How to start a biotech company

by Rob Johnson, Managing Partner and Jess Hearn, Consultant, at Alacrita

 

Key areas addressed:

 

Introduction

After toiling in the lab for a decade or more, you have finally solved the big problem you wanted to answer. But as a scientist, you’ve never started a biotech company. How does a brilliant idea form the basis for a biotech company that could move your molecule into clinical trials? And what are some pitfalls to avoid early on?

 

The ability to build a biotech starts with fantastic science, a unique point of differentiation, strong intellectual property (IP), a team that can deliver, and a clear path to exit. Your product or platform must be able to translate the science into a novel application for which there is a significant unmet medical need. You should be able to articulate patient need and how your treatment will help them.

If you are addressing an unmet need, you will likely get reimbursement – at least in the United States. “Other people in the system need to win”, said Brandon Capital Investment Manager Chris Smith. “Payers need to win, because everything has health economics behind it. You have to have a product that doesn’t send the system broke”. Your product needs to benefit the healthcare system, he said, which may mean faster turn-around for patients or a more convenient delivery mechanism. Adding a few weeks of additional months of survival is not considered as significant a benefit as it once was. You need to be sure that your product will be better than anything else currently on the market.

“You need commercial attractiveness”, said Anthony Walker, co-founder of Alacrita and former CEO of Onyvax. “And that means you need to displace other therapies”, he said. Most scientists will fail in building a biotech company when it comes to business, said serial biotech entrepreneur John Holaday. For one, most have no idea to whom they will ultimately sell a product.

Very few scientists are going to think of something alone without having support from the academic institute to get proof of principle", said Holaday, who has founded numerous start ups including QRxPharma, EntreMed, Medicis, MaxCyte, and most recently ExoCyte Therapeutics, a dendritic cell vaccine company. The first thing you need to do is make sure the proof-of-principle is there, and secondly, make sure it is patent protected, he said.

Intellectual Property evaluation

For a biotechnology company, IP is your most valuable asset. Unless you have IP to license, you have nothing to offer. But how do you know if you have enough IP to start a company? And, how do you go about protecting it?

Firstly, you need to know the product is differentiated and that you have something that is useful beyond the current state of the art. Patent claims need to be meaningful to a product, not a method, Holaday said. Case in point. Years ago, Celgene had a patent for thalidomide, but it only claimed that it inhibited tumor necrosis factor alpha; it didn’t say why. “That’s not a valuable patent; it just describes the method. It didn’t have a claim to its use”, Holaday said. One of his former colleagues, Robert D’Amato, found that thalidomide inhibits blood vessel growth relevant to cancer and macular degeneration, and Holaday helped him patent it and license it to Entremed. “The patent specified, ‘a method by which to inhibit cancer growth,’ so Celgene had to get our patent in order to patent their invention, because the academic patent they had was based on academic claims that are not relevant to a commercial interest”.

When asked what his advice was to a founding scientist about to embark on starting a biotech company, Holaday replied that “advice isn’t meaningful unless you roll up your sleeves and just start doing it”. When he started Medicis, which he co-founded with Jonah Shacknai in 1988, he admits that “we didn’t know what the hell we were doing”, but the company managed to raise $8 million dollars with no business plan and 26 products, “each of which was going to capture 10% of the market. We quickly realized our folly”. The company switched gears to focus on aesthetic dermatology and turned it around to sell to Valeant for $2.6 billion. Holaday later started EntreMed, which developed thalidomide and changed the way cancer is treated. Thalidomide also made Celgene “filthy rich”, he said.

Working with tech transfer offices

If you’re operating out of a university lab, speaking to the technology transfer office (TTO) of the university is likely your first step. The university usually owns the IP, and you will need their help in preparing the patent applications.

Most universities will have a formal template agreement on what happens to the IP in the course of development. They typically have, for example, a standard policy that says the IP generated is owned by the university, and researchers have an obligation to talk to the university, said Evelyn Body, director of commercialization at the University of Auckland. Most universities also have policies about how revenue accruing from inventions is divided between the university and the inventors.

“Researchers can pick up the phone and we can have a discussion, or there is an online disclosure form that includes information on what the invention does, how it’s different than what has gone on before, and what the scientist sees as most unique about the invention. That document then forms the basis of the due diligence process around the intellectual property process”, she said. Following the initial disclosure, the university will assess whether the invention does, in fact, have IP and whether there is a commercial opportunity. When looking at a potential drug or biologic, the IP should be around the actual compound, she said, noting that the University of Auckland has in-house patent attorneys as well as in-house patent managers to determine if something is patentable or not.

