As an entrepreneur at a biotech startup, you have a lot on your mind. You must simultaneously prepare for venture financing, attracting partnerships, going public, a trade sale and the successful launch of a lead product. Being ready for all these options is necessary because it allows access to the 'right' transaction and negotiating leverage at each step of development, but many biotech firms actually execute on most or even all of the options as they grow. Without developing all options at all times, you may lack 'walk-away power' and risk being squeezed into a bad transaction by a venture investor, a big pharma partner or a buyer when your company is short on cash.

Prepare, prepare, prepare

Of course, lots of companies do prepare correctly. Waltham, Massachusetts–based Adnexus Therapeutics is a fine example. Adnexus was incorporated in 2002 and acquired proprietary rights to technology and its lead oncology product candidate in 2003. By February 2007, it had signed an alliance with Bristol-Meyers Squibb (BMS), of New York, yielding an initial $20 million payment with total milestones up to $211.5 million. In August that year, it ended its venture capital cycle by bringing in $15 million, raising its total to $70 million, and it filed an initial public offering (IPO) registration that same month. It never went public, but was bought by BMS for $415 million just a month later. In other words, between February 2007 and September 2007, Adnexus signed a major alliance, closed a venture round, filed to go public and sold the company, yielding fantastic returns to founders and investors. Not too shabby.

On the other hand, there are plenty of examples of fiascos to learn from. Typically, failure can be brought on by disorganization (Box 1) or by missed transaction timing (Box 2), among other pitfalls. Life science ventures are different from those in other industries. In drug development, the path is long, astronomically expensive and very risky. A visionary bioentrepreneur like yourself cannot build a company with credit card debt, as some successful internet companies did in the 1990s. Instead, you must be ready to make deals with venture capitalists, big pharma, the equity markets and a buyer. In fact, a 'traditional' model for developing a biopharmaceutical company is first to raise money from a venture firm, which brands the company as a 'good investment'; then sign a co-development/marketing deal with big pharma, which brands the lead product as a 'good product'; then score an IPO, which brands your clinical prospects as 'promising'; and finally launch a product, with the prospect of a company sale anywhere along the line. Many firms have developed in just this way (Table 1).

Table 1 Development trajectories of three biopharmaceutical companies
Full size table

Building for all transaction options

There are several steps you can take to ensure that appropriate transaction options are available at critical junctures. In particular, as an executive, you should focus on a few core elements.

  • Your product must be targeted to meet an unmet medical need.

  • You must have 'freedom to operate' and exclusivity in the field.

  • You should have the right management team and advisors.

  • You should avoid contingent liabilities.

These elements are important for all transactions along the development line. As a founding scientist and entrepreneur, you may not be focused on an exit or a 'liquidity event' like a company sale, but the venture investors on whom you will necessarily rely are singularly focused on it. The good news is that the factors that make a company attractive for sale are the same factors that make it attractive for successive 'up' rounds of venture investment, big pharma partnerships or an IPO. So to maximize transaction options and avoid being squeezed, as I've explained in Box 1 and Box 2, you must be focused on these building blocks from the outset. Great science is not enough to ensure entrepreneurial success.

Building block 1: product meets unmet medical need

The United States is the biggest market for biopharmaceutical products in the world, and all political forces work to limit payments by government and private insurers to those products that set the standard of care in a defined patient population and have patent or orphan drug exclusivity. (There is also room for high-quality, low-cost generics.) The political forces include legislative proposals to permit 'generic' follow-on biologics; patent reform, which would ease challenges to innovative products; measures to permit government negotiation of product prices; and comparative effectiveness studies sponsored by the government to ensure only the 'best' product is fully reimbursed. Europe has already gone in this direction, with government agencies making treatment recommendations and coverage decisions, favoring the most effective and lowest cost products. So the days of 'me-too' products are limited.

In this environment, you must rigorously screen product candidates. Will your product candidate set the standard of care? Can exclusivity be obtained through patents, orphan drug status or both (Table 2)?

Table 2 Comparison of patent protection, orphan drug exclusivity
Full size table

Also, what types of clinical studies, including head-to-head studies to show superior efficacy, are needed to have a data package necessary to convince public and private payor systems with strained budgets to pay for the product? All of these questions must be answered to select for development a product that is most likely to be a commercial success.

