By: Ann Meyer

July 5, 2004, Chicago Tribune

As a co-founder of Neuronautics Inc. in Evanston, biotech entrepreneur Sam Khatami is bullish about the company's prospects for improving the lives of Alzheimer's patients--and making millions in the process.

Still, he said, he's not the greedy type. The company will be more likely to succeed if it teams up with an established player, even if that means giving up a piece of the action, he said. So Khatami is looking for a business alliance to carry him forward. One of the hottest contenders is a Japanese pharmaceutical company with local ties.

Fujisawa Pharmaceutical Co. of Osaka, Japan, already has provided Neuronautics with $500,000 in seed funding through its Evanston-based Fujisawa Investments for Entrepreneurship fund, which it established in 1999 to promote biotech research and the discovery of new drugs.

Many Japanese pharmaceutical companies are keen on establishing relationships with U.S. biotech firms because they see collaboration as a ticket to mutual success, said Tomoharu Washio, chief executive director of the Chicago office of the Japan External Trade Organization. The Japanese government-supported organization promotes international trade and economic opportunities.

While biotech firms on the East and West Coasts have been more active in pursuing Japanese alliances, "the Midwest has just begun collaborating," Washio said. "They don't have enough opportunities to meet with each other."

For example, last October, Washio's organization invited about 80 Midwesterners, including representatives from about 20 biotech companies, to Osaka. In September, it plans to host a similar mission to Tokyo for the Japanese biotech olympics.

But it's not just Japan that's interested in teaming up with entrepreneurial firms. Strategic business alliances in general are on the rise, said Ed Zajac, director of the Center for Research on Strategic Alliances at Northwestern University's Kellogg School of Management.

Exponential growth during the last 15 to 20 years has been driven by "increased attention to capital conservation," said Zajac, who also is a Kellogg professor. For small companies in particular, "It's a way to bootstrap, to leverage limited resources."

But small firm-large firm alliances often are mutually beneficial. A smaller firm may have cutting-edge technology and can respond more quickly to shifts in the market, while larger companies generally have resources and experience that can help the entrepreneurial firm, Zajac said.

Neuronautics, which operated for six years on $2 million in funding, knows the benefits of teaming up with an established enterprise, Khatami said. Besides help from Fujisawa, the company has an alliance with Northwestern, where company co-founder Lester Binder is a professor of cell and molecular biology. The company can use Northwestern's laboratories and equipment on a fee-for-service schedule, Khatami said.

During the past six years, Neuronautics has been working to develop a drug that may halt Alzheimer's disease by arresting or reversing cell death in patients, Khatami said. It also is developing a diagnostic tool aimed at more precise detection of the disease.

What's more, Neuronautics hasn't given up control of its technology to investors, which besides Fujisawa include angels; the Illinois Coalition, a non-profit promoting technology growth in the state; and the National Institutes of Health.

Unlike venture capitalists who look closely at an enterprise's financial potential, the Fujisawa fund is more interested in the research and development involved.

Quick returns not expected

"We don't place a high value on capital gain," said Masakazu Kobayashi, general partner of the fund. "As such, we invest in a biotech company regardless of its risk. We do not expect a quick return for our investment." And neither does it request the rights to a start-up's technology.

Through the fund, Fujisawa can get an early look at developing technology and assess its potential as a candidate for "in-licensing," Kobayashi said. Through in-licensing, a company such as Fujisawa acquires the rights to further develop and commercialize a new pharmaceutical product or device.

As Khatami looks to his company's goal of bringing its Alzheimer's drug to market, he knows the company can't do it alone. "It requires lots of capital and lots of expertise of FDA regulations," he said. And its success in getting the drug approved would mean a new challenge in marketing it to the millions of people it could help.

"Our strategy has been to move development far enough to pursue a partnership," Khatami said. In fact, Fujisawa has approached Neuronautics about a more extensive alliance, Khatami said.

Alliances have paid off

At Fujisawa's U.S. subsidiary, Fujisawa Healthcare Inc. in Deerfield, William Fitzsimmons is responsible for establishing partnerships with small biotech firms. And many of the alliances have paid off.

"About 40 percent of our sales in the U.S. come from products we have in-licensed from other companies," said Fitzsimmons, senior vice president of business development.

Fujisawa may invest "tens of millions of dollars" in a small firm's innovation, Fitzsimmons said. In return, the entrepreneurs often give up the commercialization rights to their drug. Then Fujisawa pays them back a royalty.

When negotiating an alliance with a larger company, it's important for the small business to be prepared, Zajac said. Cultural clashes aren't unusual between large and small firms.

"The smaller company is often hungrier, while the large company has a walk-away position that gives them leverage in the negotiation," he said. It's easier for the large corporation to say, "Take it or leave it."

But the small business can bolster its position by taking time to examine how it can benefit the larger corporation's strategy. In addition, "the small firm can subtly let the larger organization know they, too, have alternatives," Zajac said.

As awareness of Alzheimer's disease grows, interest in Neuronautics is heating up as well, Khatami said. But Khatami favors an alliance with Fujisawa over another company.

"Because of their extreme help, I'd rather give them a shot," he said.