“We want to see preliminary in vitro data, usually validating the compound’s target, and we want to see that there are no off-target effects. Ideally, we want to see some in vivo animal data showing efficacy”, she said. Once the initial assessment is completed, the university will prepare the patent application and look at what the path to market might look like. “We dig into the commercialization pathway and help round out the IP and think about what data needs to be filed. We talk to our investment committee, which includes academic experts, technology scouts, consultants, entrepreneurs and pharma company execs who have a range of skillsets to determine the best way forward”.

Some questions around commercialization might include:

  • What is the technology type?
  • How novel is the technology?
  • What is the unmet need it is solving?
  • What is the market opportunity?
  • Will the university make money?
  • What does the reimbursement landscape look like now, as well as later down the road?

Once the IP is in place, the TTO can help de-risk the product so it is investable, and can help plan the best route to commercializing the invention. Most TTOs will help by introducing you to commercial partners and venture capitalists (VCs). “Sometimes the university will co-invest in a project through its venture fund”, Body said, noting that most drug development projects run for approximately seven to 10 years. “We tend to have a close and constructive relationship with our founding scientists”, she said, “and we try to make sure they are involved in the commercialization process. Our job is to make sure the path is viable for investors or partners”.

The importance of a good patent attorney

European patent attorney Jonathan Davies advises biotech companies on behalf of investors to prepare them for the due diligence process. Davies is of the opinion that founders are reasonably good at putting together a convincing story that is focused on one or two products, but they usually “need some significant help understanding intellectual property or corporate law”, This means they often come up short when it comes to structuring the company and putting their corporate presence in front of the people who are going to fund them.

“Because they’re not well resourced, they don’t tend to put together the supporting evidence by way of IP, as well as detailed business plans, and these are areas where people like myself and consultant lawyers and accountants have a lot of difficulty getting solid answers”. It can become a forensic exercise to figure out if founders have what they think they have in terms of IP; “You have got to be able to convince someone looking from the outside who is trying to find some fault to have comfort that it is safe to invest”, Davies says.

Davies highlights that the ownership issue is always there, particularly with university-based inventions and the big question is often: “Who are all the other people you have collaborated with?”. If your invention becomes a billion-dollar product, all of these people “will come out of the woodwork and say they contributed to it. That then means obligations to third parties.”

Documenting your journey

As a founding scientist, you’ve likely spent 20 or so years in the field and have significant knowledge about the technology area as well as the top players around you. It is helpful to potential investors and patent attorneys to document as much as you can about the history of the technology, your experimental methods data and interpretation, the key players in the field, as well as academic colleagues in other institutions who are producing something competitive.

“This is a risky business, but founders could do better in taking people on that journey they embarked on as far as thinking about what would be helpful to patent attorneys and VCs who try to make sense out of it”, Davies says. Technical subject matter is an important link to the company value. “Have copies of research reports with copies of the prior art that are cited”, he advises. After 35 years, Davies says he can look at something and almost immediately know whether the inventors are knowledgeable enough to push towards commercialization.

“We look for red flags, he said, and “my job is to see whether or not a project is covered in red flags. If it is, you walk away, and that’s the end of the story”. His advice to founding scientists: “Do the thinking up front rather than asking someone else to do it later. Don’t just launch into it and assume you can fix it as you go along. Do as much as you can to pull together a good package of information so that those who receive it have everything they need to do the due diligence. What resources can you call on? If you are a university spinout, you can go a long way down the track for free with your own tech transfer people”.

For example, you can request in writing the heads of agreement terms on whether the IP is available for license or sale. This can provide good supporting evidence that will provide confidence to those looking in from the outside.

From his experience starting multiple biotechs, Holaday offers these value-destroying mistakes to avoid:

  • Not owning the IP;
  • Not keeping notebooks and other records of invention;
  • Disclosure without a confidentiality agreement;
  • Not keeping track of confidential disclosure agreements and material transfer agreement restrictions;
  • Offering the invention for sale (rather than licensing);
  • Not having a patent review before publishing scientific data.

Moving from academia to industry

Industrial research is typically conducted with more rigor and discipline than academic research as the work moves from research to development. The difference between discovery research in small and large companies is that small companies often have poor quality data, particularly in university research, says John Kurek at Uniseed. To prove your value proposition and the science, you need data and validation. The science should be reproducible, ideally by an external, high-quality independent lab; It helps to have some in vivo efficacy in a disease-relevant model, investors said.

