Startups & Outsourcing — Opposite Poles or Virtual Partners?
By Wayne Koberstein, Executive Editor, Life Science Leader
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Two industry meetings now take place in the San Francisco Bay Area within two weeks of each other: the BIO Investor Forum in late October, and our own Outsourced Pharma West in early November, in its second year. In the first event, small and mainly young companies come together with large pharmas, venture capitalists, and various other investors and observers in the nearly primeval search for company and drug-development funding. In the second, the startup crowd can learn all about the critical steps in building a virtual company, from finding to living with the right suppliers of key operations such as drug formulation and manufacturing.
But let’s face it, finding the money often captures all but a few crumbs of the typical startup CEO’s attention. Laser-sharp illustrations in the company’s dog-and-pony show may present its scientific platform with convincing clarity and purpose, but traditionally, investment conferences have not been a place where the dollar-hungry startup talks about the infrastructure it must build or hire to turn its science into a medical product. In fact, until the recent influx of ex-Big-Pharma executives into the entrepreneurial life science space, few company founder-CEOs even had a rudimentary understanding of basic business demands — the nuts and bolts of running a company, whether in virtual or actual “brick-and-mortar” form.
Even now, the scientist/CEO is likely to treat investment capital like grant money, to be plowed back into the lab for further research. It can take the proverbial crowbar of an insistent colleague or board member to pry open the company coffers for insurance fees, taxes, and other mundane business expenses. Then what happens when the same CEO learns a bench-made compound must be newly formulated, and a process created to produce it? “Why should we push into industrial-level production when we’re still doing new assays?” cries the founder.
The answer is so simple it defies acceptance by the scientific mind: We are a company now. Companies make products. This is a key step toward developing our first products.
Actually, many of the early life science entrepreneurs may have had better perspectives going in, because they were the ones who drove the idea of “bench to bedside” startups. Nowadays, the impetus seems more often to be the prospect for partnering and other access to capital. Some scientist-founders are thus somewhat reluctant warriors, marching off to business when they might prefer the home front. A good-size portion of those recruits will find inspiration in their new line of work, and some will become true five-star generals — in the tradition of the erstwhile scientist-CEOs who built many of the first-generation pharma companies during the past century. Scientists are, after all, smart people, as well as quite driven, creative, and clever in their use of talent, organizations, and technology. Sounds like ideal traits for the successful entrepreneur. Once the scientist/CEO sees the broader picture, it becomes a matter of applying those intellectual faculties to the business of building, running, and steering a company toward the ultimate goal of patient treatment.
Among the first items on the agenda should be determining what form the product will take over time, how much of it will be needed at each stage, and how it will be made. Like a guiding vision at the end of the long development tunnel, you should have a clear picture of the patient viewpoint, practice setting, and reimbursement environment the product will encounter.
For all of those activities, more and more young companies turn to outsourcing — keeping a small employee base and contracting out most operations and services as needed. But that poses another challenge for the scientists about to become first-time parents to new-born companies: trusting and getting to know the set of suppliers now available to serve the virtual model. For some, it is a hurdle comparable to hiring your first babysitter. Outsourcing does not always appeal to natural instincts.
FUNDING & FOUNDATION
At the BIO Investor Forum, I spoke with a group of companies that represented a range of development stages and states of maturity. But the group was also somewhat self-selected. I am always invited to meet with many more companies than possible at such events, but the ones I choose all have something in common: they want to speak to me. That means they have developed an awareness of the world outside of their company walls and they want to engage it. In parallel, they all tend to think ahead, to imagine the market conditions for their product in development. And they are already fully aware of the leverage they can achieve with a virtual-company approach.
In contrast, although a few of less-mature executives may circulate through a partnering/investment conference in the quest for funding, they are as unlikely to know about the virtual model as they are shy about speaking to the press. They have yet to cross over the bridge from company foundation to implementation and operations. “Build it and they will come,” to this crowd, still carries a scientific rather than industrial, let alone commercial, meaning.
But capital now comes with fangs: conditions and provisions in deal structures that will not let the new CEO remain in a blissful, nonbusiness state for long. Boards no longer typically harbor relatives and sycophants ready to indulge the king. Industry-experienced executives now populate more and more startup boards and will prompt their CEOs to get out and get educated in the business. That includes learning about the necessary operational steps and available options for a company to move forward toward its development goal. Despite the influx of business expertise, however, the congruent focus on acquiring and translating early-stage assets will bring even more scientists and other nonbusiness types into the startup arena.
I garnered some of those ideas from some other interviews conducted at and around BIO Investor for our special Forecast issue in December. A small group of investment leaders contributed comments on the coming year, but I quote below from material on the cutting-room floor — the inevitable content of value left over when a writer turns interviews into articles with limited space in the magazine. Carl Goldfischer, managing director, Bay City Capital, says the hunt for early-stage assets will continue to simulate new deals and startups translated from the scientific/academic setting.
“There is a host of ‘alternative financing structures’ being contemplated for early-stage assets that range from tiny companies partnered with a pharmaceutical company for structured buyout, to more creative solutions involving traditional angel and venture capitalists with new players such as major medical centers, patient organizations, and even payers,” Goldfischer says. “All of the players are trying to figure out how to fund the early translation of work from idea to the early clinical results, and during the next few years we will see those projects generate many novel, significant assets that enter the clinic and make a real, meaningful impact on a host of diseases.”
