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Will rapidly expanding Kinex be Buffalo’s next big thing?

In a region pining for a biotech blockbuster, Kinex Pharmaceuticals could be it.

The company that started with one promising potential cancer treatment has raised tens of millions of dollars from investors in Asia to fuel an ambitious expansion strategy.

Today, Kinex has grown from a “science project,” in one executive’s words, to a company with 325 employees worldwide. By snapping up or making licensing agreements with small pharmaceutical companies, Kinex gained access to an array of prospective drugs poised for sale on the market. The company even is changing its name, to Athenex, to reflect this broader portfolio.

“We have a lot of ways to win right now,” said Flint D. Besecker, the company’s bullish chief operating officer.

The state and federal governments have poured hundreds of millions of dollars into labs and clinical offices at the University at Buffalo, Roswell Park Cancer Institute, Hauptman-Woodward Medical Research Institute and elsewhere on the Buffalo Niagara Medical Campus, hoping to turn health care into an economic engine for Western New York.

Some of that investment will create new jobs immediately. But much of it is a bet that creating a critical mass in health care and biotech will breed new businesses – like Kinex – that generate wealth and jobs far beyond the immediate payoff.

Buffalo has been there before.

In the past, potential breakout business ideas – the MS treatment that became Biogen’s Avonex drug, SmartPill, Cleveland BioLabs – stagnated here or found success only after leaving town. They struggled to raise funds here or moved to regions that had more fully developed biotechnology industries.

The question these days: Will Kinex be different?

Kinex wants to open major drug-manufacturing centers in this country and abroad. The state is preparing a lucrative incentive package to keep the company here. Kinex has stuck with Buffalo before. Four years ago, it turned down a badly needed investment that would have forced the company to relocate to the Boston area. So far, Kinex has retained its independence, even as most startups jump at the chance to license their technology to a bigger pharmaceutical company, get acquired or go public.

“We can’t be spending all this money that we have with the Buffalo Billion, and everything that’s happened with the Medical Campus, to watch companies get to a certain point and then leave the region,” said Paul F. Ciminelli, president and CEO of Ciminelli Real Estate Corp. and an early investor in Kinex.

‘We had a lot to prove’

Kinex’s roots go back 30 years, to when David G. Hangauer was working at pharma giant Merck, trying to find a better way to fight cancer.

Hangauer is a Lancaster resident who regularly attends Town Board meetings and keeps a close eye on the actions of elected town officials. At Merck, he first got interested in the idea of targeting a class of enzymes known as kinases. The body contains hundreds of different kinases, and pharmaceutical companies for years have viewed kinase inhibitors as a promising cancer treatment. If you can develop a chemical compound to inhibit or block the kinase in a cancer cell, you can prevent the spread of cancer while limiting the damage to healthy cells.

Hangauer continued his research at UB, where he received financial support from the university, the federal government and a pharmaceutical company. That funding dried up, but Hangauer remained convinced he was onto something big.

“So that’s when I said, ‘OK, I’m going to start my own company,’ ” Hangauer said.

He and a group of co-founders launched Kinex in 2002. They brought in experienced biotech executives to run the startup. One, Allen Barnett, joined Kinex in 2003 as its CEO after retiring from Schering-Plough, where he led the development of the allergy drug Claritin. Barnett owned a home near Fort Erie, Ont., and had family ties here. His late adopted granddaughter, Carly Collard, was the inspiration for Carly’s Club at Roswell Park.

Barnett convinced Dr. Johnson Y.N. Lau to join Kinex as executive chairman. Lau had headed up Ribapharm, which raised $260 million in one of the largest biotech initial public offerings, or IPOs.

The pair had a track record, but Kinex was far from a known commodity.

“We had a lot to prove,” Barnett said.

