How to start a biotechnology company January 20, 2005 UCLA
Why start a biotechnology company? • Technological innovation can create competitive advantage (when properly protected). • What can we do better, smarter, faster, cheaper? • In the early days of biotechnology, the potential was thought to be in drug development • That protein-drugs would have • lower toxicity • superior bioavailability • high efficacy • Technology Push or Market Pull?
A brief history of biotechnology • Recombinant DNA methodologies first invented in late 70’s and continually refined • Courts rule that DNA is patentable • Scalable • Flexible • Enabling • What should we make?
What is a biotechnology company? • Generally refers to any company using recombinant DNA technology AND • Any small, start-up company pursuing drug discovery
What elements are required? • Market Niche or Need • Entrepreneur • Technology • Capital
Market niche or need • Most biotechnology companies focus on pharmaceutical discovery • Why? • Low volume, high value • Relatively low plant, property and equipment requirements • Other applications include agriculture, industrial
What is an entrepreneur? • Risk takers • Pursue opportunity without regard to the resources they currently control • Have a vision of success • View change as an opportunity • View themselves as agents of change • Can thrive in the right environment
Technology • Licensing technology • Bayh-Dole Act • Protecting technology • Private versus public ownership • Developing technology
Challenges to Technology Commercialization • Recognition of potential • Avoiding technology push • Focusing on market pull • Regulatory hurdles • Access to capital • Management
Technological innovation is not always obvious! • "This 'telephone' has too many shortcomings to be seriously considered as a means of communication. The device is inherently of no value to us." • Western Union internal memo, 1876. • Other examples include: • Steam engines • Computers • Internet • Recombinant DNA
What is Technology Push? • An innovator sees an opportunity to profit from a technology that has little or no current market. An "entirely new" market is created, based on the novel capacities of the technology. • Users do not know they need a product until it is there.
Examples of Technology Push • Xerox machines • Polaroid cameras • Transistors • Fax machines • Integrated electronic circuits • Beta-max • Laser discs • FlavorSaver • DVDix • TPA? • Camera phones? • iPods? • Biotechnology? • GMOs?
What is Market Pull? • Occurs when existing firms seek better technologies to reduce their costs of production or to make marginal improvements in the quality of their existing products. • The market "pulls" technology into it. A need exists, and there is currently no technology to meet the need.
Examples of Market Pull • VHS format • GUI interfaces • CD ROM • Google? • Apple’s music store? • Biotechnology? • GMOs?
Pharmaceutical product development • R&D • Screening • In vitro characterization • In vivo pharmacology, ADME (Absorption, Distribution, Metabolism, Excretion) • Preliminary toxicology • Preclinical • Process chemistry (GMP) • Toxicology (GLP) • Clinical plan • File IND (Investigative New Drug) • Clinical • Phase I, Phase II • Phase III • NDA (New Drug Application)
Product development timeline $10-20M $10-20M $20-30M $30-60M 1:10,000 1:100 1:10 1:10 1:5 1-5 years 1-2 years 1year 1-2 yr 1-3+ yr R&D Preclinical P I P II P III
Sources of Capital • Revenue • Banks • SBIR’s • Angels • Venture Capital • The three F’s
What is Venture Capital? • Unsecured equity investing • Money is invested in return for stock • Investment returns are generated when that stock can be sold at a significantly higher price.
Venture Capital • Venture capitalists generally: • Finance new and rapidly growing companies; • Purchase equity securities; • Assist in the development of new products or services; • Add value to the company through active participation; • Take higher risks with the expectation of higher rewards; • Have a long-term orientation
What is market capitalization? The total number of shares issued by a company X the price per share = the market capitalization or value of a company 8 shares X $2/share = $16
The financing lifecycle of a biotech co. • Seed • Start-up or “First” round • Second round • Mezzanine round • IPO • Secondary offering
Valuations increase with investment [18.5M shares] ($20M) [13.5M shares] ($15M) [6M shares] “pre-money” valuation = $111 ($5M) [1M shares] $1 $2 $4 $6
Valuing companies • Traditional investors use financial parameters to value companies. These include: • Multiples of revenues • Multiples of earnings or “PE ratios” • But biotechnology companies do not have revenues or earnings for 10 years or more! How are they valued?
Seed stage (<$1M) • Write business plan • Management, market, technology, products • License technology • Attract angel investors or specialized firms • The 3 F’s
Start-up or “First” round ($1-10M) • Bring in professional investors • How is the company valued? • Attract management team • Build-out facility • Begin product development
Second Round ($10-30M) • Typically still VC investors • Continue product development • Provide “proof of principle” or other “validation”? • What justifies a step-up in valuation?
Mezzanine round ($25-50M) • VC and “later stage” investors • Continue product development • Provide “proof of principle” or other “validation”? • What justifies a step-up in valuation? • In clinical trials?
IPO round ($100M) • Mutual funds and institutional investors • Complete clinical trials? • Conduct product development on additional candidates? • How much risk are these investors being asked to take?
What is a FIPCO? • Fully Integrated Pharmaceutical Company • Examples: Amgen, Genentech, Chiron, Biogen, Gilead, MedImmune • Focus on proprietary drug discovery • High Risk • High Return
The FIPCO Hockey Stick R&D Phase I Phase II Phase II IND The NPV of failure in a single-product company is $0
The Fundamental Flaw • The traditional FIPCO business model requires too much cash from investors upfront and loads a disproportionate risk on later stage investors.
A Few Words on Biotech Business Models • Platform • Examples: HGS, Exelixis, • Millennium, Ceres • Sell platform to multiple • customers while pursuing • forward integration • Low Risk • High Return • Service • Examples: Incyte, Aurora, • Gene Logic, Lion • Focus on providing high- • value services to pharma • Low Risk • Low Return • FIPCO • Examples: Amgen • Genentech, Chiron, • Biogen • Focus on proprietary, • self-funded drug discovery • High Risk • High Return
What makes biotech so expensive? • Long product development cycles • Regulatory hurdles • Technology development • Are there alternative products/industries for which biotechnology is applicable? • Will there be start-up companies in these areas?
How to start a biotechnology company? • Do everything all entrepreneurs have to do AND • Manage product development risk while; • Attracting capital at attractive prices