Starting a New Biotech Company
What are the core elements of a successful biotech?
Each
individual biotech business is unique: founding entrepreneurs have their own
visions, strategies and goals; the science and technology that drive companies
is inherently exclusive; and every business is exposed to a wide range of external
factors, risks and market forces. With that said, do successful biotechs share
common characteristics?
Yes,
they do, and this article looks at the main facets of sustainable and long-term
biotech businesses. Of course, it always starts with the science, but then
you'll need to focus on management, adaptation, timing, location and cash
Management:
the right team
Having
a strong, experienced and stable management team is essential to the success of
any business, because venture capitalists (VCs) are investing in the people at
the top rather than the assets, technology or product. Why? Because a good
management team keeps a business working effectively and efficiently and sets
out the company's values, visions, commitment and culture. Additionally, with
start-ups, it is not always clear which product(s) or service(s) will be
successful, and there is little historical data on which to base a decision.
That leaves management as the most concrete aspect for a VC to evaluate (though
products and services will still be scrutinized). VCs consider the following
when evaluating the cofounders and leadership teams:
- Characteristics: successful management team
members are people who are entrepreneurial, motivational, flexible,
determined, committed and energized. Combined with leadership ability,
management teams with these characteristics help drive a company forward
and exploit opportunities.
- Employees: getting the most out of
employees is vital to the success of your business—you want to attract and
retain the best people. Management must also be open to new ideas and
suggestions.
- Experience: good management will be
familiar with many positive and negative situations (both internally and
externally), which means they will be able to make decisions quickly and
respond effectively.
- Networks: well-connected management
teams have access to cash, strategic advice, information, markets and
opportunities.
- Success: management teams with a
record of success are more likely to attract VCs and greater amounts of
cash. They also understand what makes a successful company and how to run
one.
Consider
the top 20 biotech companies across the United States and Europe. The
management teams at those firms all possess the above elements. Although assets
and technology drive overall market value, having the right management team
(usually based around 3–4 cofounders) and cash from the very beginning is key
to success. You should form your management team to be ready to adapt and
evolve. Your team must be able to absorb failure and learn from
disappointments.
Two
other factors play a critical role in forming companies that earn long-term
success. First, the quality of the original idea and founding vision behind the
company's formation must always remain constant—even when the business grows
larger and adapts to change. Second, the original founders and entrepreneurs
should remain and lead the company through the inevitable peaks and troughs.
Although the founders' roles and responsibilities will no doubt change,
founders tend to confer the same enthusiasm and passion that they did when they
first set up their business, which keeps an entrepreneurial spirit at the heart
of the company. A good example is Actelion in Allschwil, Switzerland, which
still has its original founders involved in the goings-on of the company.
Evolve
or die: adapting your business
One of
the main reasons biotech companies fail is because they believe they have the
best potential drug and that the world will adapt to accommodate their
business. They assume that they will be able to hire the best people, raise the
most cash and make lots of money. This couldn't be further from the truth.
Other than perhaps Genzyme, of Cambridge, Massachusetts, very few companies got
their drug right the first time.
This is
why the majority of the world's top biotech companies are very different today
compared with their formative years. Their original products and/or technology
were shelved or deprioritized as they quickly adapted and evolved to changing
market forces and consumer needs. Amgen, of Thousand Oaks, California, for
example, was formed to capitalize on recombinant DNA and genetic engineering.
It wasn't until years later that it focused on erythropoietin, which brought in
billions of dollars. Another example is Millennium Pharmaceuticals, of
Cambridge, Massachusetts, which even though it was originally founded as a
genomics company, bought Leukosite (a Cambridge, Massachusetts-based company
developing therapeutics for cancer, autoimmune and inflammatory disease) in a
stock-for-stock deal worth about $635 million. This ultimately led to the
approval of the new ubiquitin proteasome inhibitor Velcade (bortezomib) and an
investment in an oncology drug pipeline, transforming Millennium into a drug
company. That led to Osaka, Japan–based Takeda buying Millennium in May 2008
for $8.8 billion.
