Which Way Forward?
by Elisa Ludwig
June 2008
Amidst the constant need to secure steady financing, emerging biotech companies are considering options that will not only produce a larger return, but also increase the likelihood of getting a product to market.
Emerging biotech companies have a number of options for long-term business strategies, but the challenge is finding a strategy that dovetails both with the company’s values and with current market conditions. “It’s the best of times and the worst of times,” says Chip Gillooly, vice president of NovaQuest, the managed partnership group of Quintiles Transnational in Durham, N.C., USA, with additional offices in Europe and Japan. “It is absolutely a fantastic time if you’re a biotech developing products in a hot therapeutic area of great need, but one still sees too many undercapitalized biotechs out there, with too few products and under-powered development plans.”
The Next Generation
Experts say that the models that worked for pioneering biotech companies such as Amgen and Genentech a couple of decades ago no longer seem relevant to young companies today. “I think we’ve seen the last of the big biotech companies grow up,” says Ed Saltzman, president of Defined Health, a biotech, pharmaceutical and health care consulting firm in Florham Park, N.J., USA. “Those companies were able to grow under a very different market in which investors had long timelines and companies had multiple points to exit along the way.”
Whereas the IPOs of an earlier generation of biotech firms signaled an era of transformation, the current crop would be hard-pressed to find the same generosity in the public marketplace. “The prognosis for new biotechs trying to access public markets is pretty dismal, and investors have had to change their sights in terms of exit strategies,” Saltzman says.
Once the harbinger of ultimate success, an IPO could now signify weakness for a company, Gillooly says. “Perversely—and this is my opinion based on what we’ve been seeing—the IPO window can be construed as a sign the company was unable to secure private capital from existing shareholders or other sources.”
Eventual acquisition remains the strongest exit strategy option for small biotechs, given that biotech has become the de facto early stage development feeder for big pharma. “In the last four or five years selling to big pharma has been the predominant exit, and for some companies it’s the only alternative,” Saltzman says.
Partner Up
Yet there are other options available to companies that wish to remain independent through development and even eventual distribution. Partnership and licensing deals allow companies to keep their own management intact while relying on outside support to get a product to market, maximizing resources and minimizing risk, and most importantly, allowing biotechs to do what they do best. “We’re seeing hundreds if not thousands of these every year—biopartnerships, strategic alliances, licensing deals, whatever you want to call it,” Saltzman says.
Indeed, more biotechs recognize that partnering allows companies to avoid the in-house bureaucracy that burdens large corporations. Gillooly reports seeing a “once-in-a-lifetime” shift as the pharmaceutical industry offers its partnering resources to biotechs and vice versa. “We are working every day with more biotech companies exploring the potential for commercializing a product and holding onto products longer, like ProStrakan, which recently announced an alliance with NovaQuest to commercialize its product in the U.S.” Certainly that’s a viable strategy for an emerging company with a niche-type product, and it’s becoming more and more of a consideration, he says. “But if you’re talking about a blockbuster primary care product, the associated costs are monumental and that product must be supported by a small army of commercial folks.”
If infrastructure is, as Gillooly says, “the anchor that slows down so many of these companies,” emerging biotechs can stay vital by outsourcing sales, keeping personnel numbers low and keeping the operation more flexible and responsive to changes in the marketplace.
Another option for long-term independence is through private investment, which continues to be a significant avenue for some biotechs. “The capital providers for much of the biotech community are still the venture capital firms that seem to be raising ever larger new funds,” Gillooly says. “Within that context, there’s a significant amount of capital available to put into biotech companies. However, the bar is being set higher in terms of clinical development strategies by these investors.”
Years after the biotech boom of 2000, biotech executives can expect today’s investors to be more cautious and more demanding about development timelines. “I think a biotech company’s ability to remain independent is just a function of the patience and the timelines of their investors,” Saltzman says. “Unfortunately, over the course of the last 10 years, there’s been a steady erosion of investment, and the timelines for some kind of liquidity event are shorter.”
According to Saltzman, biotech companies pursuing innovation are going to be forced to push their programs to a proof-of-concept stage in a shorter amount of time and with as limited investment as reasonably possible. Capital efficiency in development—limiting indications in the early stages of product development, appealing to unmet medical needs and minimizing the risk profile—will be most important for emerging biotechs, whether acquisition or independence is the ultimate goal, he adds.
Gillooly agrees. “If you’re a biotech, almost all your value is wrapped up in your clinical development, and you need to take very special care of that precious cargo. But what’s exciting is that biotechs can do it cheaper, faster and smarter.”
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