FROM SCIENTIFIC FOUNDERS

04 STORY UTEC Hiroaki
Suga

Developing invention into innovation: The pursuit of an ideal relationship between research and entrepreneurship

UTEC Partner Department of Chemistry,
Graduate School of Science,
The University of Tokyo. Professor

PROLOGUE

PeptiDream was listed on the Tokyo Stock Exchange Mothers in June 2013 and then moved to the First Section of the Tokyo Stock Exchange in December 2015. The company is no longer a venture company. In the fiscal year ended June 2017, net sales, operating income, and operating income margin reached 4,895 million yen, 2,490 million yen, and 50.9% respectively. The driving force behind high profits is the company's unique drug discovery platform "PDPS (Peptide Delivery Platform System)", which was developed by Hiroaki Suga of the Graduate School of Science, the University of Tokyo. Professor Suga first developed a flexizyme technology for synthesizing special peptides, then the "FIT system", a technology for producing 1 trillion types of peptides in a single test tube, and then a high-speed production system called “RAPID displays” which produces hundreds of billions to trillions of special peptides. The source of high profits comes from the joint research partnerships that utilize PDPS and the income from the technology license of lending out the PDPS technology to contractors. Last time, we interviewed Mr. Kiichi Kubota, the founder and current chairman of the board. This time, Professor Hiroaki Suga, co-founder and external director of the company, and UTEC partner Maiko Katadae, who was the early believer in the excellence of the research, will talk about the ideal form of research and entrepreneurship in a science venture.

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SECTION01 : A researcher founds a company.
What are the ideal conditions to drive a researcher to start a venture

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SECTION01

A researcher founds a company.
What are the ideal conditions to drive a researcher to start a venture

“I want to change the genetic code at will”. Having incubated tremendous ideas since graduate school, Mr. Suga moved to the United States after completing his master's course. He then went on to work on basic research on ribozymes (RNA catalysts) as a postdoctoral researcher at Harvard University. Eventually he was appointed as an assistant professor at the Department of Chemistry, University at Buffalo, New York, USA, and it was then that he had succeeded in developing a prototype of Flexizyme. In 2003, he was invited to the Research Center for Advanced Science and Technology at the University of Tokyo as an associate professor and returned to Japan. After a year, he became a professor. In 2005, he applied for a patent on the Flexizyme, and in 2006, a paper he published on the Flexizyme was published in "Nature Methods" and became a hot topic. It was during this time that UTEC and the Tokyo TLO connected with Mr. Suga and recommended him to start a company.

Suga:
From the time I started researching flexizyme, I had envisioned the application of this technology in drug discovery and development. Initially, the products the technology produced were was negatively referred to as unnatural amino acids or unnatural peptides, but we changed the naming to special amino acids or special peptides to envision their potential to be registered as a drug. I always wanted to contribute to society through my research results.
I knew that in order to commercialize a drug discovery technology, one must create a company. At the same time however, I knew that I did not want to be president. So I asked the University of Tokyo TLO and UTEC to find a professional who could be entrusted with the management of the company to be created. This was in the fall of 2005.
Katadae:
When I first heard about Flexizyme, I felt its great potential in the outstanding research results that it had obtained. At that time, of course, there was no record of making drugs with this technology. But when I heard that the Flexizyme could freely rearrange the codon table that shows the correspondence between the genetic code and amino acids; I was very impressed. I still remember it vividly today. We really wanted Professor Suga to start a business, so we introduced four presidential candidates one after another.
Suga:
One of them was Mr. Kiichi Kubota, who left a strong impression as he was quick to understand the technology and his responses were very sharp. I also felt that he had the characteristics of a businessman and a personality that was very likeable. That's why I told Ms. Katadae, "If Mr. Kubota will be the president, I will create a company. If he does not become the president, I will not create a company.". However, it still took about half a year for Mr. Kubota to accept the position of become president.
Katadae:
Actually, Mr. Kubota was also enthusiastic from the beginning. He said that Mr. Suga's presentation had a strong impact. He was also impressed by your appearance, which is not that of a typical professor (laughs). I could tell there was a cooperative atmosphere when you two talked. However, I think it took time for Mr. Kubota to make up his mind up to prepare to take on responsibility for management and get involved.

