Finance in Biotechnology

Finance in Biotech

I agree with the point about the value of academic researchers. It is important when launching a start-up to choose the management team with the company's competitive advantages in mind. The usefulness of academic researchers cannot be overstated. Young MBA recruits can be a valuable asset, but they are common. Furthermore, the biotech industry is driven by research and development, even at the largest and most business-savvy companies. It is more essential, then, that the firm's management team be constructed with its competitive advantages in mind. It is difficult to compete in any biotech field with young MBA talent alone. Skilled, experienced researchers are necessary to develop the competitive products needed for the firm's long-term growth and survival.

The timing of hiring talent is well-described. Bear in mind that sooner or later, the firm will need venture capital, as it would be difficult to go public before a product has been introduced to market. Venture capitalists will need to see much more the passionate speeches from MBAs still wet behind the ears. Biotech is a field that relies strongly on research and it would be nearly impossible for a firm to land the funding it needs to develop a product without having top-flight scientific talent. Such talent will define the company and develop the projects. But such talent is also critical to sell the company to potential investors, be they venture capitalists, the stock market or partners within the industry. Communication skills are fine, but they are no substitute for genuine knowledge. Even that assumes that the scientists have no communication skills of their own, which is probably an unfair stereotype rather than something upon which sound business decisions should be made.

2) Although the development process is fluid, and subject to change at any point, the company should develop an exit strategy prior to embarking on the project. The exit strategy can be updated to reflect the current realities of the project. The company must also maintain a sense of the product's future value at all times. Not only does this help to shape and define the exit strategy, but it also gives the company insight into the true value of the project. If a project becomes too costly, then the company should not assume that they will be able to license it or sell the lead. Even if they are able to do so, it is merely an act of salvage. Certainly, the company cannot simply count on generating income from a lead that appears too costly to pursue. Other firms may also find it too costly, even if they have the money.

The company should also have a stronger sense of the strength and commitment of its financial backers. Cash crunches happen, especially in biotech startups, but the firm needs to mitigate the risk of such events. The company therefore should not ignore the lessons learned from this experience. It should be aware that failure can occur and at many different points in the product development process. A well-run company should ideally not find itself in a position of having a funding crisis, by virtue of taking on the right partners at the right times, and being selective in product development.

That said, when a company finds itself backed into a corner financially, it should exhaust all options. There are many variables that will come into play -- the specific financial terms of the deal, the strategic implications, and the current competitive and economic climates. The generic "best" scenario is only a guiding point -- until the numbers and terms are revealed the company will not truly know what the best option is.

3. James Flanigan's article "Biotech Tries to Shrug off Setbacks," from the New York Times and found here: http://www.nytimes.com/2009/09/17/business/smallbusiness/17edge.html?_r=1 outlines the difficulties that biotech firms have had recently with respect to securing financing. The investment climate is different for several reasons. The first is that the traditional providers of venture capital to biotechs have seen their asset values plummet along with the stock market. As a result, industry insiders are pessimistic with respect to the availability of venture capital in the coming years. The remainder of the article explains that despite the gloomy outlook, there are players in the industry that are optimistic, in part because they perceive the industry as sufficiently strong to attract capital even in a tight VC environment.

The article's guardedly optimistic finish leaves the question unanswered as to the consequences of the current sluggish VC environment being sustained for the next several years. This is an important question to answer for the industry. While some firms may still receive financing, the apparent shortfall will reduce funding opportunities for many more. Most of these firms will go quietly into the night, taking solid leads and research with them. This will reduce opportunities for larger firms that would otherwise buy the leads or enter into partnership with smaller firms. There are profound implications for understanding what would happen if the optimists are proved wrong and the venture capital market for biotech firms remains weak for years.

An economic analysis could be conducted to help answer this question. Certain assumptions could be made with respect to the reaction of firms within the industry to the sustained difficult VC environment. This would give the author an indication of the degree to which businesses would fold, the degree to which partnerships would not take place and other withdrawals of activity in the industry.

4. I would ask the question:

In light of reductions in venture capital from traditional sources (university endowments, pension funds, etc.) what new sources is the industry looking to in order to sustain growth?