Building block 2: 'freedom to operate' and exclusivity

Without a product that meets an unmet medical need and has 'freedom to operate' in the market and patent or orphan drug exclusivity, the expected sales and market value of a drug candidate is limited, and likely to be much more limited in the future. It is important that you evaluate and understand both freedom to operate, which is the ability to promote a product without infringing another company's patents, and potential exclusivity through patents or orphan drug designation. You also must establish the patent and orphan exclusivity of your product, which allows the company to block competitive products.

Freedom to operate involves an analysis of the patent and orphan drug designation of other products in a proposed indication. For example, if you have identified a new product candidate for Pompe disease, it is important to understand the scope of existing third-party patents and any orphan designations in that field. If the field is well covered by existing patents or orphan designations on effective products or promising candidates, the value of a new product may be low unless it will dramatically change the standard of care.

Once the competitive landscape and freedom to operate is well understood, bioentrepreneurs need to acquire exclusivity for their products through patents, orphan drug exclusivity or both. The market potential of any new product is in large part defined both by a company's ability to market its product without interference from others (freedom to operate) and the availability of exclusivity platforms that allow it to prevent others from selling competing products (patents and orphan exclusivity).

Building block 3: hiring the right management team, advisors

Experience counts. Venture capitalists receive hundreds of business plans. They will surely not have a full appreciation for your technology and target product based on your business plan. However, they will get an immediate sense of your company from the track record of your management team. Management team and outside advisors should have experience in their fields and in preparing a company for venture financing, pharmaceutical partnership, IPO and sale. In other words, experienced management will ensure that the company has options that create walk-away power, leverage for negotiating good deals and the best opportunity to maximize outcomes and achieve its potential.

The right management team and advisors will also help the company avoid mistakes. In Box 1, our early-stage biopharmaceutical company was delayed in securing financing because of organizational mistakes. In later-stage companies, sloppy contracting can become a problem. For example, in a rush to complete a license agreement, startups sometimes agree to restrict their freedom to operate by contract. They might in-license a technology or even a product for development but restrict use in certain indications and fields. Worst still, they might agree not to compete in certain fields. Experienced management and advisors will ensure an early-stage company does not unwittingly make mistakes that will adversely affect future transactions and reduce options.

Building block 4: avoid contingent liabilities

In any transaction, whether financing, sale or IPO, expect extensive due diligence on your company. This process is intended not only to confirm facts but also to uncover contingent liabilities. Large contingent liabilities make it more difficult and perhaps impossible to close transactions.

In the biopharmaceutical area, compliance concerns are now a serious contingent liability that cannot be overlooked by a company. Compliance concerns include the failure of a company to have a compliance program in place or to comply with all applicable laws. Of particular concern is any failure to comply with prohibitions under the Food, Drug and Cosmetic Act on preapproval or off-label product promotion or federal antikickback laws, which prohibit paying anything of value in exchange for the referral of business (including drugs) paid for under Medicaid or Medicare. Several pharmaceutical and bio-pharmaceutical companies have settled criminal and civil investigations by federal and state prosecutors and entered so-called corporate integrity agreements, that regulate their operations going forward, and the operations of any companies they acquire (Table 3).

Table 3 Notable corporate integrity agreement (CIA) settlements (2005 to present)
Full size table

If an acquired company is out of compliance (or subject to any other large contingent liability), then the buyer may inherit the large liability. For example, New York-based Pfizer paid $430 million postacquisition for the preacquisition conduct of the Warner Lambert division, and Jazz Pharmaceuticals in Palo Alto, California, paid $20 million for the preacquisition conduct of Orphan Medical. Because compliance concerns and other contingent liabilities may adversely affect sale prospects, they also are of great interest to venture capitalists, IPO underwriters and big pharma partners.

Conclusions

The development and launch of a biopharmaceutical product often takes more than ten years at a cost in excess of $1 billion. A bioentrepreneur must be flexible and prepared to complete the right transactions at the right times to maximize success. What is 'right' will change with circumstances, so the only way to be prepared is to always be prepared for them all. Without having multiple options and thus, walk-away power, you might be squeezed and receive substantially less return on your innovations. On the other hand, if you develop all options, you will have leverage and the luxury of picking the transactions that realize maximum potential and financial returns.