Ralf Brandt, president of Discovery and Early Development at Vivopharm, suggested that what’s needed first is a solid knowledge of the mechanism of action and the pharmacology and toxicology.

To get the right data, it helps to have the end in mind, as far as whom the patients are and the value proposition. To understand the value proposition, you need to know:

  • The market and what clinicians globally are trying to do;
  • How your product impacts the market;
  • How much it will cost to reach a commercial product;
  • What the regulatory path and associated hurdles and milestones are.

“The biggest hurdle when it comes to risk is clinical trials,” said Smith, “so you will need to know clinical outcomes and endpoints”. How long will clinical trials take, how much will it cost, and who is doing the work? What are the go/no-go decisions?”

Defining the pathway to clinical trials

Robert Gallagher, senior principal and head of Strategic Clinical at QuintilesIMS said that to be able to articulate to investors, you will need to conduct a technical and commercial assessment and come up with a target product profile (TPP). This will help you determine what data you need to formulate a clinical development plan.

“First, consider the mechanism of action and the regulatory pathways and do a gap analysis,” Gallagher said. Ask yourself: What is the probability of success and the risk of failure? What are competitors in the market doing? What are the implications for trial recruitment?

In parallel, evaluate the commercial strategy and position, including market potential and potential revenue. “Is there a huge unmet need? Do a competitive pipeline analysis. Are there lots of products in development or should you be looking at other areas? Chose one indication that makes sense for investors”, Gallagher advised.

Accepting negative results

Serial entrepreneurs have stressed the importance of defining go/no-go points early on and sticking to them. They highlight the need to accept negative results, which is difficult for a biotech that is likely a one-product company.

Small companies have more to lose, and early failures will have a bigger impact on the company; survival may depend on having your drug in the clinic. However, it’s important for a therapeutic to “fail before it gets into the public eye and before you get it into the clinic”, advises Kurek.

Clinuvel Pharmaceuticals is developing drugs to treat severe skin disorders. It is beginning to see sales take off for its lead product Scenesse for treating erythrpoietic protoporphria, a metabolic disorder that causes painful burning reactions under the skin after brief exposure to sunlight. The treatment uses melanocortins for systemic internal photo protection, which involves injecting patients to protect them from light exposure. "We were the only ones in the world who wanted to tackle the problem, so with that novel risk comes a huge burden", said CEO Philippe Wolgen. "We are focusing on one molecule, which in my opinion, is all a small team should focus on to execute well"."Because we operate in such a niche market, we work exclusively with ivy league researchers. We felt they would give us early feedback on feasibility", he said, "and at the same time they would also provide validation if we were on the right track".

“You need to be super critical and understand that if you put a new molecule on the market, it will be to the detriment of another drug and another indication, and there are finite resources,” the CEO said. “In that sense, you may need to avoid a program. We did that twice. And then sometimes, you see clinical effectiveness, but you decide commercially that its not viable, and you still have to kill it.”

Holaday concurred, “Do everything you can to fail early”, he said, and “try to do tests that disprove your point, which makes for a more rigorous and less biased scientific evaluation. You can prove anything you want to, and that is often the blind alley that scientists go down because they become enraptured in their own wisdom. Do the studies that are likely to show you are not right. And if you can’t show that you’re not right, that means you’re probably right”.

Knowing when to shutter a program

Atlas Venture Partner Bruce Booth wrote in a recent blog post about the painful decision to shutter Quartet Medicine. Booth refers to himself as a “recovering scientist turned early-stage venture capitalist.”

“Chalk up Quartet as one of biotech venture investing’s ‘successful failures’ – with that adjective providing an essential distinction. Yes, we and our co-investors lost all of our invested capital, and that hurts, but it was ‘successful’ because we stayed disciplined to the investment thesis and focused on revealing the scientific truth. In the end, the team determined the probability of making a new medicine on this mechanism was now too remote, and so we closed the book on the final chapter of a well-executed story”, Booth wrote.

Founded in 2013, Quartet sought to address pain via tetrahydrobiopterin (BH4) synthesis as a key modulator of both neuropathic and inflammatory pain. “Quartet is another reminder of the importance of truth-seekers”, Booth wrote. “Early stage biotech, and drug R&D in general, is always challenging, but particularly so if there are cognitive biases in place that corrupt objective decision-making. Truth-seeking behaviors aim to reduce false positives (e.g. chasing a failed mechanism longer/farther than you should), while progression-seeking behaviors frequently reinforce them”.

