The thing about biotech: A beginner’s first look into the ecosystem.
Despite many biotechnology founders trying to paint a picture of their companies pushing the forefront of technology, such a glorified illustration is not always the truth. From a year of work in biotech, I think that many people who are new or peripheral to the industry have inherent misunderstanding of the field.
In this piece, I will attempt to break down the segments of this industry, and roughly define each segment.
The first is the corporate player, probably the first to come to mind when recalling any keywords like “biotechnology” and “pharma”. These are the players that commercialized Humira and Xeloda, where planning for 10–20 years is the basic norm.
Pharmaceutical companies are perhaps the most capable of innovation in this space. They have the capital and resources to recruit experienced scientists and screen through thousands of drug candidates. These companies are the ones standing closest to the frontier of scientific discovery in the biotech sphere, and are truly churning through truck-fulls of cash to make new in-house discoveries year on year.
After the big player comes the small companies. From my perspective, the small companies (including start-ups) could be further categorized into two types. One of which is the “spin-out” company. Here, the company’s founding technology was originally discovered in an academic lab, and its inventors built a business model around the product/procedure. Note that the IP will never belong to the company itself, nor its mother-company after acquisition. Most likely, the buying company will negotiate a new licensing model with the academic institution, but the start-up won’t necessarily benefit from this new deal.
The second type of small companies are the “innovative/ R&D” ones, where the majority of capital is spent on research and development during early stages. These companies usually depend heavily on intellectual property (IP), and the security thereof. They operate in a similar way to pharma, but on a much smaller scale. With the exception that, due to the limited financial and physical resources these companies have at hand, the level of R&D is often limited to replicating scientific principles already known to the leading field experts. The goals of these companies can be simplified into: process optimization to a degree stable enough for commercialization.
Obviously, other players exist in this ecosystem — the small-to-mid-sized pharmaceutical companies working on a technology-outsource/leasing model, the reagent and instrument providers, the NGOs funding certain novel efforts… But we will elaborate on these at another time.
The pharmaceutical players run on a self-sustaining model, where new drug developments are supported by previous revenues. In recent decades, a number of the leading brands started developing their venture capital arm, which allows them to bet on rising stars in the field, most of which are start-up companies. Between start-up founders, it is a common dream to be one day acquired by one of these big shots (rather than IPO like many digital companies).
I am one of those dreamers, an attribute that comes almost naturally by virtue of building a life-sciences product. Fortunately, and unfortunately, I work for a start up that is heavily R&D at this stage. While all start-up sound right about the same, as per the joke from Silicon Valley, “R&D” companies are quite different from “spin-out” companies in operation. From my experience on the journey so far, I will briefly elaborate on the ups and downs of the “spin-out” and the “R&D” start-ups.
Most “spin-out” companies have their core technology stem from academic research, and therefore must have licensed the particular technology from the university. In the short term, this is very beneficial to the company — the founders have either picked up this technology (and not spend 3–5 years building it) at an opportune time, or have been supported by government/ sponsor grants during the initial high-risk development period (and not spend capital of the company to do it).
It is relatively easier for “spin-out” companies to accelerate during the initial years. If the founders time their actions carefully, the first expense will be on a licensing agreement. After that, most of their funding will ideally be allocated to business development and marketing efforts. Having a rather proven technology (with the proving step subsidized by mostly government funding) is very attractive for early-stage investors, and having sales even more. Under this business model, further spending on R&D is not necessary until feedback from the first customers are received. The ideal team would consist of many good salespersons, and one person who understands the science to its depth. Nevertheless, due to the nature of the “spin-out of academic” company, the ratio of business vs. science majors are often reversed in these teams. From a strategic point of view, a team of mostly scientists will make fundraising more and more difficult in the long term.
In comparison, the “R&D” company typically does not have a product or core technology at founding. It will have to depend on vision and aspirations for the first months, which the product team develops the product/technology. Because of this, the “R&D” start-up will be behind the “spin-out” company by approximately 2–5 years. The clear disadvantage to this company is that it will have to pour most of its initial funding and manpower into product development. As well, investors often hesitate to fund these companies in very early stages where the technology is not robust yet. Paradoxically, the early product-development stage is where this type of company needs money the most.
However, any technology that ultimately blossoms is owned by the company, and in the long run this will give the company more freedom and revenue in deals. The ideal team would consist of many talented technical members, with one person with a keen eye for market. These teams are easier to build in the reality of the biotechnology eco-sphere.
In the case of my team, being an “R&D” company means bootstrapping is a necessity. Equally important to bootstrapping is encouraging and supporting my team members through the down days where experiments fail us. Keeping an optimistic head afloat is the essence.
Fortunately, because we own all of the current and future IP, the pathway to marketing and commercialization can only become increasingly smoother. Once the product/core technology proves to be reproducible at scale and risk-mitigated, fundraising becomes easier. “R&D” companies are born in harsh environments, but can grow at surprising speeds once they get past the initial speed bump. In the eventual sales or acquisitions, the company with its own IP will always win larger.
Alixie Yang is a biotech enthusiastic that loves talking about stem cells and cancer treatment. Conversations about CRISPR that are too optimistic will get on her nerves.
