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The innovative spirit of biotech startups is a driving force behind the development of new therapeutic products, but building a successful biopharmaceutical company from the ground up has its risks and challenges.
Biotech/biopharma startup companies are experiencing generally favorable funding environment for innovative drug development ideas thanks in part to the regulatory approval success of new drug products in recent years. In 2018, 63% of new molecular entities (NME) approved by FDA were initially developed by smaller bio/pharma companies, according to Switzerland-based venture capital firm HBM Partners (1). Today, it is these smaller, innovative companies that account for the majority of the early development of new therapeutics.
Biotech startups are good environments for innovation and early drug development work for three key reasons. For one, startups have relatively low capital needs and overhead costs while they address key technical challenges. Second, founders typically have the luxury and the drive to constantly assess risks, which is crucial for any startup, and can make a thorough study of the best markets that their technology can best serve. Third, founders of startups have incentives in terms of real-world impact and financial return, so they are often most motivated to see their technology/innovation succeed and will push for that (2).
Because smaller companies are more flexible and agile, they can move faster and push projects forward more aggressively than larger pharmaceutical companies. The cost for developing a new drug and bringing it to market has been estimated at upwards of $2 billion, according to industry experts (3), and major pharmaceutical companies do not generally want to take on the burden of early innovation and failures.
Instead, major pharma companies are looking at startup biotech firms-either by spinning out their own or collaborating with startups with interesting technology-to take on the work of early innovative drug development. This way, Big Pharma can minimize risks at the early stages of development and, if successful, have a pipeline of potential new, innovative drug products. This approach bodes well for biotech startups because, as part of an overall strategy to revive R&D and break stagnation, major pharma companies are actively seeking out startups and are investing in them (4).
Funding for biotech startups is favorable these days, not just from large pharma, but investment firms as well. Today, compared to two decades ago when the biotech bubble burst, venture capital (VC) firms show more willingness to return to the biotech space (5). A common model used today for starting up a biotech company is one where the VC creates the company by putting together a hand-picked executive team to develop an idea. The VC houses the team in its own offices and invests a substantial amount of money into the venture, which allows the VC to take a controlling ownership stake from the start.
However, a VC-created startup is not the only model for getting a new biotech firm up and running. In addition to the larger investment houses, smaller firms have now also come into play and are looking to make small investments in promising new initiatives. Typically, a large VC does not waste time making small investments, which in the past was a challenge for biotech startups. Often, a startup had to work hard for major funding and could not begin work unless an influx of cash in the millions-of-dollars range was received from a VC.
Nowadays, the cost of starting up a new company has dropped significantly, supported by changes in infrastructure led by “a combination of open source software, modern web frameworks, SaaS [software as a service] developer tools, cloud hosting, and better distribution channels” (6). Instead, a biotech startup can run on a small infusion of cash sufficient to get it to the next funding point, such as validating the molecule through modeling processes or demonstrating efficacy in animal studies. This approach has opened up opportunity for smaller investment firms to fund early biotech companies. For example, for as little as $100,000-compared to a traditional startup investment of $10 million-biotech founders can work to prove that their innovative concept works; whereas in the past, they couldn’t move forward unless a large VC provided funding (6).
Establishing a startup in biotechnology or biopharmaceutical drug development requires thought and strategy, as much as an adventurous spirit. Failure can hinge on many reasons, including a flawed financial strategy, inexperienced management, poor or lackluster science, bad timing, and/or not taking enough calculated risks (7).
Industry experts recommend that entrepreneurs clearly identify the unmet market need that its technology can address. Founders must clearly state the problem that the startup can solve to the foundation of the company’s value to the marketplace.
“It is important to solve a problem you are passionate about, but there must be a large enough market for this technology; in other words, make sure that there are enough people who care about this problem enough to pay for your solution. Going after a small or niche market is acceptable, too, but your sources of capital will be fewer, and you will need to clearly articulate how your company can even recover its costs. When looking for your market, ‘don’t be a hammer in search of a nail’; that is, be objective when identifying a need instead of trying to make your special interest into a market that might never exist,” wrote Adriana Tajonar from the California Institute for Quantitative Biosciences in a perspective piece published in Molecular Biology of the Cell (2).
Executives in the startup trenches have a first-hand look at the challenges of building a biopharma company. For example, when building a biotech/biopharma company from the ground up, key goals that founders should pursue include getting to cash-flow positive as quickly as possible to limit dilution; attracting motivated, entrepreneurial and experienced team members; creating shareholder value; and applying a business model that enables continuous growth, but is simple to execute, according to Lindsay A. Rosenwald, MD, chairman, president, and CEO of Fortress Biotech, Inc.
