BioTech's New Business Model

October 1, 2001
John Puisis

John Puisis is a consultant with Spencer Stuart, an investment advisor specializing in biotech and pharmaceutical companies, based in Chicago.

Pharmaceutical Executive

Pharmaceutical Executive, Pharmaceutical Executive-10-01-2001, Volume 0, Issue 0

Coined in the early 1940s, the hybrid term "biotech" has sustained its save-the-world aura and futurist allure. During the industry's nascent years, Amgen, Genentech, and other barrier-breaking companies were mere fledgling operations with products still in the pure science phase and their only "revenue" the hope of curing some of the world's ills.

Coined in the early 1940s, the hybrid term "biotech" has sustained its save-the-world aura and futurist allure. During the industry's nascent years, Amgen, Genentech, and other barrier-breaking companies were mere fledgling operations with products still in the pure science phase and their only "revenue" the hope of curing some of the world's ills.

A quarter century later, leaders at many of those early risk-taking companies have converted their ideas and hopes into viable science, brought products to market, and put biotech on the map. But to keep it there, companies must focus on a critical yet commonly overlooked piece of the life-science equation: the steady application of business and management principles. Although biotech's heart and soul-products, people, patents, and research-are rooted in science, a company's ability to demonstrate commercial viability by generating cash flow is ultimately its lifeblood, and its business success depends on good leadership.

Several factors have contributed to the evolution of biotech's broader commercial focus: cutting-edge technology, more compounds, increased collaboration between biotech and Big Pharma, and enhanced capability to move products from the lab to the marketplace. New emphasis on the business behind the science has also led to fundamental changes in the way biotech companies operate, develop strategies, and exercise leadership. In a nutshell, with more sophisticated management overseeing more promising technology, today's biotechs are becoming successful commercial ventures.

This article discusses how the biotech industry's evolution has affected its leadership and outlines the management skills companies need to succeed today.

A little more than a year ago, life-science investors, analysts, and senior executives raised a common concern: that the biotech industry was in trouble. Its collective balance sheet was cash starved. Bankruptcy and a massive technology fire sale seemed imminent. But, despite the dire forecast, the industry revived. In fact, 2000 was a boom year. With capital fleeing the Internet, more than 60 biotech companies bucked a five-year lag and went public, raising more than $25 billion, versus $8 billion in 1999, according to Standard and Poor.

Biotech Bounces Back

With that growth surge, biotech has been able to break ground in new areas of science. Although many of last year's initial public offerings (IPOs) involved biotech's mainstay, drug-screening companies, the so-called "toolbox" companies-genomic, proteomic, and bioinformatic software businesses-also featured prominently. Still, key questions have surfaced about the longevity of the trend to raise capital quickly on such a scale. To what extent do the industry's recent investment successes stem from the dot-com fizzle rather than true biotech sizzle? Is it a repeat of the 1980s, in which a biotech-fueled investor charge ultimately lost steam when the promise of science didn't pan out in real marketplace opportunities?

Although the abysmal decline in funds raised in the first quarter of 2001 has cast a temporary pall over biotech, the industry has a long history of pendulum shifts in investor enthusiasm. The key question now is: Beyond the current noise-or lack of it-in the capital markets, have biotech's technology and commercial proposition fundamentals changed to ensure a more promising future? The answer appears to be yes.

Despite biotech's pattern of market peaks and valleys, recent unprecedented advances in science-along with healthier balance sheets-have generated a renewed interest in the business. Within a few years, genomics evolved from concept to commercial reality, spawning a wide range of applications, including gene sequencing and functional genomics. Companies are now moving from encoding the genome to understanding how gene variance affects disease. So-called "personalized medicine" will link a person's genetic makeup and the treatment/prevention of disease in a more efficient and effective manner than is available today. Gene therapy and new compounds to battle cancer and cardiovascular disease are also gaining strong advocacy.

As a result, biotech seems to be well positioned to continue its recent good fortune. In 2000, the market falloff among Internet stocks helped channel some vital investments its way. In part because of those investments, biotech's actual and pledged profitability is more promising. Biotech industry analyst Jay Silverman at Robertson Stephens believes that 30 biotech companies will be profitable in 2001-nearly double the number that hit the charts during the past three years. Furthermore, biotech equity analysts with Standard and Poor predict that, during the next two years, 50 or more biotech companies will turn a profit.

Of all the external factors influencing the biotech sector's performance, none is as important as access to capital. Through "angels"-individuals or small group investors with deep pockets-venture capital funding, or licensing partnerships with large pharma companies, biotechs must have access to cash, particularly in their formative stages.

