Building a Business > Managing risk

Published online: 26 July 2004, doi:10.1038/bioent817

Riding the risk cycle

*Roop Chandwani is at TTRBio Ltd., a London-based biopharmaceutical product development company. rmc@ttrbio.com

**Simon Portman is at Hewitsons, a Cambridge, UK-based firm of solicitors. simonportman@hewitsons.com

For startups, early identification and planning for potential risks can mean the difference between success and failure.

Startup companies founded around innovative science and staffed by inventors with commercial aspirations have never encountered so many challenges. Perhaps the single greatest challenge is finding the cash needed to invest in developing products—and in some sectors, such as the life science industry, development timelines can be long, making the process complex and challenging, yet also exciting, dynamic and (one hopes!) rewarding.

In seeking growth and financial success, a biotech startup will encounter myriad risks that could be technical, scientific, commercial, financial, market-driven and even created by unknown influences. Such issues that may negatively affect a startup that is focused on getting its breakthrough science and product into development and the marketplace can take the form of narrowed labeling claims, product liability, a regulatory agency's request for additional clinical data, prolonged patient recruitment in clinical trials, challenges to intellectual property, financing issues and price reimbursement. When these risks materialize, the consequences can be devastating, with entire companies destroyed, losses to shareholders and investors, development programs delayed or even obliterated and management's reputations tarnished. Against this backdrop, investors, potential customers and entrepreneurial management are increasingly looking at effectively managing risk as a key component of success.

Keeping your balance

The virtues of balancing risk and reward have been described previously^1,2. But the business environment changes as a biotech venture matures, with regulations and legislation demanding greater evidence of accountability. A startup would be well advised to embrace the culture of managing risk by adopting the core components of the 'risk cycle': identifying, quantifying, managing/responding and monitoring/controlling. This process does not have to be complex, especially in startups, with the aims being relatively straightforward:

• Establish a list of risks facing the company. Initially, for example, brainstorm with the stakeholders, not just the founders and employees (this might include professional advisors).
• Filter the information you have. Categorize this list using a number of qualitative and quantitative metrics, such as business or management function, financial metrics and stage of the company.
• Prioritize your risks. The easiest way to tackle this challenge is by using your business plan as a benchmark, because there will be some risks that are time critical (e.g., filing patents, raising money, recruiting staff), those that will be critical to the next stage of development, those that are likely to require resources and money to address, and some that just have to be accepted. You must decide what key risks need to be addressed or mitigated, and then assign somebody to manage them.

Putting this process into context, Box 1 shows examples of risks that have plagued real-life startups and how these can be counteracted. These examples are likely to be familiar to more than a few unfortunate companies. As we shall see, sometimes the best and even only solution to these issues is not to get into this position in the first place! The solution boils down to planning, taking special note of the early identification of warning signals and issues.

Staying on the ride

Risk in the life sciences is a complex subject with many aspects and variables. Certain elements not addressed in Box 1 also need to be taken into account, such as the technology risk (that is, failure) and the options open to companies when a product fails. The examples presented in Box 1 reflect that sometimes there is little post-incident solution to a risk, and these issues are best addressed early in the planning process. The life sciences industry is mature enough for early-stage companies to learn from those that have previously encountered these risks. Increasingly, they are managed by people who have learned from their mistakes. One of the best risk mitigation tools that an early-stage company can have is a professional advisor base that spans insurance, legal, accounting, intellectual property, tax, market research and competitive intelligence and that can work with the management team in addressing risk.

One final tip concerns contracts. Contracts are possibly the single most value-creating instrument within companies whose value rests on intellectual property and can conversely also lead to significant liability. Furthermore, if you concede to onerous terms because securing that contract is key to your business, remember that even if you can live with those terms, a future investor or acquiring company may not be able to. You should also watch out for illegal contractual provisions, particularly under any relevant antitrust regime. A simple register of contracts, listing contracts and summarizing the main contractual responsibilities and liabilities adds enormous value to understanding your obligations, and in many cases can help a bioentrepreneur avoid many intellectual property-related mishaps.

References

1. Henderson, S. Managing business risk. Nat. Biotechnol. 19, BE23–BE25 (2001).

2. The Association of Insurance and Risk Managers (AIRMIC). A Risk Management Standard. (http://www.airmic.com, 2002).