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Xconomy has a useful two-part interview with Christopher Henney, who helped to found Icos (ICOS), Dendreon (NASDAQ:DNDN), and Immunex. The part I found most interesting, naturally, was the section entitled "Five Red Flags of Biotech". (Note to the Xconony folks - the article actually has six of them). Here are his warning signs if you're thinking of investing in (or, I should add, working for!) a new company and you're checking them out. Beware of. . .

1. Top management without a scientific background. If the CEO isn't a scientist, Henney says, there had better be some good ones very close to him, and he's not talking about the scientific advisory board, either.

2. Saying that they have no worries. Any small company in this game has plenty to worry about - heck, the huge companies have plenty to worry about. So if they try to tell you otherwise, then you're the one who should be worrying.

3. Hard-to-understand science. Henney says to look out if they can only tell you that it's really hard to explain. I'd agree with that, but I'd also add that you can go too far in the other direction. If they spout a bunch of advertising copy under the impression that they're giving you the science, then you should also flee. (That might be a consequence of Red Flag #1). I honestly think that any concept in this industry can be explained to any reasonably intelligent person. So if someone tells you that they can't do that, you have to worry that they don't understand it very well themselves.

4. Geographic remoteness. This is an interesting one, because ideas can come from all over. But for a viable company, Henney maintains, you need to be somewhere that you can recruit talented and experienced people. That doesn't mean that every company has to be in Cambridge or South San Francisco, because there are plenty of other possibilities. But trying to get a great biotech idea off the ground will definitely be a lot harder in Winnipeg, El Paso, Chattanooga, or Scranton. There are smart people there, but most of the ones who know this business or have a real interest in it will have gone somewhere else. And it'll be tougher to persuade others to move somewhere that could leave them without options if the company doesn't work out.

5. Too many VCs. This goes for just about any industry. A board that's full of venture capital people shows a lack of imagination at the very least, and it makes you wonder why the VCs will even stick around when all they see are their own kind.

6. Family members in key roles. My take is that you can get away with one sibling or the like, preferably as long as they're not like a CEO and CFO team or something. But I agree with Henney's take that if you see a board dominated by a family, you should hit the exits. This stuff hasn't been around long enough to be a family tradition.

I would add a couple of others to be wary of:

7. Breathless hype. Sure, all press releases have some of this. But if a small company is unable to speak in any other terms than "breakthrough, unprecedented, game-changing paradigm shifts" or the like, you should be worried. Either they don't really believe this stuff (in which case they may not be very trustworthy), or they do (in which case they may be delusional). Real breakthroughs in this business don't need all the glitter and spray paint.

8. Too much emphasis on the SAB. Henney addresses this partly in Red Flag #1. But it's worth remembering that a wonderful blue-ribbon scientific advisory board stacked with Nobel Prize winners is also stacked with very busy people who will only be able to give this little company a small portion of their time. These aren't the folks who will be driving the projects forward. If a small company relentlessly promotes the big-name advisors they've signed up, you have to wonder if there's anything else to promote.