Capital Ideas

Given the industry's continuing need for substantial cash infusions, Wall Street will continue to hold sway. When dot-coms fell from investors' favor last year, biotech companies quickly filled the void, reaping an investment windfall. Although investment banks were eager to initiate biotech IPOs, the decline in Wall Street opportunities has shut the IPO window-at least temporarily.

A conversation with Steve Lazarus, managing director of Arch Venture Partners, confirms that point. But Lazarus, who oversees a fund with one-third of its asset base devoted to biotechs, also believes biotech has long-term value as an investment. The mapping of the human genome in particular is a primary stimulant for investment activity, freeing up money for second-, third-, and fourth-round financing.

What about biotech companies in their earliest stages? At Protiveris, an early-stage biotech toolbox company that does not plan to go public immediately, CEO Donagh McCarthy focuses on angel funding. Even at that stage, however, a company needs an exit strategy-a plan for harvesting monies to satisfy prospective investors. As McCarthy describes it, a company's long-term plan, which, in many cases, includes an exit strategy, will dictate how-and how much-money can be raised. Investors are no longer willing to put their money down solely on the merits of the technology. They want to see, in detail, the product's commercial impact coupled with an exit strategy.

Because the pathways to various types of financing differ, company leaders must make careful strategic planning a priority. If an IPO is the goal, venture capital is important. On the other hand, companies positioning themselves for purchase need leaders who can develop strategic partnerships with Big Pharma.

Yet, regardless of a biotech company's product niches or goals, a fundamental aim is common to all: mapping the road to revenues. Business now drives what happens in the lab. So, being dependent on outside capital during the developmental stage, biotech companies need to make the profit motive part of their strategic planning. That may sound obvious, but in the 1980s, bio-tech raised significant amounts of capital on pro-mises alone, and the pathway to profits was not well articulated.

Well-developed companies have a different set of issues. Dinu Sen, president and COO of Cubist, a specialty pharma company focused on novel antimicrobial drugs, describes 2000 as an excellent year for raising money in the biotech sector. However, recent stock-market declines signal that financing through an equity stake in 2001 will bring significantly less funding this year than last. And, during last year's rush to go public, some biotech leaders may have taken the IPO step too soon. Sen believes that could ultimately help Big Pharma acquire new technologies, drug discovery companies, and toolbox companies at steep discounts after biotechs burn capital on technology not yet ready for commercialization.

For biotech companies charting their courses, therefore, money is simultaneously the starting gate and the finish. Companies whose leaders fail to keep a profitability model in mind-those unable to effect a transition from research to revenues-will find their supply lines to capital far less reliable than they once were as investors become increasingly more discerning about which biotech companies to invest in.

Money issues have not only dictated new strategies for biotech companies, they have influenced what the industry defines as success. "Pure science" has given way to an enlightened practicality that melds research capabilities with market needs. Consequently, the success of biotech companies now will be measured by their leaders' abilities to address real-world demands. In short, biotechs are now realizing the commercial impact of their science and retaining the leaders who know how to get them there.

Milestones for Success

The industry's key drivers are now at the "business end" of the marketplace: customers who buy products and investors who supply the funds to facilitate the development of those products. With capital markets open to a much broader range of participants than they were during biotech's early years, more investors are available to companies that have a superior technology demonstrating a real, near-term market opportunity. Although the Baby Boom generation is growing "grayer and greener"-older and wealthier-keeping the promise of capital flow alive, uneasiness on Wall Street has also brought a new level of scrutiny to investments. As a result, a biotech company's access to capital will depend on how well its leaders position the company to investors-and on its marketplace objectives.

Which types of biotech companies are likely to succeed, and what does success look like? Although there may be an infinite number of market strategies, biotech leaders need to chart courses based on their companies' unique competencies-and on a realistic outlook for their products. Leaders of successful companies differentiate themselves not only by carefully choosing investors but by targeting specific products and markets. Lazarus sees genomics tools as "hot" and predicts that genotyping will enjoy strong revenue growth. But regardless of a company's scientific orientation, Lazarus believes that diversifying products-rather than relying on a single product-is essential for success.

Strategic Leadership

Meanwhile, at Protiveris, McCarthy sees no quick-fix formula for leadership. Instead, he believes a company's key objectives are what dictates success: a well conceived business plan, maintaining focus, and the ability to recruit the right people-for both the science and business aspects of the operation.

Another leadership characteristic of particular importance for biotech is having a senior executive who can "open doors," as McCarthy describes it, within an increasingly competitive environment. For that, industry-specific leadership experience is critical, particularly for companies in the earliest stage of their life cycles.

Leadership is also a critical concern for biotech companies at the board of director level, particularly for younger, smaller companies, where strategic direction and support can make the difference between success and failure. "You need board members who will do a lot more than just show up four times a year," McCarthy advises.

