Postmortem: 5 Lessons Learned from a Public Benefit Rare Disease Startup

Ethan Perlstein

On February 26, 2014 the first biotech public benefit corporation was born: Perlstein Lab PBC, which would eventually be renamed Perlara PBC. Almost exactly five years later, this bold and necessary — and some might say overly ambitious — experiment in rare disease drug discovery has ended.

For now.

Perlara, a company I founded that went on to raise $9.7 million and employ 20 people on 12 discovery projects at its peak, has now shriveled down to a single employee (me). I’m trying to find other homes for some of our assets, so they might still have a chance to thrive.

Anyone who has followed the South San Francisco-based company’s journey knows that we were devoted to conducting business and research in the open. That commitment to openness persists even while Perlara is winding down operations and transitioning to a virtual company. I want to see our most advanced discoveries advance to the clinic, even if it happens in someone else’s hands.

I’d like to share the top five lessons I learned as a first-time founder and scientist CEO so that the next time an experiment like this is attempted, it will succeed. Consider these the essential biotech startup commandments, in order of importance.

(1) Don’t overdrive your headlights

Imagine yourself behind the wheel of a high-performance vehicle careening down a two-lane country backroad on a moonless night. What happens if a deer suddenly appears in front of you? Do you have adequate reaction time and stopping distance to avoid what will likely be a fatal head-on collision? Prudence and caution dictate that driving more slowly will almost always ensure the car safely reaches its destination even if it will take much longer.

Managing cash burn and team bandwidth are the hardest jobs a CEO has. When I started the company, the “lean startup” philosophy was all the rage in tech circles and the “virtual biotech” thesis was earning plaudits from life science investors. I took all of those teachings very much to heart in 2013, when I was laying the groundwork for the company’s launch. That’s why I rented lab and office space in what was then the brand new QB3@953 biotech incubator (now called MBC Biolabs), starting with just one bench/knee well and one desk in January 2014. We were then bursting at the seams in this space with nine benches/knee wells and two small offices three years later.

This is when I made the first mistake of stepping on the gas when I should have taken my foot off the accelerator. We moved out of the incubator (in fairness we were like the millennial overstaying her welcome in her parents’ basement) and into our own space. All of my peer companies that launched around the same time were also searching for their own (larger) spaces. At the time it was all we as CEOs talked about. But the only way to finance the move was to bring a subtenant in tow. The math actually looked good, or that’s what I convinced myself: we were paying 2.5X more in rent per month but we got 8X more space. No matter how you slice it, that meant our fixed costs went up and our runway shortened.

I made the mistake of stepping on the gas pedal a second time when I should have pumped the brakes.

We kept launching new PerlQuests, our term for collaborations with rare disease patient advocates to advance our discoveries into clinical development. It made sense at the time, based on the productivity of our discovery platform. So we doubled the number of PerlQuests from three in 2017 to six by mid-2018. I told myself it was okay because we had not only achieved product/market fit (patient advocates were lining up support for trials, providing needed cash and eager research subjects in some cases) but also because we were growing organically.

In retrospect, the demand for PerlQuests outstripped our supply of resources. It’s not like we were a charity taking on commitments for free. As the only PBC in this space how could we turn away any family or foundation that was willing to work with us? We almost 10X’ed PerlQuest revenue year over year, launched a dozen PerlQuests in total, and in fact we were cashflow positive for few months at the end of 2018. But P&L statements don’t lie. Like a law of nature that cannot be defied, more money was flowing out of our bank account than flowing in, and that can only end one way.

(2) Choose one variable, hold the rest constant

There are three principal axes of any biotech company: the science, the business, and the brand. I think it’s fair to say that the vast majority of biotech companies create edge with their science, whether it’s an asset-centric or platform play. At the same time, they keep the business model constant, whether than means exit by acquisition or IPO. And they basically ignore brand altogether or go with formulaic and focus-group-tested websites featuring stock photos of happy patients and slogans about patient centricity. The astute reader is vigorously nodding in agreement because there’s a reason why biotechs vary the science while holding the other two variables constant. The science is failure-prone enough!

I purposefully made the decision from the outset to tweak all three variables at the same time, continuously. The model organism science at the heart of Perlara’s discovery engine was certainly heavy lifting on its own. Indeed, just being a platform company put us a relative disadvantage because of the higher technical hurdles and longer timelines for success compared with a single-asset company.

From meetings with investors, I learned we were regularly being compared to the first model-organism-centric platform company Exelixis. That wasn’t a helpful comparison, as that South San Francisco company burned a lot of cash and dragged down a lot of investor portfolios before finally turning things around in recent years with a single asset. My standard answer to the Exelixis comparison was that it was simply ahead of its time in the 1990s and early 2000s before the advent of diagnostic whole-exome sequencing, CRISPR and social-media-enabled patient advocacy groups.

For many investors, our scientific approach was a non-starter. Too risky, too expensive, many thought. In the end, it turned out that our science was robust, and not as risky as some imagined. Two of our PerlQuests identified repurposable clinically actionable drugs that already had significant safety databases to their credit. That, includes the NGLY1 Deficiency data package I set free into the public domain as one of Perlara’s dying acts.

No, the science wasn’t the bugaboo. It was the business model that was fragile.

For starters, as a Public Benefit Company, we had an unusual corporate structure that investors needed to spend some time and energy getting their heads around. Yes, you could still make a profit, as long as your work was aligned toward a Public Benefit. Yes, one could imagine Perlara getting acquired some day and generating liquid returns to investors. That took some explaining.

