Getting Discovery to the Commercial Arena: Not for the Faint of Heart

Moving a new idea to market is a tenuous process that demands balance between investors and inventors and careful management of financial risk.

Abstract

A promising technology needs more than just a passionate scientist behind it to achieve commercialization. Acquiring funding requires business acumen as well.

Research institutions and educational institutions play pivotal roles in entrepreneurism. They train tomorrow’s workforce and facilitate “spin out” of the medicines of tomorrow. For each new discovery, the complexities of the development process should not be underestimated. Moreover, complications stem from the fact that investors often seek a proven track record before trust can be established and investment pledged.

Those wishing to translate a nascent technology to the commercial domain need substantial business and scientific acumen. Rarely, if ever, does the chief scientific officer (CSO) working at the bench have the business acumen to move the discovery forward — compromising its commercialization prospects from the start.

Every research institution, academic facility, and medical school has a technology-licensing group charged with the outlicensing of discoveries. A few of these technologies have commercial potential. Due diligence necessitates, though, that any technology that could be useful outside of the laboratory should have proof of concept, market potential, a sound management team surrounding the primary CSO, and at least a modest level of investment.

In reality, most of these technologies are high risk, based on their anticipated transition from discovery to product development, time to market, high “burn rate” in research and development, regulatory pathway, maturity of management team, and minimal business infrastructure. These factors combine to make getting discovery through its life cycle continuum tenuous — and an inevitable investment risk.

FUNDING MECHANISMS

While prospects for biotechnology products entering the market in the near term appear optimistic, this optimism has hardly translated into financial stability for the companies producing these products. More biotech drugs are in the pipeline than ever, some of which are close to reaching the market (Arnst 2005). Yet, attracting the cash to feed the pipeline has been hard. The American Stock Exchange Biotech Index (2005) has remained flat despite the rapid rise of companies like Genentech. Indeed, in the last two years, shares of 40 biotechs that have gone public have fallen by about 7 percent on average, making initial public offerings unfavorable right now (Weintraub 2005).

Venture capitalists have tended recently to invest in later-stage companies with products closer to market, because they present less risk and a faster return on investment. Smaller companies, then, have turned to venture funds owned by big pharma and biotech companies, such as Amgen, AstraZeneca, and MedImmune, that are looking for technologies for their pipelines. Consortiums, which may include VCs and angel* groups, can provide shared risk and much larger investments than any single group (Weintraub 2005). This type of cash investment, as opposed to developing a complex partnership with a single bigger entity to develop a drug, is often more popular for smaller concerns because the early-stage company can maintain some autonomy over management of its programs.

Meanwhile, the big pharmaceutical and biotech investors, through their experience, can offer valuable advice to the maturing entity on such difficult issues as manufacturing and regulatory challenges, which can help steer the drugs, devices, and diagnostics through those minefields in a cost-effective way. This kind of advice is advantageous to all parties concerned.

Often, financially strategic alliances occur when the startup company moves toward its first phase 1 trial, an extremely expensive time. The best strategy often is to partner with another company, but such relationships can get quite complex (Table 1) in terms of balancing the financial ties between the partners and the inventor.

TABLE 1.

EXAMPLE OF STRATEGIC FINANCIAL TIES IN THE PRODUCT DISCOVERY PROCESS

Researcher: John Lollar, MD, professor of medicine, Emory University, Atlanta

Discovery: OBI-1, a genetically engineered molecule for hemophilia treatment

Partner 1: Octagen Corp. entered into an exclusive worldwide licensing agreement with Emory for commercialization rights to OBI-1

Partner 2: Beaufour Ipsen, sellers of the commercially available porcine factor VIII (Hyate C) used as standard comparison

Clinical phase: Phase 1 in up to 20 clinical centers throughout the United States and United Kingdom

Study: Compare single infusions of OBI-1 against commercially available Hyate C, derived from pig plasma

SOURCE: GEORGE 2003

More often than not, complex collaborative agreements involve a university building alliances with a VC or angel group as well as with small and large biotech/life sciences companies. The partnership described in Table 2 resulted in a $3.6 million private placement, but a certain level of control was relinquished to get this agent that targets cancer through phase 1 trials.