Fortress Biotech, a rapidly growing New York-based biopharmaceutical company specializing in the identification, in-licensing, development, and marketing of FDA-approved pharmaceuticals and high-potential clinical-stage assets, has more than 25 programs in clinical and preclinical development with product candidates spanning six therapeutic areas, including oncology, rare diseases, and gene therapy. The company has established partnerships with academic research institutions and biopharmaceutical companies.
Evelina Vajeso, CEO of Ilya Pharma, an Uppsala, Sweden-based clinical-stage biopharmaceutical company, says building up data step by step, reducing risks, and planning out the development strategy for a drug candidate are also important.
Ilya Pharma targets unmet clinical needs such as the treatment of post-surgical wounds in special populations, problematic diabetic wounds, and indications in the gastrointestinal tract, such as inflammatory bowel disease. The company’s lead candidate, ILP100, EudraCT No. 2019000680-24, is currently in its first in-human trial, and a Phase II program is planned to start in 2020 under investigational new drug status.
Rosenwald recommends using business development as R&D (don’t try to invent anything); putting parameters around the types of product candidates to acquire (e.g., clinical-stage product candidates that have excellent human data, unmet medical need, and a clear path to market); and building relationships with the best research organizations.
Success also hinges on keeping in line with certain best practices, such as maintaining excellent relationships with key opinion leaders (KOLs) and listening to advice from quality consultants and advisors. “KOLs (particularly those well-versed in the field of medicine that a startup’s product candidate is meant to serve) will help you avoid poor choices when it comes to drug development. Another best practice is to work with world-class consultants and advisors to make sure your development programs are formulated with the highest chances for clinical success. And last but not least, hire experienced and motivated employees to facilitate efficient and successful execution of your programs,” advises Rosenwald.
Vajeso also points out that, even though many may say something will not work, experience has taught her otherwise. For her, a good practice to follow is surrounding oneself with people who have an open mindset and are eager to learn and develop.
Ilya’s lead candidate, ILP100, is in the cell- and gene-therapy space, and Vajseo says she is surprised at how fast the project is growing. “We are currently running a first-in-human study but really mostly working with the Phase II programs for new trials to start next year. In developing a new and innovative compound, it is crucial to work with the best senior experts with an open mind and who have seen multiple complex compounds before. Do not waste time with generic advice,” Vajeso says.
Experts also advise avoiding major pitfalls early on, such as taking on too much risk at the start. “My advice is to create a durable business model, grow slowly, forge partnerships, and spread the risk,” Rosenwald cautions. “Another pitfall to steer clear of is sticking with losing product candidates for too long. Cut them early!”
In Fortress Biotech’s case, the company had to overcome a challenge related to its drug candidate for amyloidosis. Rosenwald explains that the company had to deal with market confusion over Fortress Biotech’s drug candidate and a competitor’s product that was further along in clinical trials. Though Fortress Biotech believed its candidate demonstrated superiority over the competitor’s product, the confusion over the two drugs made it difficult for the company to raise the necessary development capital. “We recognized that we had to pivot and were fortunately able to forge a partnership with a large pharmaceutical company in a $500-million deal to develop the drug candidate,” Rosenwald explains.
Quality is an integral aspect in drug development, not just quality of the product, but quality of the environment, processes, and company mindset. In Vajeso’s opinion, enforcing quality is about “always keeping the science and data in mind.” Beyond that, having good people with key expertise goes a long way in implementing the necessary quality aspects in drug development.
For Rosenwald, enforcing quality into the core of a company depends on having a dedicated management team, and having external advisors who are experienced in the areas you are working in to help grow, support, and maintain a culture of quality.
1. U. Geilinger and C. Leo, HBM New Drug Approval Report (HBM Partners, Zug, Switzerland, January 2019).
2. A. Tajonar, “How to Start a Biotech Company,” Mol Biol Cell. 25 (21) 3280–3283 (2014).]
3. J.A. DiMasia, et al., Journal of Health Economics 47, 20–33 (2016).
4. JLL, “Big Pharma Poised for Disruption in 2019 While Mid-Tier Companies Double Down on Innovation,” Press Release, Jan. 17, 2019.
5. B. Booth, “The Creation of Biotech Startups: Evolution Not Revolution,” LifeSciVC.com, Aug. 15, 2019.
6. J. Friedman, “How Biotech Startup Funding Will Change in the Next 10 Years,” YCombinator.com, Aug. 5, 2019.
7. R. Fernandez, “Top 5 Reasons Why Biotech Startups Fail,” Labiotech.edu, Nov. 27, 2018.
Vol. 32, No. 12
When referring to this article, please cite it as F. Mirasol, “Building a Biopharma Company,” BioPharm International 32 (12) 2019.