Early biotechnology companies sought to replicate the big pharma model, building an integrated company that went from research all the way to direct sales. But these models proved quite costly to build up and maintain. They increased pressure on fundraising while allocating financial resources to non-critical services.
That’s why many biotechnology companies today adopt a more flexible model, building virtual organization which hires a minimal amount of permanent staff, often working over a dispersed geography while coordinating multiple external resources such as CROs, CMOs and consultants (regulatory experts, patent lawyers, accountants) that are utilized on an as-needed basis. This reduces the companies’ burn rate to a minimum while emphasizing research and development.
Before using this model, the start-up has to answer a number of questions such as:
- What are the core competencies the company wishes to keep in-house?
- What is the selection process which will be used to choose partner companies?
- Should the company use a single provider or select multiple ones?
- Which contractual model will be used with collaborators?
- Will it involve some form of risk sharing (i.e. using equity as payment)?
- Is the company willing to use independent contractors for specific functions?
Some companies have expended collaboration with Contract Research Organizations (CROs). These collaborative models can take different forms. One model, pioneered by Eli Lilly in collaboration with Quintiles allows the small biotech company to develop early assets quite efficiently. Eli Lilly, through its venture capital arm (TPG Ventures) pays the CRO directly to cover the costs of contract research services. If successful, the CRO obtains a performance premium directly from the pharmaceutical company. The model is interesting, as this allows small biotechnology companies to utilize high-quality CRO services, while the investor keeps an eye on invested capital without further integration (buying equity, joint-venture setup, etc…), allowing for a quicker exit if needed.
In another model, Cato Research established its own venture capital affiliate, Cato BioVentures. Through strategic service agreements, CaroBioventures invests CRO Service Capital in innovative companies, sharing the risk with the early stage start-up against a partial cash basis, and the rest in equity. If the project is a success, the CRO will profit down the line, also developing a long-term relationship with the company. As for the biotechnology company, the model allows it to have access to a high-quality CRO provider while also decreasing the short term outlay of funds. Furthermore, showcasing the partnership can also be beneficial when raising funds in the future. CatoBioventures has organized more than 60 shared risk deals in the last 25 years.
Overall, there are a number of business models which can be developed to share costs and minimize burn rate, and companies should be open to innovative models.
The above post is an excerpt from our recent whitepaper that outlines how early-stage biotech companies can bridge the investment gap. Access the complete whitepaper here.