Description
Detailed explanation concerning survival strategy in the turbulent biotech industry.
EntreMed 1
EntreMed, Inc:
Survival Strategy in The Turbulent Biotech Industry
Douglas N. Ross
Towson University
TOWSON, MARYLAND, USA
David L. Entin
EntreMed, Inc.
ROCKVILLE, MARYLAND
Douglas M. Sanford, Jr.
Towson University
TOWSON, MARYLAND, USA
Contact:
Douglas N. Ross
Department of Management
Towson University
8000 York Road
TOWSON, MARYLAND, USA 21252
[email protected]
tel: 410-704-4071
This case was prepared by Douglas N. Ross, Towson University, David L. Entin, EntreMed, Inc.
and Douglas M.Sanford, Jr. Towson University and is intended to be used as a basis for class
discussion. All of the information presented in this case was obtained from public sources. The
views represented here are those of the case aut hors and do not necessarily reflect the views of
the International Journal for Case Studies in Management, Towson University or EntreMed, Inc.
Authors’ views are based upon their own professional judgments.
In submitting this case to the International Journal for Case Studies in Management for
widespread distribution in print and electronic media, we certify that it is original work, based on
real events, in a real organization. It has not been published and is not under review elsewhere.
Copyright holders have given permission for the use of any material not permitted by the “Fair
Use Doctrine.” The host organization has signed a release authorizing the publication of all
information gathered with the understandings of confidentiality.
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EntreMed 2
EntreMed, Inc: Survival Strategy In The Turbulent Biotech Industry
Having recently been promoted from Vice President to Senior Vice President, Corporate
Development, newly named President & COO, Neil Campbell faced major challenges as he took
the reigns of the Company beginning in 2003. During 2002, EntreMed’s stock price had
declined to $.83 per share down from an all-time high of $101.75 per share in 2000 and the
company faced possible de- listing (NASDAQ: ENMD). The Company began 2003 with
insufficient capital to bring a drug candidate to market, several million dollars of debt that had to
be restructured, an unsustainable “burn” rate (annual expenditures) and an uncertain future
regarding the development path for its product candidates. Furthermore, the Company recently
had reciprocal lawsuits dismissed wherein Celgene sued EntreMed for patent infringement and
EntreMed counter sued for anti-trust and tortuous interference. The suits were related to several
product candidates that ultimately were licensed to Celgene for $27 million.
EntreMed, Inc. was founded in Maryland in 1991 and has been publicly-traded since 1996
(NASDAQ: ENMD). Through a combination of foresight and fortuitousness, EntreMed, in 1993,
licensed from Children’s Medical Center Corporation (Boston) technology from the laboratory
of Dr. Judah Folkman (the acknowledged father of angiogenesis --abnormal blood vessel
growth.) In the 1960s, Folkman discovered that tumors were unable to thrive without networks
of new blood vessels to feed them. EntreMed positioned itself as the “angiogenesis” company
and focused its efforts on the development of new products intended to inhibit the growth of
certain types of cancer tumors by blocking new blood vessel growth.
At the close of 2002, the company continued to focus on the development of oncology
therapeutics for human health, however, the strategy for accomplishing this objective changed.
More specifically, EntreMed shifted its development strategy in the beginning of 2003 from
large molecule, living organism “biologic” research, which is often very expensive and
unpredictable, to small molecule, new chemical entities (NCEs) which tend to be more
economical. The Company had an extens ive intellectual property (IP) portfolio, both U.S. and
foreign which was an important asset of the company since it did not have any FDA-approved
products that could generate revenue from product sales. All company revenues were from
licensing fees, royalty payments, monetization of future royalty streams, research grants, or
research and development funding (for financial statements, see Tables 1,2,3.)
BIOTECH INDUSTRY BACKGROUND
Beginning in the middle to late 1970’s, a technological revolution was occurring in the field of
biomedical research that allowed scientists to probe the inner workings of organisms by studying
their cellular structure at the molecular level. This new field of research labeled “molecular
biology” established the underpinnings that paved the way for the creation of the biotechnology
industry. Additionally, another critical development occurred in the political- legal arena in 1980
(the passage of the Bayh-Dole Act) which allowed academic and government research
laboratories to patent discoveries and license them to commercial entities. Venture capitalists,
angel investors and large pharmaceutical companies eventually entered the picture and
underwrote the commercial development of these discoveries into products that eventually found
their way to the marketplace. What has stimulated personal and business devotion to “biotech”
EntreMed 3
over its 25 year history has been both the thrill involved in such worthwhile discovery and the
possible financial rewards.
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EntreMed 4
The word biotechnology was coined in the early twentieth century to describe the interaction of
biology with technology as a means of manipulating life forms to provide desirable products for
mankind's use. Biotechnological approaches have been used in a number of product markets:
Aspects of human health and healthcare (therapeutics), medical diagnostic tests,
genetically modified foods, agbio (agriculture, animal health, aquaculture), environmental
biotechnology (industrial biotechnology applications), and information technology
(bioinformatics). “Biologics,” which have relied on the use of cellular and molecular processes,
can be distinguished from chemically-based approaches to product creation traditionally used by
pharmaceutical companies.
Mr. David Entin, Director of Intellectual Property and Licensing at EntreMed, put the industry
into historical perspective. In 1980, Congress passed the Federal Technology Transfer Act – the
Bayh-Dole Act – which gave academic institutions ownership of its federally- funded discoveries
and accompanying intellectual property. This Act (and its subsequent amendments) paved the
way for the creation of the biotech industry because it allowed academic institutions to license
their institution-owned intellectual property (IP) to newly- formed and existing companies for
commercial development.
Key government agencies such as the National Institutes of Health (NIH), the Patent and
Trademark Office (PTO), and the Food and Drug Administration (FDA) have been inextricably
linked to the pipeline of cutting edge biotechnology products. And each, in its own way, has
shaped the nature and structure of competition in the biotechnology industry.
With respect to NIH, the majority of its budget is devoted to funding biomedical research at
academic institutions under the auspices of its extramural research program. Other federal
agencies such as NSF, DOD, DOE and USDA also have extramural research programs that
provide funding for biomedical research.
The Patent and Trademark Office, one of the oldest federal agencies in the country, establishes
intellectual property ownership by diligently researching an invention’s uniqueness and
authenticity and then publishes a written record of the invention. A patent, for example, gives its
owner a right for 20 years (under most circumstances) to exclude others from making or using
the discovery unless they obtain a license (grant of rights.) Thus, intellectual property protection
provides incentives for the creation of products that eventually make their way through the FDA
regulatory review process.
The third government agency that acts as a change driver is the Food and Drug Administration
(FDA). Exhibit 1 “Biotech Drug Discovery Process” shows the steps involved in the FDA
regulatory process that every medical device and drug (chemical and biological) has taken in
order to reach the U.S. market.
EntreMed 5
Exhibit 1
The cost of developing a typical product candidate during this 12-15 year regulatory path was
estimated at over $800 million (Tufts University Center for the Study of Drug Development,
2003). Business costs include not only the costs associated with the conduct of clinical trials,
but also scientific research and computational capability (bioinformatics). Exhibit 1 can be used
to illustrate not only the hurdles at each milestone (phase) but also how the value of a product
candidate increases as each regulatory phase is successfully completed.
ENTREMED’S SITUATION AND BUSINESS MODEL
EntreMed faced a number of opportunities and threats. Primarily, EntreMed continued to focus
on the development of life-changing drugs (oncology therapeutics) on which society placed a
high premium. This business objective was supported by well developed intellectual property
and patent systems which rewarded new product developers.
0 2 4 6 8 10 14 12 16
Discovery
(2-10 yrs)
Pre-clinical Testing
(Lab and Animal Testing)
Phase I
(to check for safety and dosage)
Phase II
(to check for efficacy and side effects)
Phase III
(monitor reactions to long term us age)
FDA Review and Approval
Post Launch
Figure 1 Biotech drug discovery and Regulatory Approval
Source: Ernst & Young LLP, Biotechnology Report: Convergence,
2000. Used by permission
EntreMed 6
Today, the industry remains highly regulated by the FDA. According to an FDA report (2004), a
drug now entering Phase I, after a decade of preclinical testing, has an 8% to 10% chance of
reaching market (and of course cost is also increased for meeting European and Japanese
standards and securing world-wide patents). In the global arena, many countries have poorly
enforced intellectual property rights that limit the financial rewards expected from such a high-
risk investment. It is not uncommon in this business to discover that a competitor may have
intellectual property rights that precede the “priority date” of your issued patent.. Constant (and
expensive) vigilance has been needed to protect against intellectual property infringement yet
firms must invest heavily to protect products because intellectual property often has been the
firm’s only asset. Investors must be patient and often have had to wait years to receive a return
on their investment.