Kinex’s founders were convinced that they had their hands on a groundbreaking cancer medication. But the company faced the same challenge as every other biotech startup: raising enough money to pay for the expensive, drawn-out process of developing the drug. The odds against success are staggering. For every 5,000 to 10,000 compounds discovered by researchers, just five will make it to clinical trials and just one will win approval from the U.S. Food and Drug Administration, according to PhRMA, the Pharmaceutical Research and Manufacturers of America. The approval process takes 10 to 15 years, on average, and can cost as much as $1 billion.

“It’s not a game for the faint of heart, that’s for sure,” said Vic Nole, director of business development and entrepreneurial activity for the Medical Campus.

Finding angel investors

Raising capital is especially difficult for startups located outside Boston, San Diego and other major biotech hubs. Eventually, that left Kinex executives facing a fateful decision.

From the beginning, Kinex aggressively recruited angel investors in Buffalo. At Barnett’s urging, Charles E. Lannon, a well-connected entrepreneur and founder of Sovran Self Storage, rounded up a group of local doctors and business people to invest in the company. Kinex officials made their pitches to prospective backers, with Hangauer distilling how kinase inhibitors work and why they show so much promise.

In all, 99 angels invested $15,000 to $1.5 million each over four rounds of fundraising between 2006 and 2014, Lannon said, for a total of $16 million. Many were drawn to supporting a homegrown company trying to find a better cancer treatment.

“Kinex was built on the backs of local investors,” said Lannon, who later served on Kinex’s board.

By 2005, Kinex had developed two compounds based on Hangauer’s research. But if Kinex hoped to shepherd the compounds through the drug-approval process, company officials knew that angel money wouldn’t be enough.

In 2011, after years of scraping by on angel money, a private equity firm in the Boston area agreed to put millions of dollars into Kinex. But that financial lifeline came with several conditions: Kinex had to move to Massachusetts and give up control of its board, and the offer set a lower valuation for the company than seen in the angel financing up to that point.

Looking to Asia

Besecker, who had just joined Kinex’s board, said company officials, led by Lau, seriously considered the offer, but it wasn’t hard to turn it down.

“They think you don’t have a choice and you’ll come back to them,” Besecker recalled. But he and Lau were convinced that they could raise enough money on their own.

“Why don’t we roll up our sleeves and put together a business strategy that creates a huge operating platform that can compete against Big Pharma? That’s where Johnson and I looked at each other and said, ‘Let’s do it,’ ” Besecker said.

They found their new strategy in Asia, where they turned to China, South Korea and other countries as sources of badly needed capital and as potential markets for the company’s drugs.

It was a daring change in direction that coincided with Lau’s appointment as CEO in 2011 and accelerated when Besecker joined the executive team in 2013. Lau is from Hong Kong and has extensive contacts in the biotech industry in Asia. Barnett, Kinex’s first CEO, lauded his colleague’s aggressive approach to business and his unflagging energy. “He doesn’t recognize jet lag,” Barnett said.

Besecker, who first came to Kinex as an investor and joined the board in 2011, serves as the public face of the company now. The former chief executive of the Center for Hospice and Palliative Care is an Orchard Park native with a well-traveled career in health care finance at startup and Fortune 500 companies. He encouraged his teenage sons to study international business and learn Chinese.

“I said, ‘China is really where it’s going to be in the future,’ ” Besecker said.

Asia is a fertile potential market for life sciences companies. Health care spending in Asia is predicted to rise by nearly 8 percent a year – in China alone, it’s 16 percent a year – through 2017, according to a report from Deloitte.

Kinex cultivated individual and institutional investors in Asia who would bring the company credibility and connections. In its latest round of financing, revealed in May, Kinex raised a significant sum from Ma Huateng, founder of a Chinese Internet firm, who is known as “Pony Ma” and is worth an estimated $20 billion.

Beyond raising money there, Kinex is securing deals with Asian pharmaceutical companies to give the company access to drugs that are closer to winning final regulatory approval in the United States and worldwide. Kinex has reached licensing agreements with South Korea’s Hanmi Pharmaceutical Co. to further develop an oral delivery method for cancer drugs now typically given through draining, hours-long rounds of infusions.