Booth highlights four key themes that made Quartet successful:

  • A science-first culture: A data-driven team dynamic fostered engagement and objectivity. “All of the emerging data, even troubling results (which we had on occasion), were out in the open”;
  • Innovative translational plan: Pathway biomarkers were tracked in preclinical models of pain and were correlated with pharmacodynamic effects;
  • Operational efficiency and virtual drug discovery: Quartet used a virtual model. It expected to file its clinical trial approval in 39 months and spend about $25 million;
  • High-value, risk-mitigating partnership: The company had forged a deal with Merck & Co., and Booth said it was a “smart move for the company and one that, in principle, we’d do over again.”

Understanding what investors want

Investors said that besides addressing a significant unmet need, companies they want to invest in have novel science against a novel target and a well-conceived strategy. They want to see well-executed IP and a management team with the skills to advance to significant milestones.

Bruce Booth said in his blog to look for VCs that fund early-stage companies. “We like to help shape the DNA of the companies we back, and that can really only be done if we help co-create them”, he said. Atlas wants to see “a cool scientific hypothesis, a hot new target, next generation scaffolds, novel modalities, creative clinical strategies, robust drug packages”. He says that companies should not expect to gloss over the scientific substance. “We get into the science. We really want to see data”, he said.

However, some global investors only invest in the team. “I can’t stress enough how important the team is”, Smith said. “You can do all this deep learning and big data but this is a human activity. It’s complicated and unpredictable. This is a team sport. The question everyone asks is: ‘Is that team backable'?”

Removing people is painful, and one wrong person might be the end, so make sure you have the right ingredients and make the hard decisions early, he suggests. Consider bringing on people with different key capabilities in commercial, international reach, as well as the needed scientific disciplines. “If you can’t convince a global key opinion leader to join your team, that’s telling you something”, he said.

You will need strong leadership to pull the team together to get through the rough spots and near-death experiences that all biotechs face at some point in their history. You will need a full time CEO/project manager who has the right experience; you might be able to engage skilled pharma consultants to flesh out the rest of the team.

Building a team

Alacrita Consulting Co-founder, Anthony Walker, said his motivation for establishing the consultancy was based on his experience running a biotech company and the gaps he saw there.

“The biggest need is the ability to access very experienced people and not have to bring them in house. For example, if you have IP, what do you do with patents? You need an in-house patents manager, but that might not be a full-time job, so it would be great to have access to a very experienced IP manager. At Onyvax we had to search high and low to find experts, but at Alacrita, we have them all in house”.

Biotechs need strategy, analysis and operational support, he said, and that could mean that you need a part time CMO or a part time regulatory person; Alacrita Consulting is a senior management team that any biotech could access on an as-needed basis.

“We do traditional consulting projects, but mostly all are geared toward a biotech focus with more flexibility and ability to change quickly.” “It’s not just identifying the right person, but it’s building the team. You could find someone who doesn’t have the exact right experience, but they can grow with you. They need a certain amount of expertise and ability to get along”, Walker said.

He said the “must haves” for a biotech include a good commercial lawyer for negotiating your investment agreement, preferably one you’ve worked with before and you can trust who is willing to cut you a deal that is contingent upon raising money. You’ll also need a “great patent lawyer”, he said, and these are both positions that a consultant can fill. Then, as you build up, you can bring people in house as you need them.

The general principal is that for anything core and strategic you will want in house expertise. Anything not core, you’re better off outsourcing as specialist consultants can do it better and cheaper. Don’t overlook advisory boards and board members to serve as the objective voice of experience.

Later on you’ll need a business development partner and someone to introduce you to potential strategic partners that can help you grow. This is also a position that can be filled, or supplemented, by external consultants who often have their own established industry networks that can be tapped.

Don’t forget to have fun by surrounding yourself with passionate people. That passion often comes from being involved with a therapy that can change the world, not something that will just increase life expectancy by a few months. Holaday said his three motivators are indeed to have fun, make a difference and make money; “If you have fun and make a difference for people, you can make money at it. And, most scientists have fun. That’s why they’re scientists – it’s the art of discovery”.