EntreMed, along with many biotech firms in 2003, adopted a business strategy that would allow
it to survive financially. An unanticipated market recession in 2002 and accompanying tight
capital markets, forced many biotech companies in 2002 to rethink their plans. Many of the 320
US publicly traded biotech companies underwent some type of restructuring in 2002 and were
forced to cut programs and lay off employees. A poll of 200 senior executives at nearly 60
companies revealed that over 80% of the companies underwent major organizational transitions.
While over 60% of the surveyed companies claimed that the most significant change driver was
“management model inadequate to handle a new stage of growth” for over 50% of these
companies, the reason was a “cash crunch” (Aibel and Mardis, 2003).
At the close of 2002, EntreMed faced: cash on hand for about three weeks (with an
approximately 58-employee payroll); $11 million debt; a stock price of $.83 per share (down
from an all time high of $101.75 per share in 2000); and possible de-listing by NASDAQ.
Celgene had sued EntreMed over alleged patent infringement. EntreMed responded by filing a
counter-suit for alleged violations related to anti-trust and tortuous interference. Eventually, both
law suits were dismissed and Celgene paid EntreMed $27 million for stock, warrants and certain
product rights which enabled EntreMed to survive and continue operations into 2003 (EntreMed
press release, January 2, 2003.)
EntreMed understood that in order to succeed in 2003 it had to have access to at least five critical
elements: 1) seasoned, experienced management, 2) capital markets or other sources of
financing, 3) broad intellectual property coverage with strong patent claims, 4) state-of-the-art
cutting-edge technology and 5) access to technical personnel unique to this industry segment.
A strong management team is critical for the success of any biotechnology company. While
company scient ists discover and develop new product candidates, it largely has been
management’s responsibility to determine the “winners” and “losers.” Capable management has
been able to set strategic focus for both a company and its scientists. Indeed, the quality and
experience of management have been prime factors when venture capitalists and investment
bankers make decisions regarding financing. Thus, financing by venture capitalists and
investment bankers has played a critical role in the survival and success of most biotechnology
companies. Deep pockets have been needed to take a product candidate through the increasingly
costly regulatory phases. Obviously, companies would like to have more than one product
candidate, creating even greater opportunity for success.
EntreMed 7
A third aspect is Intellectual Property. Intellectual Property can refer to patents, trademarks, trade
secrets, and copyrights. Steven Caltrider, Assistant General Patent Counsel for Eli Lilly and
Company BioProducts division noted: “Intellectual Property has become a CEO-level issue as
generic drug manufacturers have become more aggressive over time.” (Krause, 12). Intellectual
property protection, therefore, is crucial to the creation of value in biotechnology companies and
is a key factor necessary for growth.
Access to state-of-the-art technology has been required in order to successfully compete in this
industry. Technology has enabled scientists to develop new product candidates quicker and
cheaper and allowed management to deliver products to the market sooner. Similarly, success
cannot occur without talented people to develop and manage new product candidates. Human
resources (HR), therefore, have been critical to the success of these companies. Companies are
continuously trying to hire the most talented individuals and offer competitive salaries and
benefit packages in order to reduce turnover. HR professionals are constantly recruiting
individuals with backgrounds in science, business, legal, regulatory expertise and managerial
skill.
Biotech business models have been driven largely by managements desire to secure adequate
financing despite changing market conditions. What has differentiated biotech from other
industries has been the overwhelming need for significant amounts of capital well in advance of
product sales. Burrill & Company has identified five distinct business models and changes that
have been occurring in those models (Burrill & Company, 2004B):
* Royalty intensive pharmaceutical companies (RIPCOs) have been morphing into Fully
Integrated Pharmaceutical Companies (FIPCOs). In this model, companies have traded possible
future income streams from products for royalty payments, usually from fully integrated
pharmaceutical companies (FIPCOs), such as Merck & Co. From its inception, EntreMed has
been in this category.
* Specialty pharmaceutical companies have relied heavily upon in- licensing late-stage product
candidates from “big pharma.” For example, Forest Labs Inc., the largest specialty
pharmaceutical company, has no internal research component.
* Technology platform companies have provided a technological foundation for all phases of the
drug discovery and development process. For example, Affymetrix products and processes have
been used by others to both accelerate discovery and reduce costs.
* Genomic-based and post- genomic companies have been transformed into companies focusing
on personalized diagnostics (personalized medicine). One of the first genomics companies,
Incyte Pharmaceuticals, focused on the sale of non-exclusive access to its genomic databases and
use of its genetic sequence information in conjunction with its bioinformatics software to analyze
new product opportunities. Revenues were from access fees and royalties which were negotiated
based upon drugs that were developed using its software. In 2000, Incyte’s stock hit $150 per
share; but by 2003 it had dropped to $3 per share. In 2003, it re-structured and re- focused.
* Fully integrated drug discovery and development companies. A direct result of the biotech
industry’s efforts to research and develop novel medicines has seen a maturing of companies into
full- fledged biopharmaceutical companies. Established names such as Amgen, Inc, Genentech,
Inc., Biogen-Idec, and Genzyme Corp. have developed and commercialized a number of major
drugs.
EntreMed 8
The founders of EntreMed, as is often the case with many biotechnology firms, were both
scientists and entrepreneurs. Given the difficult financial times experienced by many
biotechnology companies during 2002, the academically-oriented research culture often found in
many of these companies had to change to a more commercial focus. This shift in culture and
mindset affected virtually all company decisions. From inception through 2001, EntreMed’s
management focused the company’s efforts toward discovering major scientific breakthroughs.
During this period, over $177 million was spent on R&D and net losses amounted to $174
million (Table 1.) By the end of 2002, the accumulated deficit totaled about $213 million (see
Table 2.) Most of these expenditures were covered by paid- in capital, not revenues from
operations.
Unfortunately, EntreMed, like many biotechnology companies during this time, developed the
undesirable habit of living on investor funds. One of management’s objectives during 2003,
therefore, was to stabilize the company (i.e. reduce expenditures), raise additional capital and
move the company’s product candidates forward along the development path.
Historically, EntreMed viewed itself as “The Angiogenesis Company,” but its vision evolved
from developing therapeutic proteins to small molecules largely due to the recognition that the
Company’s financial resources were limited and the financial markets did not offer attractive
opportunities to raise additional capital. Exhibit 2 sets out statements from annual reports for the
six year period, 1998-2003.
Exhibit 2 Evolution of EntreMed Vision/ Mission and Strategy
Year Statement from Annual Report
1998 “…fundamental mission of expediting the preclinical and clinical
development of our promising antiangiogenic molecules: thalidomide,
Endostatin ™ protein, Angiostatin ™ protein, and 2- methoxyestradiol.”
1999 “In 1999, EntreMed matured into a clinical-stage biopharmaceutical
company. In just six months our three lead compounds, Endostatin,
Angiostatin and 2- methoxyestradiol entered Phase 1 clinical testing… In
1999, EntreMed developed manufacturing processes…, performed
technology transfers to contract manufacturers for the production of
kilogram quantities of clinical- grade products, demonstrated in animals a
lack of serious toxicity for each product candidate, filed Investigational
New Drug submissions (INDs) to allow the authorization of Phase I
studies by the FDA, obtained protocol approval from Institutional
Review Boards, and began to evaluate product safety in cancer patients
across the country….”
2000 “EntreMed has more antiangiogenic product candidates in human testing
oncology than any other company in the world… findings in preclinical
studies encouraged the FDA to authorize us to begin combination studies
with chemotherapy and radiation even before completion of Phase I
studies…. In addition to its anti-cancer effects, Panzem ™ has
demonstrated excellent potential in the treatment of osteoporosis and
hypercholesterolemia in preclinical studies…. Raised $46 million from
EntreMed 9
new stock.”
2001 “After recognizing the potential of Endostatin and Panzem ™ from our
clinical phase 1 studies, the U.S. Food and Drug Administration granted
orphan drug status for these molecules…. Cancer is---and will continue
to be--- our main focus… EntreMed’s portfolio is protected by over 300
US and foreign patents and patent applications giving us a strong
foundation for licensing and strategic alliances… Raised $75 million to
expand drug candidate production and clinical trials.”