Founders
who have established long-term, sustainable companies understand that they
will, at some point, need to adapt or evolve their business model. It's a tough
decision, but they mark pivotal moments in a company's history. When choosing
whom to invest in, VCs look for management teams that completely understand a
business and are fully committed to it, that demonstrate the ability to quickly
terminate unsuccessful projects and that are able to absorb failure, adapt and
move on. Successful founders are able to articulate their reasons
rationally—while remaining true to their original vision.
Arguably,
those types of entrepreneurs are able to win the renewed backing of their
investors, thus setting the stage for their businesses to adapt and evolve as
necessary. Possessing both the clarity and conviction to make (and follow
through on) tough decisions early and the strength to commit to entrepreneurial
ventures have been common features of the start-up teams at Genzyme; Gilead in
Foster City, California; Millennium; and Genentech in South San Francisco. They
didn't just have the right science—their management teams were capable of
absorbing failure and changing it into opportunities. When you start your own
firm, be sure you do the same. A key will be not throwing good money after bad.
Currently,
fewer than 15 companies in Europe have a market capitalization equal to or more
than $500 million. Of those, only three have passed the $1 billion threshold—Actelion,
Intercell in Vienna and Genmab in Copenhagen. Most of those companies were
formed in the mid- to late nineties, largely by the same entrepreneurs running
them today. Again, most of them have gone through remarkably similar changes
and evolution in their business plans, seen their leading assets fail and, in
some cases, witnessed their share price plummet by 70–80% in a single day. Yet
they have returned stronger and well positioned to grow back.
Timing:
predicting the future
Some
people argue that timing is luck and that you can't plan for things. They are
wrong. You can plan, but only if you are open-minded and position your start-up
correctly. For example, the Human Genome Project created huge excitement, and
companies that were founded two or three years before the project were well
supported by the market. Also, consider that in the early 1990s nobody was
looking at antibodies, but from 1998 onward they became huge. Timing can be
everything and a real determinant of success.
Good
founders, entrepreneurs and management teams will be able to take a macro view
and predict how the industry (or a particular sector) will develop and what it
will look like in 5–7 years. The rule of thumb is that it is easier to predict
how a market or sector will develop during the next few years than it is to
predict the destiny of your drug or molecule. If antibodies are going to be
valuable for the next decade, ask if your company should be developing
alternative platform technologies, new delivery routes or generics. Always look
ahead.
Roche
in Basel, Switzerland, for example, is well positioned for the near future
because of two visionary decisions taken by the company's management several
years ago: significant exposure to biologicals (antibodies in particular) and diagnostics.
The judgments were based on the conviction that these areas would become major
growth drivers in the industry, and Roche is now reaping the rewards of those
decisions. But there will always be the long term, and Roche's management is
deciding what it needs to do now for the company to remain competitive.
Location:
choose wisely
If you
are building a business from scratch, a key objective is to minimize the number
of risks to potential investors. One such risk is the location of your company.
Although you may think that setting up your company in lush countryside will
provide your employees with a tranquil setting that encourages free thinking
and innovation, potential investors will be shaking their heads in dismay at
the distance they must travel. Following a few simple rules can ensure your
choice of location and increase both investment and, ultimately, long-term
equity value.
Biotech
start-ups should locate near established firms for many reasons. Clustering has
several advantages: first, it enables companies to be tuned into an industry's
strategic shifts and become successful together; second, it provides an
environment that will attract world-class talent—recruits have the security of
knowing that if things don't work out with one company then there are others
nearby; third, it allows mixing of skill sets, and many important discoveries
and scientific advancements have come from the convergence of different
disciplines and cultures.
Only a
few global geographic centers have succeeded in establishing solid biotech
clusters. In the United States, these include San Francisco's Bay Area and the
Boston/Cambridge axis in Massachusetts. In Europe, the clusters are less
concentrated, but include the UK's Golden Triangle of Oxford, Cambridge and London;
the Basel/Zurich region in Switzerland; Munich/Martinsried in Germany; and the
Medicon Valley in Sweden/Denmark.
Biotech,
more than almost any other high-tech business, depends on close ties with
leading academic institutions both at inception and for continued survival.
More often than not, critical technologies are discovered and developed in
academia. Close personal and professional relationships between industry and
academia provide the main source for the most promising ideas. Quite
frequently, universities also provide initial staff for biotech companies, in
the form of consulting professors, graduate students and postdoctorates
participating in the research that produced the commercial ideas.
