Experts explore the new landscape in company formation
How has the landscape changed for start-up companies who want to go commercial? Industry experts recently weighed in on the challenges and benefits of going big.
Data shows that there are a total of 75 companies valued between USD 1 billion and USD 50 billion today as compared to 47 companies a decade ago, an increase of 60%. For companies who feel the strain of pushing their prized compounds up an ever steeper regulatory hill, joining the billion dollar valuation club is a seductive goal.
According to Karen Bernstein, common wisdom says companies can’t do it: the pie is shrinking, and everybody gets bought. But there is also compelling data that shows that the space is actually growing. Discussion during a session at BioPharm America™ 2012 centered on what it takes to get a company started today.
Quality is still king for raising money
Lonnie Moulder, co-founder and CEO of TESARO believes the combination of having a high quality compound and having an experienced team makes it a bit easier to attract investors. Expression of intent to commercialize is critical to hit the necessary regulatory benchmarks in development, and showing conviction in and aspiration to the possibility that a compound will result in a drug can make it easier to gain buy-in from initial investors. Investors need to know “that you are willing to take it all the way,” said Moulder.
This magic combination of a valuable compound, an experienced team and an eager group of investors waiting in the wings is the exception, not the norm, according to Geoff MacKay, President and CEO at Organogenesis. “I would say that it’s certainly the small minority that have the pedigree and experience to actually raise money based on their proven track record,” said MacKay.
The easy money that backed big ideas in the 1980s is no longer the way it works. There has been a shift in recent years towards funding companies, not interesting projects.
Bernstein referred to this shift toward raising the bar in the strategic formation of companies as going back to the future. “If you think about the old days when we all first got into the industry, there weren’t very many VCs, there wasn’t nearly as much money as in the genomics bubble and probably even today, and they were a club. They were gatekeepers,” said Bernstein. “And then we had the genomics revolution and a lot of people poured money—a lot of it was dumb money—into the industry, and I think the bar went way down on the formation of companies. I think we are going back to the future where the bar is higher and we’re seeing a culling of the VC community and raising the bar again. From my perspective that’s not a horrible thing. It does make it harder to get money for things but I’m not sure that that’s a bad idea for the industry.”
Richard Pops, Chairman and CEO of Alkermes plc, added, “What’s interesting in my own education and in my own evolution, is now the central role that the payor plays,” said Pops. “We don’t even conceive of funding our own internal drug development programs without a much more highly developed sense of who is going to pay at the end and why. And 10 years ago or even 5 years ago we didn’t think about that.”
Until recently, the funding priority was always science driven. “David Meeker and I were in a meeting a couple of weeks ago in DC…The medical director for United Health who buys USD 125 billion in healthcare shared his own angst about how innovation is going to get funded or not going to get funded given the pressures that he is operating under in his system. And the basic message was, ‘we’re not going to pay for your drugs unless they are saving us money now, not 10 years from now.’ He acknowledged the fact that that was going to be a challenge,” said Pops.
“What keeps me up at night are the payors, not the regulators,” added MacKay. “And what is really a business risk for us is healthcare reform. We’re all here because we take tremendous science risk to get healthcare modalities to patients and now you really have to superimpose healthcare reform with talk about science risk.”
There is no free money
There is also a risk in going public too early. There are fewer buyers, and none of them are seduced by the magic of science any more. They’re incredibly pragmatic and they will annihilate your valuation as soon as they possibly can when there’s a whiff of danger in the air.
The smarter move, according to Pops, is to cultivate a strong institutional group of private investors, and “when you cross a certain threshold where you can withstand the probable disclosures you’ll be making over the next 12 to 24 months, only then think about doing it. I think, at the end of the day, the more narrow point I would make having been on the board of a number of these young companies, is that we all tend to make the same mistake.
“When things are going well in the younger private companies, you’ve kind of made the cut, you’re now in the elite ranks. People are giving you money in venture rounds, pharmaceutical companies are courting you, you’re doing your first collaboration; invariably it’s time for a new office, bigger labs and head count starts to go because everything is working. And the story always ends the same way,” said Pops. “You go through a painful contraction where you have to bring it back down to reality. Because three years of money seems like a lot of time when you sign the deal, but after the first 18 months, you’re on the back side of that and you’re staring at that wall. And so my advice would be, keep these things as tight and as lean and as cost conscious as you possibly can even when you’re feeling pretty flush. That’s what gives you the maneuverability, because you don’t have a big boat you have to turn. You can adapt that much quicker.”
Biotechs have to ask themselves, is the idea of staying independent better than signing on to a big commercial deal? It may protect the small company from bumps along the way, but it also can be hard to measure progress toward a sale because of the inevitable fixation on available cash. And the fact remains, in an industry as volatile as biopharma, it is critical for biotechs to think about what they want, how much risk they are willing to take, and they ultimately still need a good commercial product. Biotech needs to remain self-aware, and stay open to killing a drug sooner if it isn’t progressing. There is a definite skill set in figuring out when to kill projects. “If you’ve got a portfolio and you’re showing the discipline to kill the ones that aren’t working, I think it speaks to the whole culture of the place,” said Pops.