2002 “Our primary challenge in 2002 was to provide financial stability through
an infusion of capital combined with meaningful and strategic cuts in
expenses. We made difficult decisions to direct our efforts to our most
economically feasible and versatile pipeline candidates: our small
molecules and peptides, led by Panzem ® . Other programs, including
our proteins, Endostatin and Angiostatin, were limited or ended….
MaxCyte, formerly a majority-owned subsidiary, was launched as a
separate independent company…Significant management transitions
occurred… co- founder John Holaday, Ph.D. retired from his positions as
chairman and chief scientific officer…Thalidomide analogs were
transferred to Celgene for $27 million.
2003 “EntreMed redirected its business and scientific development strategies
towards the commercialization of its best drug candidates. Oncology is
the company’s clinical and commercial focus. …In 2003, the company
completed over $40 million in equity transactions.”
Source: EntreMed Annual Reports 1998-2003; Executive Summary, August 2003
In late 2002 and early 2003, EntreMed experienced changes in some of the members of the
management staff (Exhibit 3) Management re- focused company efforts, re-examined core and
non-core assets, reviewed resource management and culture, and re-evaluated company size,
debt and operating expenses.
The new management team, led by Neil Campbell, formerly EntreMed’s SVP for Corporate
Development, was given the opportunity to redefine the mission of the company and turn it
around. Strategy change was involved. Company efforts were re-focused away from the
development of expensive, unpredictable “biologic” product candidates toward more
economically feasible chemical entities. Given the re- focusing, a decision had to be made about
core and non-core assets. Given the Company’s unsustainable spending in 2001 of almost $70
million, a decision had to be made about firm size and debt levels. If EntreMed could be
stabilized financially (e.g. significantly reduce annual expenditures) and achieve success in the
clinic with its lead product candidate, Panzem®, then perhaps new capital could be raised to
continue operations.
Exhibit 3 EntreMed Management Background --2003
Name Title Previous Company
Michael Tarnow, JD Chairman of the Merck, Merck Frost, Creative
EntreMed 10
Board BioMolecules, Inc.
Neil Campbell, MA, MBA President & COO Celera Genomics, Life
Technologies, IGEN, Abbott Labs
Dane Saglio,CPA CFO Sterling, Cominex, B&R
James Johnson, JD, PhD SVP, General
Counsel
CytRx, Kilpatrick Stockton
Udo Klein, PhD VP R&D Bayer, Cutter Labs
Carolyn Sidor, MD, MBA VP Clinical &
Regulatory
Cato, DuPont, TJ Univ.
Source: EntreMed, August 2003.
At first, Neil Campbell focused on changing the corporate culture and structure of EntreMed and
implemented the Company’s new strategy. EntreMed re-focused its business strategy on the
development of small molecules and was able to retain its NASDAQ listing. Its main criterion
became” economic feasibility.” This resulted in a new focus on “small molecule” drug
candidates --small molecules and peptides, led by Panzem
®
while other more costly protein-
based programs were curtailed. The intellectual property rights to historically important protein-
based product candidates such as Endostatin and Angiostatin were scheduled to be out- licensed
as part of a new effort to reduce costs. Thus, the company moved away from the development of
biologics and focused on the development of new chemical entities (NCEs). These small
molecules were considered to be more economical to develop and more predictable with regard
to manufacturing costs. In the process, the company moved from “scientific” to
“entrepreneurial” in spirit. By the end of 2003, EntreMed stock closed at $3.32 per share having
reached a one-time high during the year (in June) of $6.53 per share.
The shift in company focus created organizational challenges. The culture enunciated by
Campbell was based upon problem solving and a sense of urgency. EntreMed emerged with a
new commercially-oriented strategy and its scientists focused on more as opposed to less
economically feasible product candidates that had multiple mechanisms of action (MOA ); that
is, a molecule that employs multiple cellular pathways to achieve the desired clinical outcome.
Management also focused the company’s business strategy on exploring the possibility that its
product candidates could be developed for multiple indications in oncology as well as non-
oncology. Panzem® for example, EntreMed’s lead product candidate, had potential applications
in both oncology and opthamology. By this time, EntreMed had several new chemical entities
(NCEs) in its discovery pipeline and two in the preclinical phase.
Many biotech companies seek partnerships with large pharmaceutical companies, such as Merck,
Bayer, Bristol Myers Squibb, Glaxo SmithKline, Johnson & Johnson, Pfizer, Eli Lilly Corp,
Wyeth etc. to defray the significant costs associated with drug development. Since “big pharma”
generally has significant cash reserves at its disposal, it is constantly looking for new product
opportunities to in- license from biotechnology companies to fill its product pipeline. The
opportunity to partner with big pharma represented one of the many options EntreMed’s
management team considered as it developed its new business strategy in the coming year ahead.
EntreMed 11
Table 1 Income Statement
ENTREMED INC 2003 10-K 03/15/2004 (see: www.entremed.com )
YEAR ENDED DECEMBER 31,
2003 2002 2001
Revenues:
Collaborative research and development $ 667,796 $ 835,493 $
Licensing 310,496 115,496
Grants 508,243 131,681 358,427
Royalties 2,705 38,790 1,440,070
Other 86,306 55,030 63,444
1,575,546 1,176,490 1,861,941
Costs and expenses:
Research and development 14,252,196 31,308,427 54,201,179
General and administrative 7,022,986 13,932,133 14,473,012
21,275,182 45,240,560 68,674,191
Interest expense (390,941 ) (344,969
Investment income 205,580 317,910 1,437,966
Gain on sale of asset 2,940,184
Gain on discharge of liabilities 2,174,765
Gain on sale of royalty interest (see Note 22,410,182
4)
Net loss (19,494,056 ) (39,022,152 ) (43,309,071
Dividends on Series A convertible preferred (1,005,000 )
EntreMed 12
stock
Net loss attributable to common shareholders $ (20,499,056 ) $ (39,022,152 ) $ (43,309,071
Net loss per share (basic and diluted) $ (0.68 ) $ (1.78 ) $ (2.39
Weighted average number of shares outstanding 29,943,161 21,892,520 18,093,174
(basic and diluted)
__________Created by 10-K Wizard Tech. http://www.10kwizard.com/
Table 2 Balance Sheet
ENTREMED INC 2003 10-K 03/15/2004
DECEMBER 31,
2003 2002
ASSETS
Current assets:
Cash and cash equivalents $ 34,811,847 $ 24,067,045
Short-term investments 2,129,583
Accounts receivable 428,979 309,292
Interest receivable 262,192 95
Prepaid expenses and other 528,190 272,425
Total current assets 38,160,791 24,648,857
Furniture and equipment, net 1,991,516 3,152,072
Other assets 1,457 9,283
Total assets $ 40,153,764 $ 27,810,212
LIABILITIES AND STOCKHOLDERS EQUITY
EntreMed 13
Current liabilities:
Accounts payable $ 3,952,517 $ 10,065,163
Accrued liabilities 706,961 1,891,931
Current portion of deferred revenue 95,495 110,809
Current portion of notes payable 4,864,952
Total current liabilities 4,754,973 16,932,855
Deferred revenue, less current portion 192,993 286,488
Deferred rent 329,815
Other long term liabilities 80,000
Minority interest 17,100 17,223
Stockholders equity:
Convertible preferred stock, $1.00 par
and $1.50 liquidation value:
5,000,000 shares authorized and 3,350,000 3,350,000 3,350,000
shares issued and outstanding at December 31,
2003 and 2002
Common stock, $.01 par value:
90,000,000 shares authorized, 37,848,011 378,480 241,457
and 24,145,693 shares issued and outstanding
at December 31, 2003 and 2002, respectively
Additional paid-in capital 271,977,321 228,316,897
Treasury stock, at cost: 874,999 shares (8,034,244 ) (8,034,244 )
held at December 31, 2003 and 2002
Deferred stock compensation (61,846 )
Accumulated deficit (232,812,674 ) (213,318,618 )
EntreMed 14
Total stockholders equity 34,858,883 10,493,646
Total liabilities and stockholders equity $ 40,153,764 $ 27,810,212
____ Created by 10-K Wizard Tech. http://www.10kwizard.com/
Table 3 Cash Flows
ENTREMED INC 2003 10-K 03/15/2004
YEAR ENDED DECEMBER 31,
2003 2002 2001
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (19,494,056 ) $ (39,022,152 ) $ (43,309,071 )
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 930,772 1,508,559 1,376,187
Loss on equity investment 342,269
Loss on disposal of equipment 9,679 83,635
Gain on discharge of liabilities (2,174,766 )
Gain on sale of asset (2,940,184 )
Gain on sale of royalty interest (22,410,182 )
Recognition of non-cash stock compensation 175,000 94,874 218,396
Non-cash interest expenses 331,950 189,142
Common stock repurchase liability 1,995,007 1,367,914
Minority interest (124 ) (229 ) (104 )
Changes in operating assets and liabilities:
EntreMed 15
Accounts receivable (209,693 ) (132,134 ) 1,296,225
Interest receivable 56,943 (51,952 )
Prepaid expenses and other (247,939 ) 130,167 97,431
Accounts payable (4,530,366 ) (5,784,568 ) 7,746,567
Accrued liabilities (1,119,462 ) (158,891 ) 263,406
Contingent grant 80,000
Deferred rent 329,815
Deferred revenue (93,496 ) 397,297
