Virtual approach gains traction as alternate path to corporate development
Venture capitalists have a well earned reputation for being hard nosed and matter of fact, so it was a rare opportunity to explore the leading edge of investment theory in a workshop session at BIO-Europe Spring® 2010 playfully titled, “The Virtues of Being Virtual.”
Organized by the partners in Competitive Drug Development International, Grahaem Brown and Michael Tansey, the panel session outlined the principles behind building and funding a virtual company, which is rather a novel approach to drug development designed to increase flexibility, improve capital efficiency and outcomes.
Axel Polack with TVM Capital courageously and convincingly offered an investor’s perspective as the first question in the minds of participants is whether such a model would attract funding.
The solid underpinning for the virtual approach is the increasing appetite among big pharmaceutical companies for early deals that now have reached the pre-proof of principle stage.
A company able to move a program forward while keeping costs to a minimum through outsourcing becomes attractive, he explained.
“It is a relevant investment approach, even if there are not a lot of real life examples out there,” he ventured, before describing key elements for an investor in assessing such companies and their prospects.
“This is not empire building as in the past,” he cautioned, saying the ideal profile is “a small and dedicated team, smart outsourcing, and a strong business development ability from the outset.”
“Everything is going to revolve around the proof of principle as opposed to reaching a Phase IIb stage,” he said.
For an investor, “there must be shared and agreed visions to exit, and a will to kill if milestones are not met,” he said.
He distinguished between two broad classes of virtual companies, comparing them to platforms, one an oil rig and the other a sports car.
“The oil rig is expensive and it is fixed in place as the core intellectual property and technology reside inside the company,” he explained, whereas the other is small, nimble and fast with high performance skills—both can be very profitable.
Polack shared a four-quadrant analysis that is a work in progress for determining where to play with a virtual company.
On one side there is the division between those companies offering an innovative compound against those who are bringing forward a proven compound class.
Against this continuum there is the determination whether the company seeks to develop a first in class non-validated compound or a best in class validated compound.
Ultimately for an investor the complexity requires a portfolio approach and he estimated that ten such investments would be required to assure a return.
Now the CEO of the virtual company NOLabs AB, Patrick Schnegelsberg was formerly an investment banker and he appreciated the analysis offered by Polack.
He said that more than financial investment, he seeks subcontractors who are “fully invested in the company as well.”
“We are a team of three people and we have a significant challenge in managing vendors and the expectation of investors. Our solution is to create a company where everyone has a stake in the development with a non-traditional framework for providers and suppliers,” he explained.
“Instead of a fee for service, we ask them to become invested in the risk,” he said.
“Any resource provider has to be as passionate about the program as we are, and if they are then they are ready to put skin in the game,” he said.
After that it is a negotiation, “to keep the skin high and the cash expense low and to see how far you can get with that approach.”
The CEO of Sorrento Therapeutics, Toni Schuh, reinforced this strategy explaining, “Everyone tells you the smart approach for the virtual company is to keep in house what is critical for competing and to outsource the rest,” he said.
“Putting this into practice becomes difficult because it severely limits access to the skills and experience of people needed,” he said.
“Our critical issues are not speed and cost but to get expertise,” he said, adding, “Our company has as many consultants as it does employees, and all of them receive more payment in stock options than they do in cash.”
Another conventional wisdom that is challenged in practice is the notion that research and development is a predictable process that can be charted.
“We are a platform company, so that once we begin outsourcing, there is a serious concern that others are going to generate their own intellectual property off of our technology,” he said.
“The question you have to ask is whether you believe your product is so good that you do not have worry about people developing other products, because you can not control what goes on in an outsourced process.”
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