‘Large pipeline of drugs’

Cancer medication taken orally promises to be more tolerable, convenient and effective for patients, and the first company to perfect this process can expect to grab a big share of the multibillion-dollar cancer drug market.

“Many companies depend on one drug, or one group of drugs, but Kinex has a large pipeline of drugs,” said Dr. Robert J. Genco, a vice provost and head of UB’s Office of Science, Technology Transfer & Economic Outreach, or STOR, which aids faculty in commercializing their research.

For a startup, the typical goal is to license its technology to a Big Pharma company, get acquired or go public.

Kinex, so far, has spurned those options.

Instead, the company has used the $200 million that it has raised – including $119 million raised in the last 1½ years – to fuel its buying spree.

The acquisitions began last September with QuaDPharma, a Newstead company that conducts testing and small-scale manufacturing for pharmaceutical clients.

“Kinex was actually our very first customer,” said Stephen A. Panaro, president and chief operating officer of QuaDPharma, which he started with several co-founders in 2011.

QuaDPharma was looking to raise investment money last year when Kinex proposed acquiring the company. QuaDPharma doubled its workforce last year, to 25 or 30 employees, and expects to double it again this year.

Ambitious growth track

Kinex later purchased Polymed Therapeutics, a Houston-based corporation that sells medical devices and active pharmaceutical ingredients; Taihao, a Chinese company that manufactures ingredients used in cancer drugs; and Comprehensive Drug Enterprises, a Hong Kong pharma company.

The model of buying companies outright, or licensing their technology, to gain access to market-ready products has become popular in the biotech industry.

Kinex’s moves have left the company with about 325 employees in this area, New Jersey and Texas, as well as Hong Kong, Taiwan and China. Its share price has risen from $6.82 per share at the start of 2005 to $36 per share today, according to the company, based on the price paid by the most recent investors. That share price puts the company’s valuation at about half a billion dollars, Besecker said.

To reflect the company’s international reach, and a menu of prospective drugs that goes beyond its kinase inhibitors, Kinex is changing its name to Athenex, which combines Athena, the Greek goddess of wisdom and courage, with Kinex.

Today Kinex is a global company on an ambitious growth track, and industry experts say the Buffalo Niagara region is better prepared than ever to host a biotech company with that kind of potential.

Lasting success for any young life sciences company is far from certain. Buffalo Niagara has pinned its hopes on other biotech companies, only to see them fail or lag – or find success only after leaving town.

SmartPill Corp., a medical device developer based on the Medical Campus that made an ingestible wireless sensor, won FDA approval for its vitamin-sized device in 2006. By 2012, however, after raising $60 million from investors, the company ran out of money and was sold to an Israeli firm that closed local operations.

“Very good, local company that got all the way to being an actual, successfully used product. And they didn’t end up doing so great, and had to be sold to somebody, and it wasn’t a big exit for the investors,” said David J. Colligan, a lawyer who is board chairman of Launch NY, which boosts startup activity in Upstate New York.

Some compare Kinex’s potential to Avonex, a treatment for multiple sclerosis developed by the late Dr. Lawrence D. Jacobs, a Buffalo neurologist. But Avonex was commercialized elsewhere; it brings in $3 billion a year for Biogen Idec of Cambridge, Mass.

Many industry veterans think Kinex will be different. Buffalo today has a burgeoning Medical Campus that links clinical and research institutions, a recognition by its colleges and universities of the need to educate a life sciences workforce, a tightknit network of organizations that support biotech startups and the full-on engagement of local and state officials in growing a life-sciences economy.

“This decade is so much different than the previous decade,” said UB’s Genco, who knew Jacobs. “That happened because we didn’t have the infrastructure. We have it now.”

Will the company stay?