Net cash used in operating activities (24,249,870 ) (45,534,492 ) (52,873,772 )
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of asset, net 2,940,184
Proceeds from sale of royalty interest, 22,410,182
net
Reduction in ownership of MaxCyte s cash (418,108 )
Purchases of short term investments (2,391,680 )
Purchases of furniture and equipment (32,715 ) (558,187 ) (985,783 )
Net cash provided by (used in) investing (2,842,503 ) 2,381,997 21,424,399
activities
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from sale of common stock 33,476,901 5,009,265 47,139,118
Net proceeds from sale of warrants 4,452,117 5,164,099
Net proceeds from sale of preferred stock 14,405,000
Proceeds from issuance of note payable 91,843
Payment of principle on note payable (91,843 ) (1,005,727 ) (997,097 )
Proceeds from issuance of long-term debt 2,168,760 2,189,766
EntreMed 16
Net cash provided by financing activities 37,837,175 25,833,240 48,331,787
Net increase (decrease) in cash and cash 10,744,802 (17,319,255 ) 16,882,414
equivalents
Cash and cash equivalents at beginning 24,067,045 41,386,300 24,503,886
of year
Cash and cash equivalents at end of year $ 34,811,847 $ 24,067,045 $ 41,386,300
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 2,451 $ 58,992 $ 155,827
______Created by 10-K Wizard Tech. http://www.10kwizard.com/
EntreMed 17
INSTRUCTOR'S MANUAL: TEACHING NOTE FOR ENTREMED
CASE SYNOPSIS
This case presents the situation facing EntreMed management at the beginning of 2003. During
2002, EntreMed’s stock price had declined to $.83 per share down from an all-time high of
$101.75 per share in 2000 and the company faced possible de- listing (NASDAQ: ENMD). The
Company began 2003 with insufficient capital to bring a drug candidate to market, several
million dollars of debt that had to be restructured, an unsustainable “burn” rate (annual
expenditures) and an uncertain future regarding the development path for its product candidates.
Furthermore, the Company recently had reciprocal lawsuits dismissed wherein Celgene sued
EntreMed for patent infringement and EntreMed counter sued for anti-trust and tortuous
interference. The suits were related to several product candidates that ultimately were licensed
to Celgene for $27 million.
The new management team, led by Neil Campbell, formerly EntreMed’s SVP for Corporate
Development, was given the opportunity to redefine the mission of the company and turn it
around. Strategy change was involved. Company efforts were re-focused away from the
development of expensive, unpredictable “biologic” product candidates toward more
economically feasible chemical entities. Given the re- focusing, a decision had to be made about
core and non-core assets. Given the Company’s unsustainable spending in 2001 of almost $70
million, a decision had to be made about firm size and debt levels. If EntreMed could be
stabilized financially (e.g. significantly reduce annual expenditures) and achieve success in the
clinic with its lead product candidate, Panzem®, then perhaps new capital could be raised to
continue operations.
In 2003, EntreMed’s management team weighed four primary capital-generating survival
options: raise more money in the capital markets; license the rights to EntreMed’s intellectual
property; partner its product candidates to a large pharmaceutical company under a co-
development or co-promotion agreement; or merge the company with another biotechnology
company of similar size and dimension that would have a synergistic effect on the outcome of
the newly formed entity. Invariably, a combination of all of these options would be considered
as the Company moved forward into the new year.
(NOTE: Epilogue)
CASE OBJECTIVES AND USE
EntreMed, Inc illustrates some major dilemmas facing many new businesses in many rapidly
changing industries and thus provides ample opportunity for students to:
• Understand analytical concepts and techniques of strategy;
• acquire skill in the analysis of business problems;
• review actions needed in turnaround situations; and
• aquire skill in the synthesis of action plans.
• It may also be used as an entry into the study of the biotechnology industry.
EntreMed 18
This case sits in a rapidly evolving sector of the US economy. No one can really afford to ignore
biotechnology. EntreMed in a real sense is a “classic” biotech company. It has undergone a
major shift from “research” to “commercial” orientation and management skill is paramount to
survival. Vitually all of the over 1300 biotech companies are either facing cash shortages or are
about to. The case presents the opportunity to look at an important new industry and assess the
hurdles that confront an emerging player.
The case sets out the “symbiotic” relationship between biotech companies and regulators.
Indeed, a decision focus in the EntreMed case is the dilemma faced at each FDA regulatory drug
approval level: Does a firm continue to incur development costs in hopes of obtaining FDA
approval which would translate into future sales, partner with a cash-rich firm, or license its
hoped- for product? At each stage then, the “what business are we in” question can be asked and
management responses have significant implications for present and future revenue streams as
well as in EntreMed’s case, its survival. What the case provides is a chance to show the
importance of intellectual property protection and practice in its valuation.
A note has been provided on Intellectual Property (IP) for the instructor who wishes to
emphasize its critical importance in the industry. Indeed, patented IP is often the major asset of a
discovery- focused biotech company.
INTENDED COURSES AND LEVELS
This case study is suitable for use in strategic management and small business/ entrepreneurship
courses. An early version has been used in an undergraduate business strategy course to illustrate
the tasks of strategic management, competitive analysis and the role of government regulatory
agencies in shaping biotechnology company strategy. In this instance, a senior executive from
EntreMed addressed the class on “the biotech industry” and later a student team made a
presentation. Students are likely to become engrossed in the story and come away with a clearer
view of the tasks and challenges of strategic management in a company in an emerging industry.
The positioning in the course depends upon the use to which the instructor wishes the case to
serve. The case provides an excellent opportunity for thoroughly exploring competitive analysis -
- Porter's "five forces" analysis, forces driving changes, key success factors, and turnaround
strategy -- so it can be positioned to coincide with your coverage of those concepts. It also
illustrates the close relationship between biotech companies and regulators. At each FDA drug
approval level, the instructor can lead the class to consider a basic question in strategic
management: What business are we in? And then tease out the implications for revenues. The
subject has been made accessible by minimizing the use of “terms of art” and technical
terminology.
NOTE: If possible, it is exceptionally useful for students to have an industry executive address
the class. This can be fairly easily accomplished as most states have industry associations that
also have a speaker’s bureau (for example, www.mdbio.org .)
Key Issues
Competing as biotechnology company in changing industry
EntreMed 19
Determining strategic direction and market segment focus
Deciding if and at what stage to license product candidates
Implementing organizational and corporate culture change
Meeting financial challenges
Turnaround strategy
Protecting and valuing intellectual property
Dealing with a federal regulatory regime
Uses of Case
Questions Issues
Discussion 1-8 Drill in the process of
strategic management.
All key issues above
Debate 7,8 Strategy identification,
evaluation. Decisions to be
made. Valuation concepts.
Exam 1-5 Aspects of competitive
analyses
Presentation This is an excellent case for
a team presentation
For the discussion questions, we like to move from industry to firm to intrafirm issues, then
move from concrete to abstract. With this framework, we offer the following suggestions. We
assume the class is senior undergraduate to MBA level. For executives we’d take a more
customized approach.
Questions:
Question 1 What grade would you give to top management for the job it has done?
Question 2 How would you assess the attractiveness of EntreMed’s industry using the five forces
model?
Question 3 Do a SWOT analysis. Assess the opportunities and threats for “biotech.” What
suggestions emerge for EntreMed strategy?
Question 4. What different types of “directional” strategy can be employed in biotech
companies?
Question 5 How has EntreMed strategy changed?
Question 6 Review the vision/ mission and strategy statements. How have financial conditions
affected “vision/ mission and strategies?” Does EntreMed have clear corporate strategy? Product
strategy? Financial Strategy? R&D strategy? Marketing strategy? (Explain)
Question 7 What recommendations do you have that would assist EntreMed in generating future
growth in sales and creating income opportunities?
Question 8 What major issues confront EntreMed in 2004? (explain “burn rate”)
doc_640449350.pdf
Detailed explanation concerning survival strategy in the turbulent biotech industry.
