The rules under which the industry has operated and the way it has evolved since its inception have largely been obliterated. A confluence of powerful forces including global economic trends, policy changes, healthcare reform, and technological advances have transformed the way in which companies need to operate to be successful.
Biotech executives are currently writing their new "play book" in response. It is clear that the business models that were used to create current value are no longer going to be effective going forward. Companies have to adapt to a risk-averse environment where capital, while still available, has become much more difficult to access.During the past two years, we have seen investment banks fail, hedge funds and private equity investors closing their doors, and the public equity markets spiral down, out of control. Venture investors, often the umbilical cord of food for the industry, long provided the lifeblood for young biotechnology companies, but the model is more challenged today.
Companies have taken a variety of alternative approaches to access capital, such as turning to registered direct offerings, selling future product royalty streams, and selling options to promising compounds. In addition, because biotech companies are competing in an investment-constrained environment they often only have sufficient funds to complete one phase of a project successfully before building the capabilities required to move their project through the next phase. This is why companies are beginning to adapt their business models to a more virtually integrated one. This involves developing a network of third parties that provide services such as contract development, manufacturing and sales, all supported and managed by lean, in-house "coordinating" departments.
The successful companies of tomorrow will be virtually oriented and globally focused. The evolution of a more "virtual" business model means that companies can piece together the resources they need as they go. As a result, venture investors are now looking for alternative structures with which to build value (virtual companies, proof-of-concept (POC) financing of projects, building companies post-POC, etc.).
With capital in short supply, many biotech companies have been showcasing their best assets and shelving others. We have seen a huge surge in partnering deals during the past 12 months and product partnerships will continue, but in a buyer's market, only those opportunities that are particularly strategic will be considered. The leverage recently gained by biotech firms in negotiating advantageous deal terms will decline; Meanwhile option-based approaches that keep much of the program risk with the originator will increase in popularity.
Although financial markets and potential partners at home may be lukewarm about the potential value of technologies and products, emerging markets could place on them a much greater value. Smart companies will look outside their borders. They also will think strategically about the value their products may hold in different markets.