Location
can also play a critical role in exit strategies. Take the example of Ribopharm
in Kulmbach, Germany, and Alnylam in Cambridge, Massachusetts—two world leaders
in therapeutic RNA interference. For Ribopharm, although it had critical parts
of the technology and very compelling intellectual property, it was unable to
create critical mass partly due to its location, and it became attractive to
rival suitors. In the end, Alnylam, located in a biotech hotspot and owning
comparable intellectual property and technology, bought Ribopharm and became
the dominant player in the RNA interference space.
Cash:
VCs equal success
Drug
discovery and development is very capital intensive—companies need to invest
hundreds of millions of dollars before they can start generating profits.
Unfortunately, financing is probably the greatest risk companies face in their
early stages. A common feature of successful biotechs has been their financing
strategies and the investment from VCs. The earlier you can get VC backing, the
greater your chances of success.
VCs
have, from an early stage, backed about 60% of current public European biotechs
at some point. Late-stage investors, private equity funds, bankers and
institutional investors often use the presence of blue chip VCs as a
first-selection criterion to identify potential start-ups in which to invest.
Venture capital can be seen as the very first bit of leverage that an
entrepreneur may possess—essentially a key strategic tool. Serial entrepreneurs
who have previously accessed venture capital recognize this and are more likely
to look for venture capital earlier than first-time entrepreneurs. One very
fair concern of entrepreneurs is that VCs often pay attention to only a few
'value drivers' in the company's portfolio while neglecting the remaining
assets. Although this 'forced focus' may seem to be a limitation on the early
aspirations and vision of entrepreneurs, in reality this strategy does not rule
out pipeline expansion and diversification of the asset base. It instead
focuses limited early investment on reaching major inflection points that allow
further financing at a more attractive cost of capital.
And you
should look to VCs right from the outset. Bringing in VCs gives you access not
only to cash but also to advice, information, market knowledge and networks.
The VCs can help you build the company, make it more financially attractive to
other potential investors and increase the chances of your company going
public. Essentially, the VC acts as a founding partner and gives you a solid
financial platform from which to build your company.
When
you do look for money, don't try to play VCs against each other to gain more
investment for less equity. VCs know what they are talking about, they
understand the market and will do their utmost to raise the value of your
company. It is best to stick to one or two VCs that you trust, have previously
worked with or that have been recommended. The VC you choose will be your
long-term partner in building your company.
Of
course, it helps if your business generates cash, because that decreases the
dependence on equity and/or debt financing. Most companies will not have a
revenue-generating profit stream early on. Forming strategic alliances with
corporate partners as soon as possible can provide valuable endorsement in
addition to financial support. However, it is important to weigh the long-term
implications of such deals. Generous up-front and milestone payments can be to
the detriment of downstream royalties as well as providing a hurdle in the
event of a business sale. The distance, measured in cash, to independence from
equity fund raisings is a key parameter in evaluating the attractiveness of an
investment and its intrinsic level of risk.
Conclusions
Starting
a sustainable biotech company means having the right blend of management,
access to cash, adaptability, timing and location. By recognizing, leveraging
and capitalizing on all the possible opportunities, you will give yourself a
head start on the road to building a successful company. After all, although it
can be done , starting a biotech business from scratch and developing it into a
truly global player that can evolve and adapt with the industry is something
that almost defies natural selection in today's competitive market. So don't
focus all your energy into a drug that most likely will not succeed; rather,
look to build a unique business, with great science, that is forward-looking
and can adapt to the market several years from now. This will make your company
more attractive to VCs at an earlier stage because you are minimizing investors' risks.
With
these elements, combined with a long-term vision, an entrepreneurial spirit,
good management, drive and passion, you will possess the keys to having a
successful biotech company.
Factor
|
Strategy
|
Management
|
Build a team that
shares an ambitious common vision, intellectual honesty and an
entrepreneurial culture in which the driving founders have a long-term
commitment
|
Ability to adapt
|
|
Timing
|
Where is the market
going to be in seven years' time? You should know the answer
|
Location
|
Choose somewhere
accessible that will raise your equity value
|
Cash
|
Attract venture
capitalists from day one
|
Science
|
Make sure your science
is world class, but remember: science alone does not make a successful
company
|
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