EntreMed 1
EntreMed, Inc:
Survival Strategy in The Turbulent Biotech Industry
Douglas N. Ross
Towson University
TOWSON, MARYLAND, USA
David L. Entin
EntreMed, Inc.
ROCKVILLE, MARYLAND
Douglas M. Sanford, Jr.
Towson University
TOWSON, MARYLAND, USA
Contact:
Douglas N. Ross
Department of Management
Towson University
8000 York Road
TOWSON, MARYLAND, USA 21252
[email protected]
tel: 410-704-4071
This case was prepared by Douglas N. Ross, Towson University, David L. Entin, EntreMed, Inc.
and Douglas M.Sanford, Jr. Towson University and is intended to be used as a basis for class
discussion. All of the information presented in this case was obtained from public sources. The
views represented here are those of the case aut hors and do not necessarily reflect the views of
the International Journal for Case Studies in Management, Towson University or EntreMed, Inc.
Authors’ views are based upon their own professional judgments.
In submitting this case to the International Journal for Case Studies in Management for
widespread distribution in print and electronic media, we certify that it is original work, based on
real events, in a real organization. It has not been published and is not under review elsewhere.
Copyright holders have given permission for the use of any material not permitted by the “Fair
Use Doctrine.” The host organization has signed a release authorizing the publication of all
information gathered with the understandings of confidentiality.
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EntreMed 2
EntreMed, Inc: Survival Strategy In The Turbulent Biotech Industry
Having recently been promoted from Vice President to Senior Vice President, Corporate
Development, newly named President & COO, Neil Campbell faced major challenges as he took
the reigns of the Company beginning in 2003. During 2002, EntreMed’s stock price had
declined to $.83 per share down from an all-time high of $101.75 per share in 2000 and the
company faced possible de- listing (NASDAQ: ENMD). The Company began 2003 with
insufficient capital to bring a drug candidate to market, several million dollars of debt that had to
be restructured, an unsustainable “burn” rate (annual expenditures) and an uncertain future
regarding the development path for its product candidates. Furthermore, the Company recently
had reciprocal lawsuits dismissed wherein Celgene sued EntreMed for patent infringement and
EntreMed counter sued for anti-trust and tortuous interference. The suits were related to several
product candidates that ultimately were licensed to Celgene for $27 million.
EntreMed, Inc. was founded in Maryland in 1991 and has been publicly-traded since 1996
(NASDAQ: ENMD). Through a combination of foresight and fortuitousness, EntreMed, in 1993,
licensed from Children’s Medical Center Corporation (Boston) technology from the laboratory
of Dr. Judah Folkman (the acknowledged father of angiogenesis --abnormal blood vessel
growth.) In the 1960s, Folkman discovered that tumors were unable to thrive without networks
of new blood vessels to feed them. EntreMed positioned itself as the “angiogenesis” company
and focused its efforts on the development of new products intended to inhibit the growth of
certain types of cancer tumors by blocking new blood vessel growth.
At the close of 2002, the company continued to focus on the development of oncology
therapeutics for human health, however, the strategy for accomplishing this objective changed.
More specifically, EntreMed shifted its development strategy in the beginning of 2003 from
large molecule, living organism “biologic” research, which is often very expensive and
unpredictable, to small molecule, new chemical entities (NCEs) which tend to be more
economical. The Company had an extens ive intellectual property (IP) portfolio, both U.S. and
foreign which was an important asset of the company since it did not have any FDA-approved
products that could generate revenue from product sales. All company revenues were from
licensing fees, royalty payments, monetization of future royalty streams, research grants, or
research and development funding (for financial statements, see Tables 1,2,3.)
BIOTECH INDUSTRY BACKGROUND
Beginning in the middle to late 1970’s, a technological revolution was occurring in the field of
biomedical research that allowed scientists to probe the inner workings of organisms by studying
their cellular structure at the molecular level. This new field of research labeled “molecular
biology” established the underpinnings that paved the way for the creation of the biotechnology
industry. Additionally, another critical development occurred in the political- legal arena in 1980
(the passage of the Bayh-Dole Act) which allowed academic and government research
laboratories to patent discoveries and license them to commercial entities. Venture capitalists,
angel investors and large pharmaceutical companies eventually entered the picture and
underwrote the commercial development of these discoveries into products that eventually found
their way to the marketplace. What has stimulated personal and business devotion to “biotech”
EntreMed 3
over its 25 year history has been both the thrill involved in such worthwhile discovery and the
possible financial rewards.
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EntreMed 4
The word biotechnology was coined in the early twentieth century to describe the interaction of
biology with technology as a means of manipulating life forms to provide desirable products for
mankind's use. Biotechnological approaches have been used in a number of product markets:
Aspects of human health and healthcare (therapeutics), medical diagnostic tests,
genetically modified foods, agbio (agriculture, animal health, aquaculture), environmental
biotechnology (industrial biotechnology applications), and information technology
(bioinformatics). “Biologics,” which have relied on the use of cellular and molecular processes,
can be distinguished from chemically-based approaches to product creation traditionally used by
pharmaceutical companies.
Mr. David Entin, Director of Intellectual Property and Licensing at EntreMed, put the industry
into historical perspective. In 1980, Congress passed the Federal Technology Transfer Act – the
Bayh-Dole Act – which gave academic institutions ownership of its federally- funded discoveries
and accompanying intellectual property. This Act (and its subsequent amendments) paved the
way for the creation of the biotech industry because it allowed academic institutions to license
their institution-owned intellectual property (IP) to newly- formed and existing companies for
commercial development.
Key government agencies such as the National Institutes of Health (NIH), the Patent and
Trademark Office (PTO), and the Food and Drug Administration (FDA) have been inextricably
linked to the pipeline of cutting edge biotechnology products. And each, in its own way, has
shaped the nature and structure of competition in the biotechnology industry.
With respect to NIH, the majority of its budget is devoted to funding biomedical research at
academic institutions under the auspices of its extramural research program. Other federal
agencies such as NSF, DOD, DOE and USDA also have extramural research programs that
provide funding for biomedical research.
The Patent and Trademark Office, one of the oldest federal agencies in the country, establishes
intellectual property ownership by diligently researching an invention’s uniqueness and
authenticity and then publishes a written record of the invention. A patent, for example, gives its
owner a right for 20 years (under most circumstances) to exclude others from making or using
the discovery unless they obtain a license (grant of rights.) Thus, intellectual property protection
provides incentives for the creation of products that eventually make their way through the FDA
regulatory review process.
The third government agency that acts as a change driver is the Food and Drug Administration
(FDA). Exhibit 1 “Biotech Drug Discovery Process” shows the steps involved in the FDA
regulatory process that every medical device and drug (chemical and biological) has taken in
order to reach the U.S. market.
EntreMed 5
Exhibit 1
The cost of developing a typical product candidate during this 12-15 year regulatory path was
estimated at over $800 million (Tufts University Center for the Study of Drug Development,
2003). Business costs include not only the costs associated with the conduct of clinical trials,
but also scientific research and computational capability (bioinformatics). Exhibit 1 can be used
to illustrate not only the hurdles at each milestone (phase) but also how the value of a product
candidate increases as each regulatory phase is successfully completed.
ENTREMED’S SITUATION AND BUSINESS MODEL
EntreMed faced a number of opportunities and threats. Primarily, EntreMed continued to focus
on the development of life-changing drugs (oncology therapeutics) on which society placed a
high premium. This business objective was supported by well developed intellectual property
and patent systems which rewarded new product developers.
0 2 4 6 8 10 14 12 16
Discovery
(2-10 yrs)
Pre-clinical Testing
(Lab and Animal Testing)
Phase I
(to check for safety and dosage)
Phase II
(to check for efficacy and side effects)
Phase III
(monitor reactions to long term us age)
FDA Review and Approval
Post Launch
Figure 1 Biotech drug discovery and Regulatory Approval
Source: Ernst & Young LLP, Biotechnology Report: Convergence,
2000. Used by permission
EntreMed 6
Today, the industry remains highly regulated by the FDA. According to an FDA report (2004), a
drug now entering Phase I, after a decade of preclinical testing, has an 8% to 10% chance of
reaching market (and of course cost is also increased for meeting European and Japanese
standards and securing world-wide patents). In the global arena, many countries have poorly
enforced intellectual property rights that limit the financial rewards expected from such a high-
risk investment. It is not uncommon in this business to discover that a competitor may have
intellectual property rights that precede the “priority date” of your issued patent.. Constant (and
expensive) vigilance has been needed to protect against intellectual property infringement yet
firms must invest heavily to protect products because intellectual property often has been the
firm’s only asset. Investors must be patient and often have had to wait years to receive a return
on their investment.
