Biotechnology Healthcare MediMedia, USA Early-Stage Biotech...

Biotechnology Healthcare
MediMedia, USA
Early-Stage Biotech Companies: Strategies for Survival and Growth
Wendy Tsai and Stanford Erickson, MA, MBA

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Abstract
The promise of start-up biotechnology companies is enormous. So are the risks and the uncertainty of product development. The authors present a checklist for young biotech companies, covering environmental factors, alliances, and strategic planning.

A few key strategic elements are critical to the early-stage biotechnology company’s growth and success. These elements serve as a checklist — and a necessary one, because the early-stage company often can be a business case study for high attrition rates among product candidates, huge technical risk, and very long product-development time lines of 8 to 12 years.

The promise of positive net present value (NPV+) market returns and commercial success are fleeting for most startup biotechs. The pharmaceutical development process is complex, calls for significant investments in financial and human capital, and involves risks in project execution, the regulatory process, and scientific technical attrition. Further, the cost to gain market approval for a single product is estimated at $800 million (DiMasi 2001). Of the companies that set out to develop a drug beyond proof of principle, most fail due to lack of product efficacy or safety, or insufficient cash for clinical trials or business operations.


Wendy Tsai


Stanford Erickson MA, MBA

Industry data indicate a 20 percent likelihood for a compound to advance from initiation of phase 1 trials to market approval. With these odds, there’s a need to mitigate product development risks, from startup capital through early-and late-stage clinical trials. Further, leadership and commitment from the company’s executives are essential to determine tactics and strategies for developing product candidates, to set the right course for clinical development, and to manage capital. Ask any CEO who has founded a company and then kept it in business: it’s the toughest job she or he has ever done. It calls for flawless operational execution, talented management, perseverance, and scientific expertise and vision.

ENVIRONMENTAL TRENDS
As reported by the Biotech Industry Organization, the U.S. Food and Drug Administration approved 38 biotech and biotech-related products, as well as expanded labels and other therapies. The biotech industry reached a maturity level in producing a “steady stream of new and unique therapies” with the goal of producing more targeted therapies that will result in more effective medicines (Coghill 2006).

Biotechnology, broadly defined, uses living organisms or their products for commercial purposes. In this and other ways, the biotech industry is viewed separately from the pharmaceutical industry. Still, it is useful to recap some key environmental trends for the pharmaceutical industry as it relates to biotech:

Gradual slowing of growth due to industry maturity
Continued consolidation of companies
More personalized medicine
A greater role for nanotechnology in diagnostics, drug development, and drug delivery
Increased concern for drug safety in the post-rofecoxib (Vioxx) era (Shamel 2006)
Expertise in scientific research, leadership in business, and at least one great idea for a biotech product are needed to start a bioscience company. Surprisingly, barriers to market entry can be minimal. Early-stage and research-stage bioscience companies have the opportunity to obtain study funding from numerous programs. Some of these, like Small Business Innovation Research and Small Business Technology Transfer, can provide substantial funding to small businesses.

Building and sustaining an early-stage biotech company calls for a business model that optimizes financing, market, and operational strategies. Depending on the availability of seed capital and financing options, the company may undertake 1 of 3 business models on which tactical and strategic plans can be executed by the company:

Build: Develop a product in-house from bench research to market approval
License: Secure strategic alliances, partnerships, and licensing deals
Sell, divest, joint venture, other: Other alliance, divestiture, or exit strategies
At some point, all three of these strategies may come into play.

Strategy is how a company differentiates its identity from the environment and competition. This should not be confused with core competency, expertise, tactics, or mission. Financing strategy is often the foremost focus of the start-up biotech company. Funding and balance sheet liquidity — cash for operations — are its lifeblood and are needed to drive product development and business strategies. To obtain financing, many companies raise venture capital, partner with big pharma or other bioscience corporate partners, or secure capital from angel investors and government or small-business grants.

In aggregate, the biotech industry — comprising about 300 publicly traded companies and more than 1,200 companies — is not highly profitable, and typically lacks economies of scale in research and development, sales, marketing, and distribution. A small number of biotech companies are extremely profitable, which drives the entry of a high number of competing companies and inflow of capital. While the potential for generating free cash flows on a company- or product basis is extremely promising, biotech companies are sometimes hard pressed to retain any great share of the profits or majority ownership in the company. Product attrition, technical risk, long R&D horizons, and rapid cash burn often result in the biotech forgoing majority ownership in exchange for financing from venture capital or corporate partners.

CORPORATE ALLIANCES
Biotech is typically thought of as a high-growth and high-risk industry. The upfront investment on R&D and clinical trials can soar into the tens of millions dollars even before initiation of large population human efficacy trials. Potential blockbuster market returns are possible, but they usually come with a high front-end investment and a proportionate high risk of R&D technical attrition (where studies are halted because the compound fails efficacy, safety, toxicity, or other criteria). Risk also is baked into the decade-long investment horizon and commercialization time line — all part of navigating the FDA regulatory approval process for biopharmaceuticals.

The deep financial pockets of fully integrated, established, or large-cap drug companies play a key role in the growth of the biotech industry. As big pharma encounters patent expirations on core franchises or blockbuster products, or as pipeline productivity struggles to keep up with forecasts or analyst and shareholder expectations, big pharma can turn to biotechs as a way to bolster pipelines. The number of compounds in big pharma phase 3 trials dropped 23 percent from 2000 to 2005, which contrasts with a 60 percent increase in products from biotechs and small drug companies. Today, biotechs and small pharmaceutical companies are developing nearly two thirds of phase 3 compounds (Longman 2005). Pharma companies are well positioned to “backward integrate” into biotech through licensing deals and strategic alliances, using biotech companies to supplement their pipelines and portfolios. Two such examples are detailed in the table on page 52.

Corporate alliance deals structured as licensing transactions, codevelopment agreements, joint ventures, or sales and marketing alliances play an integral role in many growth strategies for biopharmaceutical companies. Licensing also may afford an aggressive strategy for identifying and providing lead products for the pharmaceutical licensee and the biotech early-stage company acting as the licensor. Strategic partnerships can involve research focused on discoveries characterized by unique mechanisms of action at the molecular level and within cellular processes that can be targeted as a way to develop best-in-class medicines.

Pharma companies have the capabilities, operational scale, and cash reserves to partner with biotech in the development and commercialization of new products. By providing clinical trial funding, large pharma companies essentially secure rights to percentages of equity or product-licensing rights in a biotech company, in exchange for future royalties or product revenues.

While benchmark alliance deals vary across therapeutic categories and naturally step up in value at later stages of clinical trials, a typical phase 1/2 biotech-pharma licensing deal could involve upfront and milestone proceeds to the biotech licensor of up to tens of millions of dollars. The biotech licensor seeks to secure back-end reward by structuring the deal with royalties on product sales. This also is a way to gain compensation for the front-end risk taken in the R&D of an unproven compound. Unfortunately, a biotech that depends on large cap pharma for financing often gives considerable control and profits to the drug company. This is often necessary to secure future marketing, distribution, clinical trials testing, and revenue for a product in development. The upside to the biotech partner giving away overall NPV of the asset valuation comes in the form of netting near-term alliance revenues and proceeds that may provide the cash flow needed to keep the company in business.