Startup Business Models: Is there a third way?

In cases where technology is promising and founders of the companies might be scientists rather than managers, venture capitalists can provide infrastructure and operating guidance. (See "Startup Business Models: Is there a third way?")

However, this single-technology-platform business model is risky due to a lack of diversification and long clinical development times. This model is akin to giving baseball's home-run superstar Barry Bonds one swing with one time at bat. If it works, it's poetry. Unfortunately, with this one-strike model, most times the player walks back to the dugout.

Another commonly used business model in specialty pharmaceuticals is often based on redirecting failed compounds, or selling smaller products acquired from larger biopharmaceutical companies. This approach has its flaws, as companies will not simply surrender promising technologies.

For this reason, companies are more often than not stuck with acquiring failed compounds or smaller products from the larger companies. There are some notable exceptions, particularly in the case of mergers and acquisitions.

While this approach provides speed to market for the products, the utilized method typically reflects low innovation, is opportunistic, provides lower margins—and, consequently, is difficult to sustain.

Innovation

Today, early start-up companies increasingly license their technologies from academia. And the public is starting to notice. In a survey conducted at the 2005 American Association for Cancer Research conference, 81 percent of the delegates agreed that academia is the engine for drug discovery.

The key factor that separates academic licensing from inter-company licensing is risk. A big pharmaceutical firm typically partners with companies after proof-of-principle clinical trials. This gives biotech start-ups an opportunity to license technologies from universities and research institutes, and focus on translational development through the different phases in clinical trials. Sometimes, these small biotechs will bring the product to market themselves. More often than not, once the technologies and products start to look promising, Big Pharma enters the picture and in-licenses the product from them. One can argue that Big Pharma is selectively paying a premium to avoid the risk involved in licensing academic technologies.

This business model provides Big Pharma companies with a more diverse range of technologies to choose from and provides a higher projected profit yield when the drug hits the market. Now, instead of getting one swing at bat, companies can choose from multiple opportunities with independent technologies to diversify risk, increasing the probability of a clinical signal or, to extend the metaphor, a hit.

Partnering with Academia

Before biotechs consider a licensing deal with academia, the deal first needs to fit within the company's strategy. Sorting through the myriad opportunities is most successful when companies have clearly defined acquisition or licensing objectives. For the most part, executives must look for products and technologies that will be attractive to the big companies that might eventually in-license them.

Biotechnology companies may find their partner institution by searching through technology transfer listings on university Web sites and their corresponding transfer offices. Companies may also send their scientists to identify key university researchers in a particular therapeutic area.