They must have minimum technical and scientific credentials so they can understand and challenge the company's science strategy. Also, a company's developmental phase affects the types of board members it needs-and is likely to attract. Early-stage companies require those with strong science credentials; more mature companies, members with a solid foundation in business.

But at Cubist, which is making the transition from an exclusively R&D-based organization to a fully integrated company, the leadership focus is somewhat different. Cubist's leadership has opted for a strategy of autonomy, emphasizing $50-$100 million niche opportunities that allow the company to enter markets too small for Big Pharma to gain the returns it demands. Cidecin (daptomycin), the company's lead product, is the first in a new class of antimicrobial drug candidates.

Niche opportunities are important to Cubist because, as market size increases, the company's scope and reach must follow. Because of the logistics involved in servicing its marketplace, as opposed to a broad therapeutic market, Cubist targets opportunities with limited patient populations.

Sen admits that Cubist's approach requires the company's leaders to understand that it cannot spread its wings too wide. By developing realistic synergies between the company's R&D and business components, Cubist finds an appropriate marketplace for its anti-infective products without having to venture into new therapeutic research areas. In effect, the crucial issue for Cubist's leadership is integrating R&D into the company's business focus, rather than the other way around. That allows for the sequential launch of products necessary to generate sustained revenue streams.

Perhaps above all, biotech's leadership-regardless of the company's size or niche-must seek employees who combine appropriate business and science backgrounds with ample motivation, ensuring that the company is always moving forward. Says Sen, "You need expertise and passion to maximize the impact of talent."

Biotech leaders need to evaluate their companies' capabilities in terms of what the external market is looking for. Because their companies are generally small, they need to create a culture of operational efficiencies to service market needs, which translates into focusing limited resources on the most optimal areas.

Engineering the Future

Biotech companies also need leaders who can deliver a rare elixir to the corporate culture: a dual business and science proposition that makes sense at all levels of the company. Few have the combination of technical science and business savvy to do it well. "You need reasonable financial stability to attract good scientists," says McCarthy, adding that there are fundamental questions incoming biotech executives should ask when they join a company. "Are the people at the company doing what you want to do, and can you fit in?" The human element is a critical-yet often overlooked-part of the biotech mix, and leaders should ensure that their companies' aptitudes and culture align with their own objectives.

A company's size is another determinant of leadership's roles. For Baxter's huge operation, McCarthy was an "intrapreneur" presiding over two start-up businesses, RMS Lifeline and RMS Disease Management. But Protiveris' much smaller size demanded an expanded role. "With a smaller company, you have far fewer resources," McCarthy says, "which means you have to be everything to everyone."

As a company matures, its orientation changes, and so should its management. Before Sen's arrival at Cubist, he says, the CEO was "doing it all-handling outside relationships, the board, investors, everything." To free the CEO to pursue strategic issues, Sen, with a background in sales and marketing, business development, and strategic planning, was brought in to handle day-to-day operations.

Overall, the challenges for biotech leaders exist on many fronts, from developing technology that can improve the quality of human life-the altruistic concern at biotech's heart-to exercising the sound business sense that keeps a company's head above water. Given those challenges, successful industry leadership demands experience in or understanding of the following:

How to exercise business savvy within a scientific environment. Such talent is found most frequently among the leaders of fully dimensioned pharma companies, but some biotechs are looking for it outside the life sciences industry as well.

How to successfully launch a new product. At its core, biotech is about the practical exercise of commercializing groundbreaking science, with "practical" carrying as much weight and importance as "science." Even a great product can fail if it is not launched in the right way at the right time.

Line management. As products get closer to market, biotechs need leaders with success in a structured, commercially oriented environment such as Big Pharma.

"Doing deals." Given the mammoth R&D costs associated with biotech and the risks of bringing products to market, stand-alone companies face major obstacles. Partnering with, or licensing to, complementary companies-and taking advantage of the economies of scale those partnerships generate-is essential for gaining access to the marketplace.

International experience. In an industry with regulatory hurdles in markets around the world, companies must be able to address global legal and cultural issues. Knowing what different markets demand and what it takes to reach those markets are essential for steering a biotech company forward.

Biotech has, in short, become inextricably entwined with the real world of business, and its leadership clearly reflects that transformation to corporate maturity. Among the companies issuing IPOs in 2000, only 39 percent were led by their founders, corroborating the industry trend toward business-oriented CEOs.

Although biotech, like other promising high-growth industries, is inherently subject to periods of boom and bust, its future increasingly will reside in its leaders' abilities to look beyond the vagaries of business cycles and to develop synergies between companies and investors, science and the marketplace, products and end-users.

Related Content:

News