No matter where you are in creating or developing a biotechnology company, you will undoubtedly have immediate and long–term goals by which to measure your company’s success. As your company grows, these goals will vary. Whether it is securing venture capital funding, entering into a collaboration with a partner, floating a successful initial public offering or secondary issue, having a product candidate complete a successful clinical trial, or launching a product on the market, the scale by which you measure your company will change.
One often overlooked source of capital is the institutional investor. Largely, given lack of relationships as to where to start. However, an investment from an institutional fund is often viewed by the financial community as validation of a company’s product or platform technology. This can help attract other investors at transition points when funding may be critical—for example, moving into phase III clinical trials, or launching a new product. For these reasons, it is important from the outset that you understand “success” means from the institutional investor’s point of view as a way of strategizing your business development.
So how does an institutional investor measure your potential for success? First, is an assessment of risk. Only one in five of the products in clinical trials reach the market. However, with biotechnology companies, there are two other biotechnology–specific risk factors that must be considered in analyzing the potential success rate.
The first is the industry’s focus on therapeutic voids as initial targets. These are largely multifactorial diseases such as amyotrophic lateral sclerosis (ALS), adult respiratory distress syndrome (ARDS), septic shock, wound healing, and psoriasis. These diseases have no existing products for a reason: They are extremely difficult to treat. This means that it will be extremely costly and difficult to generate convincing clinical data that will meet with the US Food and Drug Administration’s approval.
Beyond that, the “one product nature” of most biotechnology companies means that the company’s chances are hit or miss: they will either prosper or fail based on the results of their clinical trials. For these reasons, the biotechnology success rate is approximately one in eight or one in nine. Success will be determined largely by the ability to allocate and control research and development risk.
Investors will also think about the clinical viability of the drug candidate. This means having a clear understanding of “the label” sought for a product at the earliest possible point in the development process. Without this information, it is difficult, if not impossible, to design trials that answer the efficacy and statistical questions to the satisfaction of the FDA.
Moreover, without a clear labeling strategy, a realistic patient population cannot be identified, making competitive product positioning impossible. This obscures any realistic appreciation of a product’s potential, confuses management about how to allocate scarce resources for product development, and scares off a potential strategic partner.
For products in earlier stages of clinical development, where clinical data is in progress, investors will want to understand your data and to validate the science.
The three basic capabilities a company can leverage to add value are research, manufacturing, and marketing. For most biotechnology companies, research is the only viable focus because they do not have enough cash to initiate manufacturing and marketing. Accordingly, the out-licensing of the first product has become a popular transaction strategy. However, often management tries to convince itself that because there is a lower risk in taking the out-licensing route, that a lower operating return would suffice as well. Yet, royalties or operating profits in the low to mid-teens may be insufficient for long–term survival (despite the attractiveness to pay near–term bills). Given the popularity of this model, a valid question is, “what are the transaction alternatives?”
Through various service offerings and engagements, we help emerging biotech and pharmaceutical firms think through the right development choices and transaction pathways – working with management to identify their company’s differentiated value–add to maximize the successful commercialization of their limited resources to maximize value, to increase the likelihood of investment from institutional investors.