EntreMed, along with many biotech firms in 2003, adopted a business strategy that would allow
it to survive financially. An unanticipated market recession in 2002 and accompanying tight
capital markets, forced many biotech companies in 2002 to rethink their plans. Many of the 320
US publicly traded biotech companies underwent some type of restructuring in 2002 and were
forced to cut programs and lay off employees. A poll of 200 senior executives at nearly 60
companies revealed that over 80% of the companies underwent major organizational transitions.
While over 60% of the surveyed companies claimed that the most significant change driver was
“management model inadequate to handle a new stage of growth” for over 50% of these
companies, the reason was a “cash crunch” (Aibel and Mardis, 2003).
At the close of 2002, EntreMed faced: cash on hand for about three weeks (with an
approximately 58-employee payroll); $11 million debt; a stock price of $.83 per share (down
from an all time high of $101.75 per share in 2000); and possible de-listing by NASDAQ.
Celgene had sued EntreMed over alleged patent infringement. EntreMed responded by filing a
counter-suit for alleged violations related to anti-trust and tortuous interference. Eventually, both
law suits were dismissed and Celgene paid EntreMed $27 million for stock, warrants and certain
product rights which enabled EntreMed to survive and continue operations into 2003 (EntreMed
press release, January 2, 2003.)
EntreMed understood that in order to succeed in 2003 it had to have access to at least five critical
elements: 1) seasoned, experienced management, 2) capital markets or other sources of
financing, 3) broad intellectual property coverage with strong patent claims, 4) state-of-the-art
cutting-edge technology and 5) access to technical personnel unique to this industry segment.
A strong management team is critical for the success of any biotechnology company. While
company scient ists discover and develop new product candidates, it largely has been
management’s responsibility to determine the “winners” and “losers.” Capable management has
been able to set strategic focus for both a company and its scientists. Indeed, the quality and
experience of management have been prime factors when venture capitalists and investment
bankers make decisions regarding financing. Thus, financing by venture capitalists and
investment bankers has played a critical role in the survival and success of most biotechnology
companies. Deep pockets have been needed to take a product candidate through the increasingly
costly regulatory phases. Obviously, companies would like to have more than one product
candidate, creating even greater opportunity for success.
EntreMed 7
A third aspect is Intellectual Property. Intellectual Property can refer to patents, trademarks, trade
secrets, and copyrights. Steven Caltrider, Assistant General Patent Counsel for Eli Lilly and
Company BioProducts division noted: “Intellectual Property has become a CEO-level issue as
generic drug manufacturers have become more aggressive over time.” (Krause, 12). Intellectual
property protection, therefore, is crucial to the creation of value in biotechnology companies and
is a key factor necessary for growth.
Access to state-of-the-art technology has been required in order to successfully compete in this
industry. Technology has enabled scientists to develop new product candidates quicker and
cheaper and allowed management to deliver products to the market sooner. Similarly, success
cannot occur without talented people to develop and manage new product candidates. Human
resources (HR), therefore, have been critical to the success of these companies. Companies are
continuously trying to hire the most talented individuals and offer competitive salaries and
benefit packages in order to reduce turnover. HR professionals are constantly recruiting
individuals with backgrounds in science, business, legal, regulatory expertise and managerial
skill.
Biotech business models have been driven largely by managements desire to secure adequate
financing despite changing market conditions. What has differentiated biotech from other
industries has been the overwhelming need for significant amounts of capital well in advance of
product sales. Burrill & Company has identified five distinct business models and changes that
have been occurring in those models (Burrill & Company, 2004B):
* Royalty intensive pharmaceutical companies (RIPCOs) have been morphing into Fully
Integrated Pharmaceutical Companies (FIPCOs). In this model, companies have traded possible
future income streams from products for royalty payments, usually from fully integrated
pharmaceutical companies (FIPCOs), such as Merck & Co. From its inception, EntreMed has
been in this category.
* Specialty pharmaceutical companies have relied heavily upon in- licensing late-stage product
candidates from “big pharma.” For example, Forest Labs Inc., the largest specialty
pharmaceutical company, has no internal research component.
* Technology platform companies have provided a technological foundation for all phases of the
drug discovery and development process. For example, Affymetrix products and processes have
been used by others to both accelerate discovery and reduce costs.
* Genomic-based and post- genomic companies have been transformed into companies focusing
on personalized diagnostics (personalized medicine). One of the first genomics companies,
Incyte Pharmaceuticals, focused on the sale of non-exclusive access to its genomic databases and
use of its genetic sequence information in conjunction with its bioinformatics software to analyze
new product opportunities. Revenues were from access fees and royalties which were negotiated
based upon drugs that were developed using its software. In 2000, Incyte’s stock hit $150 per
share; but by 2003 it had dropped to $3 per share. In 2003, it re-structured and re- focused.
* Fully integrated drug discovery and development companies. A direct result of the biotech
industry’s efforts to research and develop novel medicines has seen a maturing of companies into
full- fledged biopharmaceutical companies. Established names such as Amgen, Inc, Genentech,
Inc., Biogen-Idec, and Genzyme Corp. have developed and commercialized a number of major
drugs.
EntreMed 8
The founders of EntreMed, as is often the case with many biotechnology firms, were both
scientists and entrepreneurs. Given the difficult financial times experienced by many
biotechnology companies during 2002, the academically-oriented research culture often found in
many of these companies had to change to a more commercial focus. This shift in culture and
mindset affected virtually all company decisions. From inception through 2001, EntreMed’s
management focused the company’s efforts toward discovering major scientific breakthroughs.
During this period, over $177 million was spent on R&D and net losses amounted to $174
million (Table 1.) By the end of 2002, the accumulated deficit totaled about $213 million (see
Table 2.) Most of these expenditures were covered by paid- in capital, not revenues from
operations.
Unfortunately, EntreMed, like many biotechnology companies during this time, developed the
undesirable habit of living on investor funds. One of management’s objectives during 2003,
therefore, was to stabilize the company (i.e. reduce expenditures), raise additional capital and
move the company’s product candidates forward along the development path.
Historically, EntreMed viewed itself as “The Angiogenesis Company,” but its vision evolved
from developing therapeutic proteins to small molecules largely due to the recognition that the
Company’s financial resources were limited and the financial markets did not offer attractive
opportunities to raise additional capital. Exhibit 2 sets out statements from annual reports for the
six year period, 1998-2003.
Exhibit 2 Evolution of EntreMed Vision/ Mission and Strategy
Year Statement from Annual Report
1998 “…fundamental mission of expediting the preclinical and clinical
development of our promising antiangiogenic molecules: thalidomide,
Endostatin ™ protein, Angiostatin ™ protein, and 2- methoxyestradiol.”
1999 “In 1999, EntreMed matured into a clinical-stage biopharmaceutical
company. In just six months our three lead compounds, Endostatin,
Angiostatin and 2- methoxyestradiol entered Phase 1 clinical testing… In
1999, EntreMed developed manufacturing processes…, performed
technology transfers to contract manufacturers for the production of
kilogram quantities of clinical- grade products, demonstrated in animals a
lack of serious toxicity for each product candidate, filed Investigational
New Drug submissions (INDs) to allow the authorization of Phase I
studies by the FDA, obtained protocol approval from Institutional
Review Boards, and began to evaluate product safety in cancer patients
across the country….”
2000 “EntreMed has more antiangiogenic product candidates in human testing
oncology than any other company in the world… findings in preclinical
studies encouraged the FDA to authorize us to begin combination studies
with chemotherapy and radiation even before completion of Phase I
studies…. In addition to its anti-cancer effects, Panzem ™ has
demonstrated excellent potential in the treatment of osteoporosis and
hypercholesterolemia in preclinical studies…. Raised $46 million from
EntreMed 9
new stock.”
2001 “After recognizing the potential of Endostatin and Panzem ™ from our
clinical phase 1 studies, the U.S. Food and Drug Administration granted
orphan drug status for these molecules…. Cancer is---and will continue
to be--- our main focus… EntreMed’s portfolio is protected by over 300
US and foreign patents and patent applications giving us a strong
foundation for licensing and strategic alliances… Raised $75 million to
expand drug candidate production and clinical trials.”