In a university spin-off venture, there are cases where the researcher himself becomes the executive manager. However, when starting PeptiDream, Professor Suga was particular about recruiting a management professional from the outside. The reason was that Mr. Suga wanted to draw a clear line between research and management. As Mr. Kubota and Mr. Suga were going to found the company together, it was an absolute requirement that they be respectful of one another. Mr. Suga had thought that if the CEO felt that he was hired by a researcher, the business would not be successful.

Katadae:
At that time, I was still in my twenties, but I knew how impressive a team of Mr. Suga and Mr. Kubota would be. I strongly felt that them two together would create a great company. I was convinced, but Mr. Suga still wanted one more professional to join.

PROBLEM
Despite having both a scientific founder and a CEO, Mr. Suga had thought that another piece was needed for the management suite to be complete. Professor Suga thought that the missing piece was that of a science director. Normally, one would think that the CSO/researcher should take on the science director role himself, but Professor Suga was particular about appointing someone else. He thought that if he himself directs the science department of a company, there is a risk that the company will unknowingly shift into doing into basic research. Many ventures that are supposed to be a business entity but act like an extension of a laboratory, fail. Professor Suga wanted to avoid this and he felt that having a science director would allow Mr. Suga to focus on his research and the company to pursue the business with a direction. Therefore Professor Suga decided to invite a CSO (Chief Science Officer) to join the company.

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SECTION02

Establishing a superior strategy through the building of an organization

Suga:
I selected Mr. Patrick Reed as the person responsible for the direction of the science. I could have appointed someone in my lab as the CSO, but I knew that this would not serve the true purpose. People in the laboratory tend to look at the complexion of the professor who is practically their boss, and the professor unknowingly tries to move his disciples at will. So I decided to entrust all the science direction of the company to someone outside my sphere of influence. If the CSO increasingly does not listen to me as the business grew, I thought of this as the proof that the business was doing well. This was what I wanted.
Katadae:
The appointment of an American as the CSO has helped drive the business significantly. For overseas megapharma, understanding science and drug discovery is a major premise, but it seemed that negotiations were sped up due to there being no hurdles for communication if the correspondent was American rather than Japanese. Mr. Reed brought a real momentum to the PeptiDream business.

For some time after its founding in 2006, PeptiDream will strived to absorb the technology of the Suga Lab and concentrate on solidifying its scientific and technological foundation. After solidifying the scientific foundation, PeptiDream embarked on a deal with an overseas corporation, and the first project was completed in 2008. The funding during this period was solely done through investment by the three founders, and their close ones such as their relatives and friends.

Katadae:
As for UTEC we were waiting for the time to ripen. During that time, I personally was eager to help with everything I could (laughs).
Suga:
I understand that the investment risk will be lower if the corporate framework is firmly established. In fact, Japanese pharmaceutical companies didn't even look at special peptides at the time. They had failed with their past peptide projects and hence they probably did not understand how innovative our technology was. As a result, the first contract partner was an overseas pharmaceutical company.
Katadae:
It was in the contracting with this pharma company that my belief in Mr. Kubota and Mr. Reed's business capability really grew. Many bio-ventures tend to be over excited at the sight of a global mega pharmaceutical company and tend to contract with them on unfavorable terms without fully considering the impact on the future business. However, Mr. Kubota and Mr. Reed had built a business which, from the first contract, ensured meticulously ensured that the value of the product was fairly and accurately covered by a financial return.
Suga:
I would give lectures overseas to publicize for flexizyme technology. Then I would connect the people who became interested to PeptiDream. We were able to divide our roles well and were also blessed with timing. If this was another year or two earlier, there was a possibility that no one saw the opportunity for the technology. On the other hand, if we were one or two years late, we probably would have not been able to secure our current exclusive position. One of the success factors was that we were able to expand our business at once when the superiority of our technology became apparent to everyone.

