My last post talked about broad classes of technological innovation – novel research methods and tools, novel mechanisms of action or targets, novel compound types and novel treatment modalities – and the common business models associated with them. The type of technology a company has influences the choice of business model, since the technology bears on the need for specialised assets, such as manufacturing and distribution that may or may not be readily available, and on the ease of transferring knowledge about the technology to collaborators, licensees or acquirers. Some technologies are readily written down in standard operating procedures or lab reports, whilst others may be more art than science and their implementation may require extensive personal expertise. However, technology type is not the only factor driving a firm’s choices.

The hard reality is that drug development is an expensive process and access to capital is a massive constraint. The high costs are largely driven by the high quality standards inherent in clinical trials and manufacturing in order to pass stringent regulatory hurdles that stand between our innovations and commercialising a product. And for the most part, we need access to assets that are outside of our companies – such as clinical and regulatory capabilities, manufacturing, sales and marketing infrastructure and the like. Financial constraint often impairs our ability to build these assets internally, some of which may be needed to deal with regulatory burden.

The environment is tough. How do biotechs choose the best strategy? Which business models work best? There are no easy answers or good data to help make these decisions. The knowledge and data are simply not available because the biotechnology sector is too early in its life cycle to provide stable patterns of performance. Even the early successful biotechs have significant differences in strategies – Amgen commercialised a few blockbuster drugs, Genentech focused on smaller markets (e.g. specific cancer therapeutics) and Genzyme focused on very rare diseases.

However, I have made several observations (during my doctoral research) about strategies for biotech start-ups. Firstly, companies often endeavour to progress as far along the value chain as possible – capital and capabilities permitting. Certainly this is the trend that has emerged in the wake of the platform company era. There is a strong tendency for start-ups to plug in to the value chain at the point where they either run out of capital or they require complementary assets (such as sales and distribution) that they cannot easily access.

That is to say, biotech start-ups often enter into a partnering transaction when they can no longer raise enough capital to continue along the value chain independently or when they reach some kind of obstacle that they do not have the skills or resources internally to overcome.

Secondly, it is not uncommon for companies to pursue therapeutic indications where there are lower regulatory barriers, such as orphan diseases or acute uses for a drug rather than chronic, thus lowering cost and risk. Many companies focus on reformulations of existing drugs to minimise cost and risk.

Thirdly, in the absence of sufficient capital to bring their innovations to market, biotech companies pursue a number of supporting strategies:

• Leveraging strategies
• Survival strategies
• Alliances
• Strategies for building credibility

Leveraging strategies

All companies that I studied faced significant cash constraints. This caused companies to add value to, or to de-risk, more than one asset, and also to use assets in more than one way. For example, preclinical and phase 1 safety data may be applicable to more than one product based on a single molecule or technology. Similarly, proof-of-concept in a first indication may strongly suggest that proof of concept will be likely in other indications. Companies typically have a pipeline of projects that they intend to develop, and leveraging strategies are used to ensure that money spent enhances the value of several projects. (See also Taylor and Ramsey’s post for more ideas on leveraging strategies.)

Survival strategies

Survival strategies are often tangential. Examples include the provision of contract research or contract manufacturing services to third parties in order to generate surplus cash flow. Survival strategies are aimed at ensuring that the company lives until it earns a return on its core business. Sacrificing the first-born project through an early stage deal provides cash flow that will improve the firm’s chances of survival. Sometimes survival strategies are incorporated up-front as part of a business plan, whilst other times they are developed in response to financial pressure.

Alliances

Alliances are key for pursuing development and commercialisation in the face of capital constraint. Alliances can provide cash-strapped start-ups with access to complementary assets that they cannot afford to develop in house. Furthermore, alliances often provide the third-party validation and credibility, which may support further raising of capital.

Strategies for building credibility

Credibility for biotech start-ups may come from several sources – the reputation of the team, the science, or key investors and alliance partners. Biotechs can pursue credibility by ensuring that their scientists participate in conferences and by publishing in peer reviewed journals. Firms can also win credibility through cornerstone investors such as large pharmaceutical or biotech companies and respected venture capital firms.

The key strategic issues (capital constraint, regulatory burden and the need for complementary assets and credibility) faced by biotech firms are inter-related. Combine those with project-specific factors, such as market opportunity and competition, and the decisions about ‘what’, ‘when’, and ‘how’ to plug into the value chain are shaped. Over my next few posts I am going to explore the implications and trade-offs that surround each of these strategic decisions, beginning with ‘what.’

Janette Dixon