2002 “Our primary challenge in 2002 was to provide financial stability through
an infusion of capital combined with meaningful and strategic cuts in
expenses. We made difficult decisions to direct our efforts to our most
economically feasible and versatile pipeline candidates: our small
molecules and peptides, led by Panzem ® . Other programs, including
our proteins, Endostatin and Angiostatin, were limited or ended….
MaxCyte, formerly a majority-owned subsidiary, was launched as a
separate independent company…Significant management transitions
occurred… co- founder John Holaday, Ph.D. retired from his positions as
chairman and chief scientific officer…Thalidomide analogs were
transferred to Celgene for $27 million.
2003 “EntreMed redirected its business and scientific development strategies
towards the commercialization of its best drug candidates. Oncology is
the company’s clinical and commercial focus. …In 2003, the company
completed over $40 million in equity transactions.”
Source: EntreMed Annual Reports 1998-2003; Executive Summary, August 2003
In late 2002 and early 2003, EntreMed experienced changes in some of the members of the
management staff (Exhibit 3) Management re- focused company efforts, re-examined core and
non-core assets, reviewed resource management and culture, and re-evaluated company size,
debt and operating expenses.
The new management team, led by Neil Campbell, formerly EntreMed’s SVP for Corporate
Development, was given the opportunity to redefine the mission of the company and turn it
around. Strategy change was involved. Company efforts were re-focused away from the
development of expensive, unpredictable “biologic” product candidates toward more
economically feasible chemical entities. Given the re- focusing, a decision had to be made about
core and non-core assets. Given the Company’s unsustainable spending in 2001 of almost $70
million, a decision had to be made about firm size and debt levels. If EntreMed could be
stabilized financially (e.g. significantly reduce annual expenditures) and achieve success in the
clinic with its lead product candidate, Panzem®, then perhaps new capital could be raised to
continue operations.
Exhibit 3 EntreMed Management Background --2003
Name Title Previous Company
Michael Tarnow, JD Chairman of the Merck, Merck Frost, Creative
EntreMed 10
Board BioMolecules, Inc.
Neil Campbell, MA, MBA President & COO Celera Genomics, Life
Technologies, IGEN, Abbott Labs
Dane Saglio,CPA CFO Sterling, Cominex, B&R
James Johnson, JD, PhD SVP, General
Counsel
CytRx, Kilpatrick Stockton
Udo Klein, PhD VP R&D Bayer, Cutter Labs
Carolyn Sidor, MD, MBA VP Clinical &
Regulatory
Cato, DuPont, TJ Univ.
Source: EntreMed, August 2003.
At first, Neil Campbell focused on changing the corporate culture and structure of EntreMed and
implemented the Company’s new strategy. EntreMed re-focused its business strategy on the
development of small molecules and was able to retain its NASDAQ listing. Its main criterion
became” economic feasibility.” This resulted in a new focus on “small molecule” drug
candidates --small molecules and peptides, led by Panzem
®
while other more costly protein-
based programs were curtailed. The intellectual property rights to historically important protein-
based product candidates such as Endostatin and Angiostatin were scheduled to be out- licensed
as part of a new effort to reduce costs. Thus, the company moved away from the development of
biologics and focused on the development of new chemical entities (NCEs). These small
molecules were considered to be more economical to develop and more predictable with regard
to manufacturing costs. In the process, the company moved from “scientific” to
“entrepreneurial” in spirit. By the end of 2003, EntreMed stock closed at $3.32 per share having
reached a one-time high during the year (in June) of $6.53 per share.
The shift in company focus created organizational challenges. The culture enunciated by
Campbell was based upon problem solving and a sense of urgency. EntreMed emerged with a
new commercially-oriented strategy and its scientists focused on more as opposed to less
economically feasible product candidates that had multiple mechanisms of action (MOA ); that
is, a molecule that employs multiple cellular pathways to achieve the desired clinical outcome.
Management also focused the company’s business strategy on exploring the possibility that its
product candidates could be developed for multiple indications in oncology as well as non-
oncology. Panzem® for example, EntreMed’s lead product candidate, had potential applications
in both oncology and opthamology. By this time, EntreMed had several new chemical entities
(NCEs) in its discovery pipeline and two in the preclinical phase.
Many biotech companies seek partnerships with large pharmaceutical companies, such as Merck,
Bayer, Bristol Myers Squibb, Glaxo SmithKline, Johnson & Johnson, Pfizer, Eli Lilly Corp,
Wyeth etc. to defray the significant costs associated with drug development. Since “big pharma”
generally has significant cash reserves at its disposal, it is constantly looking for new product
opportunities to in- license from biotechnology companies to fill its product pipeline. The
opportunity to partner with big pharma represented one of the many options EntreMed’s
management team considered as it developed its new business strategy in the coming year ahead.
EntreMed 11
Table 1 Income Statement
ENTREMED INC 2003 10-K 03/15/2004 (see: www.entremed.com )
YEAR ENDED DECEMBER 31,
2003 2002 2001
Revenues:
Collaborative research and development $ 667,796 $ 835,493 $
Licensing 310,496 115,496
Grants 508,243 131,681 358,427
Royalties 2,705 38,790 1,440,070
Other 86,306 55,030 63,444
1,575,546 1,176,490 1,861,941
Costs and expenses:
Research and development 14,252,196 31,308,427 54,201,179
General and administrative 7,022,986 13,932,133 14,473,012
21,275,182 45,240,560 68,674,191
Interest expense (390,941 ) (344,969
Investment income 205,580 317,910 1,437,966
Gain on sale of asset 2,940,184
Gain on discharge of liabilities 2,174,765
Gain on sale of royalty interest (see Note 22,410,182
4)
Net loss (19,494,056 ) (39,022,152 ) (43,309,071
Dividends on Series A convertible preferred (1,005,000 )
EntreMed 12
stock
Net loss attributable to common shareholders $ (20,499,056 ) $ (39,022,152 ) $ (43,309,071
Net loss per share (basic and diluted) $ (0.68 ) $ (1.78 ) $ (2.39
Weighted average number of shares outstanding 29,943,161 21,892,520 18,093,174
(basic and diluted)
__________Created by 10-K Wizard Tech. http://www.10kwizard.com/
Table 2 Balance Sheet
ENTREMED INC 2003 10-K 03/15/2004
DECEMBER 31,
2003 2002
ASSETS
Current assets:
Cash and cash equivalents $ 34,811,847 $ 24,067,045
Short-term investments 2,129,583
Accounts receivable 428,979 309,292
Interest receivable 262,192 95
Prepaid expenses and other 528,190 272,425
Total current assets 38,160,791 24,648,857
Furniture and equipment, net 1,991,516 3,152,072
Other assets 1,457 9,283
Total assets $ 40,153,764 $ 27,810,212
LIABILITIES AND STOCKHOLDERS EQUITY
EntreMed 13
Current liabilities:
Accounts payable $ 3,952,517 $ 10,065,163
Accrued liabilities 706,961 1,891,931
Current portion of deferred revenue 95,495 110,809
Current portion of notes payable 4,864,952
Total current liabilities 4,754,973 16,932,855
Deferred revenue, less current portion 192,993 286,488
Deferred rent 329,815
Other long term liabilities 80,000
Minority interest 17,100 17,223
Stockholders equity:
Convertible preferred stock, $1.00 par
and $1.50 liquidation value:
5,000,000 shares authorized and 3,350,000 3,350,000 3,350,000
shares issued and outstanding at December 31,
2003 and 2002
Common stock, $.01 par value:
90,000,000 shares authorized, 37,848,011 378,480 241,457
and 24,145,693 shares issued and outstanding
at December 31, 2003 and 2002, respectively
Additional paid-in capital 271,977,321 228,316,897
Treasury stock, at cost: 874,999 shares (8,034,244 ) (8,034,244 )
held at December 31, 2003 and 2002
Deferred stock compensation (61,846 )
Accumulated deficit (232,812,674 ) (213,318,618 )
EntreMed 14
Total stockholders equity 34,858,883 10,493,646
Total liabilities and stockholders equity $ 40,153,764 $ 27,810,212
____ Created by 10-K Wizard Tech. http://www.10kwizard.com/
Table 3 Cash Flows
ENTREMED INC 2003 10-K 03/15/2004
YEAR ENDED DECEMBER 31,
2003 2002 2001
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (19,494,056 ) $ (39,022,152 ) $ (43,309,071 )
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 930,772 1,508,559 1,376,187
Loss on equity investment 342,269
Loss on disposal of equipment 9,679 83,635
Gain on discharge of liabilities (2,174,766 )
Gain on sale of asset (2,940,184 )
Gain on sale of royalty interest (22,410,182 )
Recognition of non-cash stock compensation 175,000 94,874 218,396
Non-cash interest expenses 331,950 189,142
Common stock repurchase liability 1,995,007 1,367,914
Minority interest (124 ) (229 ) (104 )
Changes in operating assets and liabilities:
EntreMed 15
Accounts receivable (209,693 ) (132,134 ) 1,296,225
Interest receivable 56,943 (51,952 )
Prepaid expenses and other (247,939 ) 130,167 97,431
Accounts payable (4,530,366 ) (5,784,568 ) 7,746,567
Accrued liabilities (1,119,462 ) (158,891 ) 263,406
Contingent grant 80,000
Deferred rent 329,815
Deferred revenue (93,496 ) 397,297