Then came our PerlQuests. What we eventually called the PerlQuest started out as a sponsored research agreement modeled after Stanford University’s template. Highly motivated rare disease families, organizations and impact investors not personally affected by a rare disease, paid Perlara to create patient avatars and deploy these personalized models first in drug repurposing screens and then in drug discovery screens.

The unflattering view of the PerlQuest model was that it was just contract research, which is a brutal business: cost overruns, low or no margins, and the unpredictable twists and turns of any research plan. Although we experienced all of those challenges, we viewed things differently (and perhaps through rose-colored glasses). The PerlQuest model was a way to bootstrap a diversified pipeline of rare disease programs staggered across discovery, preclinical and clinical stages while working with patient partners who were all in.

Why did patient advocacy groups trust us in the first place? I believe it was because of our meticulous attention to brand, which was in the service of patient engagement. As the first biotech public benefit company, we hard-coded patient centricity in our Articles of Incorporation and in our PerlQuest contracts. We tweeted and blogged research updates in as close to real-time as cutting-edge science allowed. If we hadn’t invested in building a brand and patient engagement that capital would have been spent on research. I don’t regret the decision but it’s hard to know if that would have made a difference in the end. When there is little margin for error, every little bit counts. Every CEO has a fixed mental bandwidth. I wore three hats: chief fundraiser, chief scientist and chief marketer. It had spread myself too thin.

(3) Pick your partners wisely

The conventional wisdom about platform companies is that they must partner out their lead program preclinically in order to prove the value of the underlying discovery engine. I made the calculation early on that we needed a marquee Pharma collaboration to establish street cred with patient advocacy groups. I was also hoping that a Pharma deal would also include an investment, which would establish street cred with professional biotech investors. As soon as we had completed our first high-throughput screening campaign for our lead program in Niemann-Pick Type C/NPC in the summer of 2015, the preclinical partnership roadshow commenced. I must have presented to a dozen companies. Invariably the response was the same: great progress, but you’re too early for us to start working together.

In the Fall of 2015, I had my first meeting with Novartis. I’d initially assumed that we’d partner with a rare disease company like BioMarin, which already had programs in lysosomal diseases like NPC. However, after the first conversation between us and the folks at Novartis on the science side who became our biggest internal champions, it became clear that there was a fit on multiple levels. It took an entire year for the deal to coalesce, which is typical of small biotech, big pharma deal cycles. You have to have the capital to survive the negotiation, which is why any small discovery shop must identify and stick to a short list of ideal partners and be disciplined about taking extraneous meetings with unlikely partners to be. Our two-year discovery collaboration focused on target identification for a novel chemical entity for NPC, which we called PERL101. Although we came close the underlying biology proved to be too complex to unravel in the time allotted. While we are still in the process of writing up all of the discoveries we made, the collaboration itself ended amicably last Fall without a commercial path forward.

Partnering with rare diseases families is exhilarating but fraught in its own ways. Not all families are equal. Some come to the table with wealth, connections and other resources. Not all families are able to balance caretaking with foundation building and all that entails: organizing, fundraising, advocacy, assembling a Scientific Advisory Board, and ultimately NewCo creation. And then there’s the unfortunate dirty little secret about rare disease communities, even tiny so-called ultra-orphan communities: fragmentation of families and researchers.

Alas, I’ve seen it happen over and over again. Families affected by the same rare disease don’t always cooperate with each other. In fact, there are rifts and feuds which make no sense to the outside observer. Then again when your world comes crashing down in an instant after a fateful diagnosis leaves the doctor’s lips, nothing makes sense anymore. It’s not just the families who fracture. Researchers are guilty of it too. All it takes is one or two researchers to win the favor of families and effectively usurp the purse strings and research agenda, deciding which projects get funded and which don’t. In the worst cases groupthink prevails and contrarian ideas – and the researchers who propose them – are exiled.

(4) Make a beeline for the clinic

This may strike some as controversial but everything a platform company does is noise except clinical proof-of-concept, even an n-of-1 study in a single patient. There are no other key performance indicators even close to a positive signal of efficacy in a human being. When 90% of drug candidates entering the clinic fail no matter how they were discovered, nothing else matters except human data. Unless you’re Moderna or the like, no platform receives the benefit of the doubt, at least not from investors. When I tried to raise our last round of funding — at a time when we were 12 months away from realistically entering the clinic — this response from a leading VC captured that sentiment:

“We reviewed with our broader team and are not in a position to move forward at this time. We continue to struggle with novel phenotypic screening models as we see other teams behind initially productive appearing platforms struggle with the challenges of preparing for the clinic. Given what we’ve been seeing in the market, we’re not ready to make a bet yet. Thanks for thinking of us. We often get these early calls wrong, but since we are stage-agnostic we are happy to pay up in future rounds when the company becomes a better fit for us.”

On the one hand, it’s a seemingly impossible feat to capitalize a discovery engine to generate a portfolio of clinical bets and at the same time have sufficient capital left over to advance a lead program to clinical proof of concept. On the other hand, they’re issuing a formidable challenge to all platform companies that they have to figure out a way to reach the clinic in the most capital efficient manner possible. The winners of this challenge will be handsomely reward with growth capital.

(5) Make something patients want

Every lesson above is a cautionary tale of what not to do and when and where to tread carefully. This final commandment – modeled after the Y Combinator motto “Make something people want” – is an example of what we did at Perlara that should be emulated, in my opinion. Engage with patients on their level and empower them with open science. When you actually stop and listen to patients and patient advocates, they have so much to offer. The best compliments I ever received from rare disease families were to the effect of, “You think like a parent; you think like us.” That’s how I know Perlara was truly disruptive. As I consider my next move professionally, the families that inspired me over the last five years will remain my compass, my true north. Onward and upward!