Business

Scott Kirsner | Innovation Economy

Following IT startups, biotechs going ‘virtual’

Zafgen CEO Thomas Hughes at work in his office: “The only lab equipment we have here is the sink in the restroom,” he says.
Lane Turner/Globe Staff
Zafgen CEO Thomas Hughes at work in his office: “The only lab equipment we have here is the sink in the restroom,” he says.

A decade ago, if you toured a biotech company in Cambridge, you would don plastic safety glasses and be shown through a brand-spanking-new lab, full of white-coated scientists monitoring experiments. The chief executive would boast about the sophisticated equipment, like imaging systems that could see a tumor shrink inside a rat, and how it would help them bring a new drug to market more quickly. It often felt like a millionaire walking you through his garage, cooing over the $100,000 sports cars that hardly ever touched pavement.

Today, the typical biotech tour may not include a swing through the lab — because there isn’t one. Chief executives brag now about the cost savings and flexibility of outsourcing everything from the design of a new drug to supervision of clinical trials to eventual manufacturing.

“The only lab equipment we have here is the sink in the restroom,” says Tom Hughes, chief executive of Zafgen, a biotech company located a block from the TD Garden.

Advertisement

Companies like Zafgen and Needham-based Verastem are emblematic of the tilt towards young biotech firms staying as “virtual” as possible by relying on consultants and outside service providers. In an industry where hundreds of millions of dollars get spent only to find that a promising drug doesn’t work, it’s a way to limit the cost of failure. The flip side is it means companies keep a tight lid on hiring.

Get Talking Points in your inbox:
An afternoon recap of the day’s most important business news, delivered weekdays.
Thank you for signing up! Sign up for more newsletters here

It’s part of the reason biotechnology and related companies, for all the attention and hype they receive, still employ only about 60,000 people here, according to the Massachusetts Biotechnology Council — just one-fourth of the nearly 250,000 who work in the state’s manufacturing sector.

Before joining Zafgen as head of discovery and development, James Vath worked for another fledgling biotech called Phylogix. Phylogix spent about seven years trying to develop a product to protect a patient’s bone marrow and digestive system from the damaging side effects of chemotherapy. The company raised more than $15 million, built a lab, and hired scientists and technicians. But Phylogix shut down in 2005. “It was a really exciting technology that didn’t work out,” Vath says.

Zafgen was founded the same year Phylogix faded away. Vath came aboard in 2006. The company sought to develop drugs based on research at Boston Children’s Hospital, where scientists found that the same drugs that stop tumors from growing by cutting off their blood supply also seemed to prevent fat tissue from growing. The hope was, and still is, that research would lead to a drug that would treat severe obesity — an alternative to gastric bypass surgery.

Hughes, Zafgen’s chief executive, joined the startup in 2008 from Novartis AG, the Swiss biopharma giant. Unlike Novartis, which had $58 billion in sales last year, Zafgen had a limited amount of venture capital in the bank. “It really focused your thinking,” Hughes says. “You need to get to next milestone and spend the least amount possible.”

Advertisement

His small team designed experiments they wanted to conduct, but almost all of the lab and clinical work was farmed out to consultants, contractors, and so-called CROs, or clinical research organizations. Hughes says the company began to prove its drug had value in 2010, when results came back from a test with 31 obese women.

“We were getting minimal adverse event reports, clean labs, and the weights were dropping really nicely,” says Hughes, a soft-spoken native of Pennsylvania.

With its drug showing promise, Zafgen went public in June on the Nasdaq exchange. Total employment at the time? Eight. Today, the company has 27 employees, including some who used to consult for it. The ratio of hired guns to full-timers is about 3:1, Hughes estimates. The company has contractors in nearly 50 cities around the world, including South Korea, India, and Australia.

Some biotechs describe themselves as “semi-virtual”; in Needham, Verastem chief executive Robert Forrester says almost every task that biotechs perform could be outsourced. “But you don’t want to do that,” he says. “In order for a little company to become a credible bigger company, you have to be good at something.”

His company, developing drugs that target stem cells that cause tumors to recur and metastasize, has 45 employees and even a small in-house lab.

Advertisement

But to help Verastem conduct a global clinical trial with mesothelioma patients, Forrester says, the company hired a contractor in the United Kingdom, which dedicated about 50 people to running it. If that trial fails, Verastem can simply turn off the tap and fire that firm — without having to lay off its own employees.

So is all this outsourcing leading to job losses among those well-educated workers who once toiled in the labs of young biotechs? Possibly. But Chris Palatucci of Coulter Partners, a head-hunter in Cambridge, says the virtual trend “may change the places where those people work, but there’s plenty of work to do in town, and not enough people to do it.”

The virtual trend is leading companies that provide services to biotechnology firms to set up shop or expand here, meaning researchers and others are finding jobs elsewhere in the industry.

In February, Shanghai-based WuXi AppTec, which offers research and clinical trial services, opened an office in Cambridge. Parexel, a Waltham company that helps biotechs run clinical trials, earned record revenues in 2014, almost $2 billion. Revenues at Wilmington-based Charles River Labs grew 11 percent last year to $1.17 billion.

Charles River chief executive James Foster says demand is growing for tasks like designing chemical molecules, and studying how they are absorbed in mice. Foster says Charles River is hiring and may soon reopen a 500,000-square-foot facility in Shrewsbury to keep up with the business from Boston and Cambridge biotechs.

The shift in biotech mirrors one that happened with young tech companies. Companies building websites or mobile apps today routinely hire programmers in Russia, and rely on pay-by-the-month services from “cloud” providers like Amazon to run their servers. Venture capitalist Amir Nashat says “just like the cloud had a huge impact on technology investing and the speed at which you can build companies, it is quite possible that in [the biotech] industry we’re going to see the same thing.”

Nashat, partner at the Boston venture capital firm Polaris Partners, said outsourcing will lower spending for young companies while adding flexibility to try different approaches. Zafgen’s Hughes puts it more simply: “Pretty much everyone would say that more efficiency and less capital is a good thing.”

Scott Kirsner can be reached at kirsner@pobox.com. Follow him on Twitter @ScottKirsner and on betaboston.com.