Five Strategies for Success: Brave New Biotech World

In the biotech industry’s early days, the benchmark for success for any early-stage company was the nurturing of a biological discovery made in the lab through to market approval. As a result, the value of any company achieving this goal skyrocketed and its investors were rewarded for providing the risk capital that allowed the company to operate and prove its product was safe and effective. Among the choices that senior managers at life sciences companies faced more than two decades ago was whether to enter into long-term joint partnerships with Big Pharmas, or stick with the goal of becoming a fully integrated pharmaceutical company.

At the time, the fledgling industry was indeed highly dependent on the pharmaceutical industry and its success measured, particularly by the capital markets, in terms of how many strategic alliances a biotech had signed with Big Pharma. And by and large, this business model has worked well. According to The Burrill Report, the industry in 2008 became profitable for the first time in its history. What’s more, there are now 43 public biotech companies currently operating that have a market caps greater than $1 billion.

But today, biotech startups face an environment that is radically different than it was 25 years ago, when many of the largest companies got their start. And although many of the original elements associated with becoming a successful outfit remain true today, there have been some important changes.

No longer are there aspirations of becoming fully integrated pharmaceutical companies. After more than 40 years of easy access to inexpensive capital that fueled the success of biotech’s blue chips, the rules of the game have changed. Investors now expect companies to do more with much less capital. In addition, nearly every aspect of the business can now be outsourced. The business model for biotechnology companies that want to be successful in the future needs to be adapted to these new realities.

Here are five key strategies that biotechs may want to consider to thrive in today’s world:

Embrace changing business models:

The traditional model of a fully integrated pharmaceutical company — one that owns the entire lifecycle of value creation from drug discovery, to development, to distribution — has evolved. A shift to partner-driven models, in which biotechs rely on a complex network of advisors, suppliers, service firms, academic centers, shared promotion, marketing, and distribution relationships, is increasing.

Successful companies of the future will seek novel ways to trim operations down to the most profitable core and tightly focus only on those projects designed to increase company value. In the past several months, more than 100 companies have announced restructuring initiatives.

Target new benchmarks for success:

In an environment that will see the public equity markets remain unwelcoming to biotech companies well into 2010, the days of just nurturing a promising product past proof-of-concept trials in order to complete an initial public offering are over. Companies will need to have products on the market with predictable revenue before going public, thus eliminating technology, regulatory, and reimbursement risks. More likely, companies looking to gain liquidity for their early investors will look to be acquired.

Meanwhile, companies seeking financing to advance their technology will be better able to turn to pharmaceutical partners looking to strengthen their pipelines. But this may grow harder as big M&A transactions preoccupy Big Pharma. Increasingly, to spark pharma’s interest in biotech acquisitions, it will take breakthrough products and a strong intellectual property portfolio giving the company wide room and freedom to operate. Pharmaceutical companies may be opportunity-challenged, but many are also cash rich, debt poor, and don’t have to compete for other sources of financing. As a result, they will likely take their time to pick off the products or companies they want.

Take advantage of global arbitrage:

Biotechs will also need to look beyond their own borders for financing and market opportunities to maximize the potential of certain technologies and products. Emerging markets may place a much greater value on them. Smart companies will look outside their borders. They’ll also think strategically about the different value that their products may hold in different markets, particularly where the industry is in an earlier stage of development and where acquiring critical technology may provide greater value.

Be open to new ways to finance operations:

Successful companies will find a new way to finance. The venture capital mechanism for raising money has weakened amid the high cost and long timeline for drug development. Venture investors don’t have the ability to provide round after round of financing and then wait 10 to 15 years for a return.

Fortunately, with the evolution of a more virtual business model where companies can piece together the resources they need as they go, venture investors are now looking for alternative structures with which to build value. There will be a movement to finance individual projects rather than companies.

Whenever possible, demonstrate cost effectiveness:

In the past, all companies needed to do as they developed their products from the lab to the marketplace was to demonstrate to regulators that they were safe and effective. That will no longer be enough. As pressure grows for governments to rein in the cost of healthcare, there will be increasing demand that therapies also be shown to be cost-effective. Companies will not only have to show their products are better able to treat a disease than what is already available, but comparative effectiveness and pharmaco-economic efficiency will emerge as de facto regulatory standards.

In the near future, it will not be enough just to do something better. Pharma, biotech, and medical devices companies will also need to provide true economic savings and better patient outcomes. A dramatic change toward a performance based, high-value healthcare system is underway. Innovative products will not only be judged by how well they perform, but whether they represent true improvements over existing products and do so on a cost-effective basis.