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The above image summarizes some of the common business models in the biotech sector – showing which parts of the value chain the firms participate in and discussing very briefly the usual types of transaction mechanisms they use. Using the lingo of my previous posts (here, here and here), we are looking at the “when” and “how” of interacting with the value chain in these typical business models.

With limited financial resources, the vast majority of biotech firms start out life as RIPCOs – research intensive (or royalty income) pharmaceutical companies. They focus on the earlier stages in the value chain, such as discovery and preclinical development. The RIPCO model covers platform and tool-based companies seeking to commercialise drug targets, services and technologies that can be sold or licensed to other companies. At some point in the product development process, a RIPCO will plug into the value chain by contracting with one or more alliance partners who have the resources and/or capabilities to move the product development project further along the value chain. A RIPCO may not necessarily earn revenues the moment they plug into the value chain, as revenues may be contingent on achievements being made by the alliance partner as work progresses.

In the FIDDO (Fully Integrated Drug Discovery and Development Organization) model, platform companies extend their existing capabilities in order to take an innovation further along the product development process. The expectation is to enter an alliance or licensing agreement on more favourable terms than can be achievable under the RIPCO model.

We also have NRDO (No Research, Development Only) model, whereby a company in-licenses product from others that is already in preclinical or clinical testing. An example is The Medicines Company; that firm does not engage in drug discovery.

With the FIPCO/FIBCO (Fully Integrated Pharmaceutical/Biopharmaceutical Company) model, the strategy is to build and fully integrate most parts of the drug discovery and development chain. Given the large amount of capital required, few biotech firms attain this model, although many dream of it.

More recent concepts are the FIPNET (Fully Integrated Pharmaceutical Network) or VIPCO (Virtually Integrated Pharmaceutical Company Organisation) business model, whereby companies may outsource/contract extensively for services at any point(s) in the value chain, providing access to complementary assets outside the firm. This allows a company to maintain control of the product development process and defer the point at which they plug into the value chain.

Hybrid business models are sometimes used, particularly by platform or tool-based companies that enjoy stable revenues from licensing or sales, which allows for attracting investors or using their own income stream to develop products.

The ultimate goal for many biotech companies is still to pursue a traditional FIPCO structure controlling the value chain for their product offering. This may be a strategy driven by the promise of long-term return to investors and possibly naïve to the cumulative risks along the way. In any case, this seems to have become very difficult to do for biotech firms, due to the significant costs involved in bringing a product through the entire drug development and marketing chain. Therefore, the basic options seem to be to either find a niche in the value chain or control a relatively narrow slice of the market.

My next post will look at how and why the above business models tend to align with different classes of technology.

Janette Dixon