Net cash used in operating activities (24,249,870 ) (45,534,492 ) (52,873,772 )
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of asset, net 2,940,184
Proceeds from sale of royalty interest, 22,410,182
net
Reduction in ownership of MaxCyte s cash (418,108 )
Purchases of short term investments (2,391,680 )
Purchases of furniture and equipment (32,715 ) (558,187 ) (985,783 )
Net cash provided by (used in) investing (2,842,503 ) 2,381,997 21,424,399
activities
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from sale of common stock 33,476,901 5,009,265 47,139,118
Net proceeds from sale of warrants 4,452,117 5,164,099
Net proceeds from sale of preferred stock 14,405,000
Proceeds from issuance of note payable 91,843
Payment of principle on note payable (91,843 ) (1,005,727 ) (997,097 )
Proceeds from issuance of long-term debt 2,168,760 2,189,766
EntreMed 16
Net cash provided by financing activities 37,837,175 25,833,240 48,331,787
Net increase (decrease) in cash and cash 10,744,802 (17,319,255 ) 16,882,414
equivalents
Cash and cash equivalents at beginning 24,067,045 41,386,300 24,503,886
of year
Cash and cash equivalents at end of year $ 34,811,847 $ 24,067,045 $ 41,386,300
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 2,451 $ 58,992 $ 155,827
______Created by 10-K Wizard Tech. http://www.10kwizard.com/
EntreMed 17
INSTRUCTOR'S MANUAL: TEACHING NOTE FOR ENTREMED
CASE SYNOPSIS
This case presents the situation facing EntreMed management at the beginning of 2003. During
2002, EntreMed’s stock price had declined to $.83 per share down from an all-time high of
$101.75 per share in 2000 and the company faced possible de- listing (NASDAQ: ENMD). The
Company began 2003 with insufficient capital to bring a drug candidate to market, several
million dollars of debt that had to be restructured, an unsustainable “burn” rate (annual
expenditures) and an uncertain future regarding the development path for its product candidates.
Furthermore, the Company recently had reciprocal lawsuits dismissed wherein Celgene sued
EntreMed for patent infringement and EntreMed counter sued for anti-trust and tortuous
interference. The suits were related to several product candidates that ultimately were licensed
to Celgene for $27 million.
The new management team, led by Neil Campbell, formerly EntreMed’s SVP for Corporate
Development, was given the opportunity to redefine the mission of the company and turn it
around. Strategy change was involved. Company efforts were re-focused away from the
development of expensive, unpredictable “biologic” product candidates toward more
economically feasible chemical entities. Given the re- focusing, a decision had to be made about
core and non-core assets. Given the Company’s unsustainable spending in 2001 of almost $70
million, a decision had to be made about firm size and debt levels. If EntreMed could be
stabilized financially (e.g. significantly reduce annual expenditures) and achieve success in the
clinic with its lead product candidate, Panzem®, then perhaps new capital could be raised to
continue operations.
In 2003, EntreMed’s management team weighed four primary capital-generating survival
options: raise more money in the capital markets; license the rights to EntreMed’s intellectual
property; partner its product candidates to a large pharmaceutical company under a co-
development or co-promotion agreement; or merge the company with another biotechnology
company of similar size and dimension that would have a synergistic effect on the outcome of
the newly formed entity. Invariably, a combination of all of these options would be considered
as the Company moved forward into the new year.
(NOTE: Epilogue)
CASE OBJECTIVES AND USE
EntreMed, Inc illustrates some major dilemmas facing many new businesses in many rapidly
changing industries and thus provides ample opportunity for students to:
• Understand analytical concepts and techniques of strategy;
• acquire skill in the analysis of business problems;
• review actions needed in turnaround situations; and
• aquire skill in the synthesis of action plans.
• It may also be used as an entry into the study of the biotechnology industry.
EntreMed 18
This case sits in a rapidly evolving sector of the US economy. No one can really afford to ignore
biotechnology. EntreMed in a real sense is a “classic” biotech company. It has undergone a
major shift from “research” to “commercial” orientation and management skill is paramount to
survival. Vitually all of the over 1300 biotech companies are either facing cash shortages or are
about to. The case presents the opportunity to look at an important new industry and assess the
hurdles that confront an emerging player.
The case sets out the “symbiotic” relationship between biotech companies and regulators.
Indeed, a decision focus in the EntreMed case is the dilemma faced at each FDA regulatory drug
approval level: Does a firm continue to incur development costs in hopes of obtaining FDA
approval which would translate into future sales, partner with a cash-rich firm, or license its
hoped- for product? At each stage then, the “what business are we in” question can be asked and
management responses have significant implications for present and future revenue streams as
well as in EntreMed’s case, its survival. What the case provides is a chance to show the
importance of intellectual property protection and practice in its valuation.
A note has been provided on Intellectual Property (IP) for the instructor who wishes to
emphasize its critical importance in the industry. Indeed, patented IP is often the major asset of a
discovery- focused biotech company.
INTENDED COURSES AND LEVELS
This case study is suitable for use in strategic management and small business/ entrepreneurship
courses. An early version has been used in an undergraduate business strategy course to illustrate
the tasks of strategic management, competitive analysis and the role of government regulatory
agencies in shaping biotechnology company strategy. In this instance, a senior executive from
EntreMed addressed the class on “the biotech industry” and later a student team made a
presentation. Students are likely to become engrossed in the story and come away with a clearer
view of the tasks and challenges of strategic management in a company in an emerging industry.
The positioning in the course depends upon the use to which the instructor wishes the case to
serve. The case provides an excellent opportunity for thoroughly exploring competitive analysis -
- Porter's "five forces" analysis, forces driving changes, key success factors, and turnaround
strategy -- so it can be positioned to coincide with your coverage of those concepts. It also
illustrates the close relationship between biotech companies and regulators. At each FDA drug
approval level, the instructor can lead the class to consider a basic question in strategic
management: What business are we in? And then tease out the implications for revenues. The
subject has been made accessible by minimizing the use of “terms of art” and technical
terminology.
NOTE: If possible, it is exceptionally useful for students to have an industry executive address
the class. This can be fairly easily accomplished as most states have industry associations that
also have a speaker’s bureau (for example, www.mdbio.org .)
Key Issues
Competing as biotechnology company in changing industry
EntreMed 19
Determining strategic direction and market segment focus
Deciding if and at what stage to license product candidates
Implementing organizational and corporate culture change
Meeting financial challenges
Turnaround strategy
Protecting and valuing intellectual property
Dealing with a federal regulatory regime
Uses of Case
Questions Issues
Discussion 1-8 Drill in the process of
strategic management.
All key issues above
Debate 7,8 Strategy identification,
evaluation. Decisions to be
made. Valuation concepts.
Exam 1-5 Aspects of competitive
analyses
Presentation This is an excellent case for
a team presentation
For the discussion questions, we like to move from industry to firm to intrafirm issues, then
move from concrete to abstract. With this framework, we offer the following suggestions. We
assume the class is senior undergraduate to MBA level. For executives we’d take a more
customized approach.
Questions:
Question 1 What grade would you give to top management for the job it has done?
Question 2 How would you assess the attractiveness of EntreMed’s industry using the five forces
model?
Question 3 Do a SWOT analysis. Assess the opportunities and threats for “biotech.” What
suggestions emerge for EntreMed strategy?
Question 4. What different types of “directional” strategy can be employed in biotech
companies?
Question 5 How has EntreMed strategy changed?
Question 6 Review the vision/ mission and strategy statements. How have financial conditions
affected “vision/ mission and strategies?” Does EntreMed have clear corporate strategy? Product
strategy? Financial Strategy? R&D strategy? Marketing strategy? (Explain)
Question 7 What recommendations do you have that would assist EntreMed in generating future
growth in sales and creating income opportunities?
Question 8 What major issues confront EntreMed in 2004? (explain “burn rate”)
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