; research programs, tortuously long and opaque.

I spoke to CEOs of a range of companies — some new, some that have weathered tough times and are beginning to ramp, and some that are struggling. Regardless, these executives focused on product, market, and financial issues.

Product Focus

“Products cannot be geared to a small niche market and be so over-designed that there are disconnects between the price of the product and the perceived value,” observes Andrew DePristo, CEO of Bioreason, a Santa Fe-based cheminformatics company. Brought in to reposition Bioreason, DePristo was struck that the company’s product offerings were priced two to three times customers’ signature authority.

Bioreason developed an affordable, scaled-down version of ClassPharmer, which resulted in immediate customer acceptance. In addition to dramatically expanding the addressable market, the company was able to generate inroads into numerous accounts that became up-sell opportunities.

DePristo implores startup CEOs “to stop being enamored with the technology and focus solely on what the customer wants.” This is so important that he advises bio-IT companies to hire pharma executives in sales and marketing roles.

Guy Malchi, CEO of Optimata, an Israeli bioinformatics startup, has adopted a novel product strategy focusing on drug target “salvaging,” which allows customers to revamp market positioning for drugs encountering safety and efficacy problems. “Tactically we are having plenty of conversations with people and stakeholders all over the industry,” Malchi says, and his company has developed a product that can be broadly utilized by many types of users.

Available Market

Another hot topic was around the definition of the available market — a phrase venture capitalists (VCs) obsess about. All the CEOs agreed that available markets need to be large and growing. Colin Hill, CEO of Gene Network Sciences (GNS), a predictive pathway modeling company based in Ithaca, New York, feels that “we do not need a lot of deals if we can price them at $2 million” to build an exciting business.

Hill is starting to see considerable activity at the top end of the market among large pharmas. There are approximately 400 compounds in preclinical stages of review. Given the extraordinarily constricted funnel to get compounds successfully into phase I trials, Hill feels that the preclinical market is poised to be tremendously enticing — even for jaded VCs.

In fact, Hill has developed a three-step product strategy that he expects to walk his customers through. Initially, GNS will leverage its technology through alliances starting in preclinical programs and that customers will “graduate” into clinical applications as particular compounds move on in the process. The third phase of product development is envisioned to be “partial product ownership in compounds as they move towards FDA approval,” Hill comments.

Regarding financing strategies, all the CEOs feel that of utmost importance is getting a company funded. Building relevant, supportive syndicates of two to three investors is usually the most productive approach. Given that this market may still be several years away from producing significant revenue streams, investor patience and understanding will be critical. Gain strategic alignment with the investors before raising capital.

Michael A. Greeley is managing general partner of IDG Ventures. E-mail: mgreeley@idgventures.com.