Karl Handelsman, founder of Codon Capital, says investors recognize business acumen as especially valuable in an early-stage company: “Angels and venture capitalist are looking more seriously than ever for high-quality companies at the earlier, preclinical stage. There is a huge need for entrepreneurs to form the connections between the best experiments needed to gain insights into their treatment mechanisms and proof-of-concept, and the best way to develop therapeutics that can exploit those insights.”
“With new methods and technologies for development, we can go faster, cheaper, and better at the earlier stages,” adds Handelsman. “The pool of talented professionals who have moved drugs forward in an industrial setting and into the clinic has never been better. Because that expertise can be outsourced, small companies don’t have to build their own departments. They can get access to the best researchers and engineers who match up perfectly with the expertise they need.”
Need more arguments for going virtual? Our editorial advisor and founder of Aisling Capital, Dennis Purcell, makes a powerful comparison: “Gilead has the same market cap as Merck, roughly $150 billion. Gilead has 7,000 employees, Merck has 75,000 employees.” No matter how large the potential market for its innovative product, how can any startup hope to match such a benchmark without resort to outsourcing leveraged by a lean corporate organization?
Isai Peimer, managing director at MedImmune Ventures, gives a sterling example of the ideal management team with a founder/scientist, in a company Peimer’s group funded (recently bought by Roche): “Adheron succeeded beyond just having a great CEO, Hari Kumar, and a great chairman, Bob Baltera. Dr. Michael Brenner, our chief scientific officer, founder of the company, and still full-time professor at the Brigham and Women’s Hospital, was a driving force. Because he was so mission-driven, because it was his number one priority, his research during the past 10 years paid off. It paid off for the company, for him personally, for the science, and hopefully for patients. This business still requires that level of commitment.”
Business experience and education can also pay off in a company’s playing position. John Chambers, vice-chairman, ROTH Capital Partners, sees more entrepreneurial companies with strong business models forestalling their exits via partnering or other deals, either aiming at full integration or, at the least, a bargaining advantage.
“Even if your plan is to go down the partnering route, the best leverage is to demonstrate to a potential partner that, by the way, we can do this on our own,” Chambers observes. “You may say, ‘Your deal isn’t strong enough for us to let go when we can hang onto 100 percent of the economics and deal with our own launch of a program.’ The pharma companies certainly want to get assets into their hands pre-launch so they can start priming the market, and they’d prefer not to let a company launch and then have to re-launch, effectively. So the stronger your balance sheet and the more legitimately you can look the pharma company in the eyes and say, ‘We can take this on our own,’ the better the deal.”
VIRTUAL AWAKENING
A few weeks later at Outsourced Pharma West in San Francisco, my colleague Louis Garguilo, Executive Editor of Outsourced Pharma, and I were discussing the challenge of awakening new CEOs with nonbusiness backgrounds to the basic building blocks of a life science company, which change along the path from early to later-stage development. Louis is a veteran of the pharma supply chain. (See The Global CMO Wars: No More Us Vs. Them (Part 1.) But for a long-time pharma business observer like me, the dramatic expansion of outsourcing for large and small companies has now opened up the twin worlds of contracted drug manufacturing and development in all their glory.
Years ago, generally to impress rather than to educate me technically, the CEOs of former and now vanished leading pharma companies would proudly tour me around their proprietary plants and trials-management operations. The new crop of companies in this industry may start out on a similar path, but with one huge difference — most of them soon learn to outsource, whether in a global way in tune with the fully virtual model, or to a more limited extent befitting their particular views, goals, and conditions. But if they don’t know anything about the basic components of the company they wish to build, how can they possibly know what they need in outsourcing, or even that they need to know anything about it?
Keep in mind the scale of virtual-company management — the core of employees who must coordinate all operations, outsourced or not. Nowadays, most of the young companies I speak with consist of no more than a half-dozen people, making them smaller than your typical local car dealership. Think of the billions of dollars invested in the life science startup sector that are divided up and entrusted to these tiny cells of people and activity, who then parse out much of the funds to their suppliers. How important is it that these people are educated and able to tap into the experience of appropriate expertise during their most vulnerable times, the earliest stages of proving and developing their concepts?
“The only thing biotechnology does worse than explaining itself to the general public is explaining itself to itself,” says Handelsman. No formal, industry-scale structure exists to guide young companies from bench to batches, let alone bedsides. Instead, the “fourth estate” of journalists, associations, incubators, and conference houses are filling the gap piecemeal. But if you know someone who has suddenly moved from a pure science position into the role of company CEO, call that person’s attention to this article, to this magazine, and to our many Life Science Connect resources such as Outsourced Pharma. By example, by lessons learned, by benchmarks, and by expert-to-beginner advice, we are tracing the practical pathways from startup to full-grown company.
These days, outsourcing in particular is a critical capability for management teams in every company employing any version of the virtual model. By the same logic, one of the first items on a startup’s agenda should be educating its scientists-turned-executives in the ins and outs of outsourcing along with other key functions such as funding and business development. Thus are the themes of both conferences I attended, investors in one and virtual suppliers in the other, united.
Read more on life science funding: Investment Experts Forecast Gains Over Pains In 2016