Bozeman Daily Chronicle

by Jason Bacaj

Bozeman-based Microbion has created one of only a few new classes of antibiotics in the last 30 years, a yellowish, powdery compound manufactured off South 19th Avenue.

It works against biofilms, which play a role in more than 80 percent of infections, according to the National Institutes of Health. Microbion’s antibiotic has shown an ability to break down bacteria that corrode metal pipes. Company founder Brett Baker has developed business relationships with several of the world’s largest companies across a variety of industries.

But it wasn’t until the Jumpstart Our Business Startups Act was passed that the business’ future felt fully secure. If Microbion partnered with another company or a venture capital firm for funding, it would likely result in a focus on one application of its compound, an approach that conflicts with the company’s goal to develop the full spectrum of its antibiotic’s applications.

“What it really comes down to is a loss of control in that step. Generally, venture capital companies take a controlling interest or close to a controlling interest in the company,” Baker said. “That’s obviously going to change business decisions along the way.”

The company is poised to enter Phase II human clinical trials, which should cost about $4 million. Its compound, in gel form, will be tested during the study on infected orthopedic implants. Microbion should receive a $2.5 million grant from the Department of Defense to cover the rest of the study’s cost.

But the next phase of clinical trials — large-scale field studies — can cost anywhere from about $5 million to $100 million over the trial’s course, Baker said.

The third phase of clinical trials has been the historic gap for promising biotechnology companies without outside financial help, particularly in Montana, where venture capital firms and large companies don’t usually look for investments, said Frank Kerins, chief financial officer.

But the JOBS Act is expected to alleviate some of the pressure on developing companies looking for financial help.

Rob Bargatze, founder of Ligocyte, a local vaccine products company, worked with Montana’s senators to develop some aspects of the JOBS Act.

Bargatze serves as chairman of the Montana BioScience Alliance, which works with national and international biotechnology organizations. He approached both Montana’s senators and spoke before the Senate Banking Committee about “Regulation A,” which allows private companies to raise money publicly without becoming a publicly traded company Established . in 1980, the regulation allowed companies to raise up to $5 million, but it has not been updated since 1992. A few million dollars doesn’t cut it in terms of financing biotechnology companies now, Bargatze told the committee.

Sen. Jon Tester, D-Mont., a member of the Senate Banking Committee, responded to Bargatze’s argument. He helped rework the regulation, along with other aspects of the financing laws in the JOBS Act, and made it easier for private companies to raise money publicly without becoming publicly traded. He also eased restrictions on soliciting private investment and created a new funding source called “crowdfunding.”

The new legislation “modernized” Regulation A to allow private companies to publicly raise up to $50 million without becoming publicly traded. The law is intended to work as a stepping stone for smaller companies looking to position themselves to go public later on. Another regulation, “Regulation D,” which addresses the solicitation of private money, was adjusted to let companies contact potential investors outside their immediate contacts.

Crowdfunding may be the least clear portion of the legislation. It allows groups of small investors to pool their money and put it in a company, typically online.

All these changes are still being hashed out by the Securities and Exchange Commission and are expected to go into effect in three to 12 months. How the changes will work when they go from abstract to practical form remains to be seen and will likely depend on whether they’re adopted more by businesses or people looking to commit fraud.    “No matter what happens, there’s going to be shysters that get involved,” Kerins said. “My fear with this, with all this legislation that has passed, is the shysters are going ahead of the successful companies.”

It isn’t impossible for Montana-based biotechnology companies to clear the funding gap though, as evidenced by Bargatze’s own company He moved . to Bozeman in the late 1990s, not long after meeting current Montana State University professor Mark Jutila while he was completing his postdoctoral studies at Stanford University.

Bargatze had started two biotechnology companies in California — one in San Diego, one in San Francisco — and began talking with Jutila about opportunities for biotechnology companies in Bozeman. Talks grew more and more serious until Bargatze got four others together and decided to start a company in Bozeman.

Ligocyte has grown steadily since its founding, securing its first round of funding in 2000 for a vaccine against norovirus, commonly called the stomach flu.

The company developed its vaccine products, getting the flu vaccine through Phase I clinical trials. It showed promising data, Bargatze said, but the company couldn’t raise the money to push through future clinical trials, leading company representatives to meet with some venture capitalists.

The investors formed a syndicate and put $28 million into the company, giving it a controlling stake in Ligocyte, Bargatze said.

The sale changed the dynamic of the company, taking founders and scientists out of a position to determine the company’s direction and replacing them with representatives from the venture capitalist firm, Bargatze said. It wasn’t a bad change, but a change nonetheless.

“They’re really focusing on success and that’s a good thing because it really narrows down what the company works on to get the most successful outcome,” he said in a phone interview. “I think that was really a good thing.”

The $28 million put into Ligocyte was among the largest venture capital investments in Montana history, though, and not something every growing company can expect. Bargatze, like Microbion’s Baker, believes the new financing laws “could be a big turnaround” for the local technology industry.

“The critical mass is here. I think that it’s not going to be very long before we’re finding multiple situations like (Ligocyte),” Baker said.