Carmel startup lands $12M in venture capital

January 19, 2009
A Carmel startup that hopes to research drug components here and make them in China has just raised $12 million in venture capital—despite the recession and a deep freeze in financial markets.

The founder of 2-year-old Waterstone Pharmaceuticals Inc. is Chinese native Faming Zhang, 44, a former Eli Lilly and Co. executive and Indiana University professor who already leads another fast-growing biotech startup, Santa Clara, Calif.-based Crown Bioscience Inc.

San Francisco-based venture firm Burrill and Co., an affiliate of BioCrossroads' Indiana Future Fund I, led the Waterstone investment. The other backer was Cupertino, Calif.-based Acorn Campus Ventures, which also put money in Crown.

Venture capitalists universally cite management talent as the most important factor in a startup's success. Acorn was eager to make another bet on Zhang, said W. Sandy Chau, a partner with the venture firm.

"People like Dr. Zhang don't come by every day. He has a rare combination of scientific excellence and the ability to focus on the development of technology," he said.

"At the same time, he's a marvelous entrepreneur with significant business instincts. On top of both is really somebody with confidence in himself and willingness to take risks."

Waterstone and Crown share the same lineage. In 2006, Zhang used his life savings to found their precursor, Kinasia BioPharmaceuticals Inc. A year later, Acorn combined Kinasia's biology operations into Crown, another Silicon Valley startup in its portfolio with a Chinese business plan.

Zhang remained president of the combined firm, which offers preclinical contract research services, such as animal testing, for big pharmaceutical companies. It now has 195 employees and $2.5 million in annual revenue.

Waterstone isn't far behind. Zhang reorganized Kinasia's remaining chemistry operations to form Waterstone. The firm—which is lowering big pharma's cost of outsourced production—now has 17 employees and $1 million in annual revenue.

Global innovation

Innovation increasingly occurs across the globe, and Zhang's personal story is a microcosm of that trend. As a boy growing up in central China, he never traveled more than 20 miles from his family's rice farm. But his father, who also worked as a schoolteacher, shared a lesson Zhang never forgot.

"My father told me if you are good at math, physics, chemistry, then you can go to anyplace on the planet and be fine," Zhang said. "Education is the key. In China, there's an old [proverb] that you can find gold in books."

Zhang said his parents invested nearly every penny into educating him and his four younger brothers. Zhang eventually achieved admission to one of China's top schools, Wuhan University, where he earned two chemistry degrees. He went on to the Chinese Institute of Biophysics for his doctorate.

Along the way, Zhang learned English, because he'd long dreamed of working for the U.S. pharmaceutical industry. Zhang did his post-doctoral work at the University of Texas, then joined Lilly in 1994 as a research scientist. His focus was diabetes and infectious disease. Lilly soon put Zhang on the management track.

"They really respect smart, hard-working people," Zhang said. "That's why I really liked Lilly. They provide careers. If you have a business perspective and want to learn management, they provide the opportunity and let you try."

Zhang soon found himself fascinated with the business side of drugmaking. Under Lilly's sponsorship, he earned an MBA in night school at IU. By the end of his nearly 12 years working for the company, he had risen to become Lilly's head of global drug discovery and development statistics and information sciences. Zhang managed 80 people and a $5 million budget.

Back then, Zhang worked underneath Dr. Richard DiMarchi, who retired as a Lilly vice president in 2003 and went on to become an IU chemistry professor and entrepreneur himself. DiMarchi's research has spawned San Diego-based Ambrx Inc. and Carmel-based Marcadia Biotech.

Zhang says he's hoping to emulate DiMarchi's success. DiMarchi, in turn, said he marvels at his protege's energy. Zhang spends much of his time on planes flying from Indiana to the West Coast and Beijing.

"In his heart of hearts, it was [always] clear he had this commercial spirit and an unbridled desire to lead," DiMarchi said. "He's one of these rare mixes of quality science with commercial interest and the ability to work very, very hard across multiple geographies."

Zhang said his desire to become an entrepreneur surged during his later years at Lilly, when he found himself concentrating primarily on personnel reviews instead of innovative science. In 2006, he and another former Lilly executive, Jean-Pierre Wery, formed Kinasia. Its business plan was to combine U.S. pharmaceutical innovation and the abundant low-cost talent in China.

Kinasia's search for outside funding led it to Acorn Campus Ventures. Acorn already had invested $3 million in Crown Bioscience. So it merged that startup with the half of Kinasia related to preclinical biology, then raised another $19 million for the combined business and put Zhang in charge.

That left Kinasia's chemical-manufacturing business an orphan in Indiana-but not for long. Zhang and its investors have big plans for the $12 million they just raised. He believes Waterstone one day can reach $1 billion in annual revenue.

Acorn's Chaug agrees.

"For all entrepreneurs, the dream is that we'll be able to open up the company for a public offering ultimately. I think the investors have all the indications to hope that the company can do that," he said.

"We are very confident the economy will recover. Hopefully by the time it recovers, we will match well for the timing of our future growth."

Life sciences boost

Zhang is just the kind of success story BioCrossroads, Indiana's life sciences initiative, hoped to foster when it launched the $73 million Indiana Future Fund I five years ago.

The money was doled out to six venture capital firms that agreed to concentrate on Indiana life sciences deals. Life sciences backers hoped the infusion would spur talented people like Zhang to become entrepreneurs and simultaneously lure coastal venture capitalists here.

BioCrossroads Project Director Brian Stemme said much of the pharmaceutical and biotechnology industry's earliest research and innovation will continue to be concentrated in its traditional hubs, like Boston and San Diego.

But Indiana has enormous advantages during the later stages of validating the effectiveness of technologies and commercializing them. Companies like Waterstone and Crown can handle key stages of development that big pharmaceutical companies outsource.

The outsourcing trend will accelerate, Stemme said, "because the pharma industry is really saying, 'I can't afford to do all these things all the time over the 10 years it takes to develop a drug.'"

For Zhang, seizing the opportunity is just a matter of keeping up the dedication to education and research that took him all the way from central China to central Indiana.

"The United States is a wonderful place. That's why I decided to be a citizen a while ago," he said. "I see honesty and integrity from all the people I deal with. It's also the land of opportunity. If you work hard, and have something to contribute, you get successful results."
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