TABLE 2.

EXAMPLE OF COMPLEX COLLABORATIVE AGREEMENT IN NEW DRUG DEVELOPMENT

Biotech: Oncogenex Technologies Inc.; Isis Pharmaceuticals

License: University of British Columbia; Vancouver Hospital and Health Sciences Centre

Technology: Novel therapeutics for cancer using antisense technologies

Clinical trial: phase 1 and preclinical

Investment Partners ($3.6M private placement): BDC VC; Qwest Emerging Biotech (VC) Fund; Milestone Medica

SOURCE: RBC 2002

In another example, San Diego-based Conforma Therapeutics (2005) recently raised $41.5 million from a consortium of investors that included venture funds held by Eli Lilly, Novo Nordisk, GlaxoSmith-Kline, and Forward Ventures, a VC company. The consortium provided constructive input from all four contributors, leading to important decisions in the young biotech’s maturity.

A structured financing arrangement sometimes makes sense for early-stage companies that need to increase cash flow, allowing a life sciences start-up to license its drug or technology to a private investment fund — with options to buy back the drug or technology later if it proves promising in early trials. The downside of this process, however, could be a change in management and/or a share in the final product profits (Weintraub 2005).

Assuming that a successful transition to commercialization occurs, state-supported funding organizations designed to help carry these technologies through their earliest stages generally request some measure of buy-in or capitalization (e.g., loans with personal assurances, grants that must be paid back, warrants, equity, company matches) from the entities they support — something that is almost impossible for the earliest concerns. Such organizations often provide technology development programs that are designed to support a young company’s emerging technology by providing small grants for research and development. The remuneration is rarely enough, however, to warrant the time and expense needed to push it toward commercialization.

Federally supported initiatives, like the Small Business Administration’s Small Business Innovation Research (SBIR) programs, can be the most promising funding source — but these are to support the technology, not a marketing plan. They also are extremely competitive and allow for only a small contribution to the company’s business infrastructure.

FOR THOSE WHO SUSTAIN THE MOMENTUM

Because the CSO often does not have the business acumen necessary to be the perfect CEO, and also because of limited funds in most cases, an early technology begins its tenuous journey in the commercial world without a mature business plan, comprehensive market survey, or strong patent protection. This presents the fledgling company with a dilemma in that the inventor needs to leave the university or research center once the discovery has shown some commercial promise. Yet the process continues to be technically driven, such that the business infrastructure (CSO versus CEO) is risky for investment, leaving the budding entity cash poor and often business inept.

Taking the initiative to work, with these fledgling entities vying for commercial promise (but with little financial support to develop a mature infrastructure), means managing risk and working from the heart. Passion and a belief in these grassroots, state-of-the-art technologies and their promise for tomorrow’s therapies, devices, and diagnostics can help these entities get their seat at the table. Any equity stake would mean a long-term commitment until realization, and more often than not, the young company folds in its tender years. Similarly, service providers who work for fees are for-profit businesses that need a return for their expertise; few businesses can afford to work pro bono for long periods or for a deferred or reduced fee.

In the Philadelphia region, a new partnership recently emerged, harnessing collective expertise and working one-on-one with the earliest commercial efforts coming out of the research arena. This relationship seems to offer the brightest hope for tomorrow’s medicines. Groups like Innovation Philadelphia, Launch, and not-for-profits such as BioStrategy Partners work to move technologies and discoveries beyond the bench by bringing together university, research, and medical institutions with experts in their respective commercial fields. In these creative partnerships, due diligence ensures that the service providers are the best and that the companies for which they are intended are viable. Where merited, financial support is provided for the service acquisition, with oversight to ensure that services are provided appropriately, the company uses the services as originally intended, and the money is well spent. Successful partnerships allow the young entity to reach the next level in its life cycle; the further along a product is in its development, the less risky the investment.

Organizations that act as gatekeepers and are willing to work at this risky end of the life-cycle continuum know the difficulties that the start-up community experiences; invariably, it is because they have been there themselves and have experienced the frustrations of trying to obtain infrastructural support with little or no financial means to acquire it. They know that belief in a new and exciting technology alone does not ensure success as a commercial venture.