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FINAL SECTION

FINAL SECTION

A management that overcomes the “valley of death” of a bio venture

There are two sources to the income of PeptiDream. One is a fee obtained from joint research on drug discovery candidate substances using PDPS, and the other is a technology license fee for lending out the PDPS technology. In joint research, a lump-sum payment will be made when the alliance is made, a milestone income will be paid when the target is achieved, and a royalty income will be paid after the successful drug discovery is launched. This avoids the "valley of death" that drug discovery ventures tend to fall into. Currently, PeptiDream has signed contracts with 17 global partners and 5 technology transfer companies in Japan and overseas. Now that the company has secured financial margins, its next goal is to develop its original drug discovery tool and to enter the expansion stage.

Suga:
At the beginning of Peptidream, I had no intention of doing an IPO. The business was so successful that it didn't require large-scale funding from the public market. Rather, I was thinking about the possibility of being acquired by some of our partners in the future.
Katadae:
At UTEC, we realized that PeptiDream was getting a lot of traction, and of course we expected the possibility of an acquisition. However, with the steadily increasing number of partner companies, it was no longer the best idea to have this technology exist in only one pharmaceutical company.
Suga:
Some companies had asked for our technology to be transferred to them if they could not acquire us. As since I was very confident in the technology, I managed to land partnership with five companies after the IPO, even though I had set conditions that would normally be unthinkable.
Katadae:
In retrospect, when we decided to invest in 2008, PeptiDream were not at a stage where the cashflow could be read. Instead, we evaluated the possibilities of the science and technology behind such as flexizyme, whether it can solve the problems of pharmaceuticals in the world and humankind, and what the addressable global market potential was. Through this due diligence, we at UTEC came to believe that the company's excellent technology will surely lead to breakthrough drugs in the future. That's why UTEC decided to invest in Peptidream, rather enthusiastically.
Suga:
Ms. Katadae, as a scientist herself, believed in the future of our technology and the social impact that out technology would have. UTEC is the only VC we have received funding from. It's because UTEC had always recognized the potential of our science and the impact that it would have.

When partnering with foreign pharmaceutical companies, our financial position becomes subject to their due diligence. In that sense, receiving a 100-million-yen investment from UTEC was effective in making foreign pharmaceutical companies comfortable in partnering with us.

Since the founding of PeptiDream, the stance of Professor Suga's stance, who respects the distinction from the management of the company, has not changed. The success story of PeptiDream, brought about by the ideal fusion of research and management, has attracted the attention of researchers interested in starting their own startups based on their research. PeptiDream's methodology and trajectory has become one of the ideal models of science/technology venture success.

Katadae:
We receive increasingly more requests to discuss starting up or commercializing technology/science from researchers these days.
Suga:
Having venture capital such as UTEC that specializes in the support of commercialization from science is a great advantage for researchers who want to start a business. PeptiDream wouldn't have been born without UTEC introducing President Kubota, who co-founded PeptiDream with me. If you are a researcher and are thinking of starting a business, you should first come consult me or UTEC. The timing of consultation is too late after the company is established. Please consult us before you incorporate it. There are many ways to successfully overcome the valley of death peculiar to bio-ventures and cross the Darwin Sea (expansion stage). In modern times, researchers are also increasingly required to contribute to society. I think that developing inventions that have the potential for commercialization into innovation is a goal that researchers should always keep in mind.
Katadae:
From the successful example PeptiDream, I have had the privilege to learn in detail the methodology for researchers and managers to divide their roles and develop a successful business together. I believe our mission is to apply this knowhow to our other upcoming portfolios for them to contribute to the world and the human race through their science and technology.