Kinex’s fate now is tied to Asian markets and Asian financing. That’s why its earliest investors fear that the company may leave its hometown behind.

The company left out local angels in its most recent $74 million round of financing. That decision caused grumbling among some Buffalo investors who wanted to put more money into Kinex. “I know some people are more upset about that than others,” said Dr. Gregory S. Shields, one of eight or 10 radiologists from his practice, Great Lakes Medical Imaging, who invested in Kinex.

Shields said he trusts what management is doing, but some investors worry about the loss of local control as the angels’ share of the company has shrunk to just 7 percent.

Two Buffalo-based members of Kinex’s board, Lannon and attorney Michael P. Murphy, left their positions in June. They were succeeded by Song-Yi Zhang, of Shanghai, founder and chairman of Mandra Capital, Kinex’s largest shareholder, and Dr. Manson Fok, CEO of the largest physician practice group in Hong Kong. Kinex soon will add its sixth and seventh board members, and only Besecker will be based here.

“I wanted Kinex to be good, first and foremost, for Buffalo,” said Lannon, who corralled the angel investors. “My hope is that it will continue to be a very significant asset to the Buffalo community.”

Kinex executives are talking with New York State about a lucrative incentive package, backed by money from Gov. Andrew M. Cuomo’s Buffalo Billion economic-development program, that would keep the company in Buffalo. Kinex and state officials won’t say much publicly, but The Buffalo News reported in June that Kinex will move its headquarters and some research and development operations into a floor of the Conventus office building on the Medical Campus. It’s the first step in what could be a much larger company investment here.

Besecker said the company is committed to Buffalo, but the region is just one contender for a major new North American manufacturing facility. The company is planning a similar facility in China.

Besecker and Kinex have grand plans for more new products and medical devices. In five years, Besecker said he envisions a couple of thousand employees, spread over a dozen manufacturing sites throughout Asia and North America.

A company meeting held in June in Buffalo showcased Kinex’s international status, bringing together 45 executives from its American and international sites. The company’s officers discussed a new name, posed for a sunny group photo on the Medical Campus and ate chicken wings at the Anchor Bar.

In a conference room in the Hauptman-Woodward building, surrounded by members of Kinex’s global leadership team, Besecker proudly held court on the company’s plans.

“We’re just getting started,” he said.


Kinex, changing its name to Athenex

• Drug discovery company

• Founded: 2002

• Headquarters: Hauptman-Woodward Medical Research Institute

• Employees: 325

• Locations: Buffalo, Newstead, New Jersey, Texas, Taiwan, Hong Kong and China

• Equity raised: $200 million, including $119 million in the last 18 months

• Angel investors who bought into Kinex: 99, at $15,000 to $1.5 million each, for a total of $16 million

• Early history: Developed two compounds, known as kinase inhibitors, that grew out of research conducted at the pharmaceutical giant Merck and later in a UB chemistry lab that show promise as cancer drugs.

• Recent strategy: The company has expanded its fundraising and product development to Asian markets. Kinex has been on a growth surge over the last two years, buying companies or reaching licensing agreements that give it access to propective drugs that are closer to winning regulatory approval, along with new testing and manufacturing services.

• What happens next: Kinex and state officials are negotiating a lucrative incentive package, funded by the Buffalo Billion, that could support a major company expansion in the region.

The ones that got away

Some of the innovations that can trace their roots to Buffalo but largely were commercialized elsewhere:

• Interferon-based treatment for MS, which later became the drug Avonex.

• The prostate-specific antigen, or PSA, screening test for prostate cancer.

• Screening test for phenylketonuria, or PKU, a rare, inherited condition that can harm the central nervous system and cause brain damage.

• Artificial blood substitute

• Time-release insulin therapy.

• Liquid breathing therapy for chronically ill, premature infants, developed under the name LiquiVent.

Source: Marnie LaVigne, president and CEO, Launch NY