FAQs

Q. What is Intellectual Property?
Intellectual Property (IP) primarily refers to patents, copyrights or trademarks which is granted for a creation that is novel, useful and non-obvious. In the pharmaceutical industry, IP can refer to a patented technology such as the structure and synthesis of a drug, a biological discovery (e.g. novel biomarker) or a medical device. A patent gives its owner the exclusive right to prevent others from making, using, offering for sale, selling or importing a product or process, without the owner’s prior permission. It is valid for a limited period of time; generally, for 20 years from the date of filing the patent application. A patent is a territorial right, limited to the boundary of the relevant country or region and can be a good source of recognition for the inventor(s) as incentives to develop a commercial product. This could involve either licensing the IP to an existing company (i.e. giving another company specific rights to use the patented technology) or to use as a basis in starting up a new company.

 

Q. What does a Technology Transfer Office do?
A Technology Transfer Office (TTO) is a sector that manages the commercial activities for academic research within a University. TTOs are often the facilitators for bringing technologies from the University into the market and act as the middle ground between academia and industry. TTOs also manage the IP and licensing within each University and can provide support to academics in all areas of the commercialisation process; including identifying funding sources and launching biotech companies from University research (spin-out companies). The full scope of work carried out by a TTO will differ between Universities, and offices can either be integrated into the administration services within a University or can exist as a separate entity.

 

Q. What is required for ‘proof of principle’?
The drug development process goes through several phases, and the precise definition of the work carried out within each phase often differs. In drug development, ‘proof of principle’ or ‘proof of concept’ studies aim to demonstrate that early hypotheses about the mechanism of action and efficacy of a drug are proven effective when used in a clinically relevant setting. For example, an anticancer drug may already have proven in vitro to interact with a specific biological target, it now needs to demonstrate the application of this interaction by providing a measurable impact on reducing disease burden. The first proof of principle step usually involves preclinical testing of the drug in a disease-relevant animal model, where efficacy (e.g. tumor shrinkage) can be quantified. As the drug progresses through the development pipeline it will enter into clinical proof of principle phases, where it will be tested in humans to prove that the preclinical data collected can translate into clinical endpoints and show effectiveness in real patients.

 

Q. What is a Target Product Profile?
When developing a clinical strategy for a therapeutic, it is important to create a Target Product Profile (TPP). A TPP is a document that defines several key factors for a new therapeutic, including the:

  • Target patient population(s);
  • Dosing, format and delivery method;
  • Standard of Care displaced and unmet needs;
  • Clinical differentiation:
  • Efficacy versus prospective trial endpoints;
  • Safety/side-effect profile;

TPPs are largely created from the preclinical data package together with primary and secondary research, and once formed, allow the full potential of a therapeutic to be evaluated and forms the basis for deciding the next steps in clinical strategy and building clinical trial protocols.

 

Q. What types of investment are available for an early biotech?
Aside from grants and bank loans, financial investment usually comes from external sources when launching a biotech, however, some founders have been known to self-fund (bootstrap) their own start-ups. There are three main sources of external investment; a biotech often accesses funding from all three as it develops and matures:

1. Angel investment
Angels would use their own personal funds to invest in a start-up biotech. They can either fund as individuals or as a group of Angels and are often known to the company founders as friends or family.

2. Venture Capital
Venture Capital (VC) investment is controlled by a firm using investment raised from limited partners. These partners could be individuals, syndicates (multiple companies) or from sources like pension funds. VC funding will often be larger than that obtainable through Angel investors, however, this comes with a higher pressure for a new biotech to provide a quick return on investment.

3. Industry partnership
Forming a strategic partnership within the pharmaceutical industry can provide both access to funding and resources; this type of investment is applicable for more established biotechs

 

Q. How do you determine commercial attractiveness?
There are many factors that go into an analysis of the commercial attractiveness for a technology. Identifying any competing companies and technologies, either on the market or in development, can be a significant contributor to commercial attractiveness; whilst novelty is often seen as a benefit to a new technology it also comes with increased commercial. Another important factor is estimating the value and forecasting the market opportunity of the technology. This will take into account the available market segment and accessible patient populations based on disease trends, together with an estimated selling price. This can be estimated based on factors like the cost of current standard of care, the efficacy, differentiation, the regulatory landscape and the geographical region where sales will be targeted. Another important factor is to explore how attractive the technology would be to the end user (or prescriber) by conducting primary research interviews with clinicians, payers and patients.

Glossary

  • CEO: Chief Executive Officer
  • CMO: Chief Medical Officer
  • IP: Intellectual Property
  • TPP: Target Product Profile
  • TTO: Tech Transfer Office
  • VC: Venture Capital

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