How to Start a Life Science Company
Not all science can or should be commercialized. If you are a new entrepreneur, or a scientist thinking about becoming an entrepreneur, it isn’t always easy to work out whether research could be turned into a successful business.
Here are the basic steps to turn science into a product:
It takes years and millions of dollars to turn that flow chart into reality. How can you decide whether it is worth spending the time and money trying to commercialize a particular technology?
If you work or study at a university or research institution, your Technology Transfer Office (TTO) can help you with this. In fact, you have to let them drive the commercialization process. Since the Bayh-Dole Act was passed in 1980, universities and non-profit research institutes in the US own any technology arising from federally-funded research at their facilities. This law requires universities and institutes to patent any useful inventions that they own and to license that technology to interested commercial partners. In Europe, many universities and research institutes have similar intellectual property rights in place.
If your work was sponsored by a company through a Sponsored Research Agreement or contract, the sponsoring company may have the first right to refuse licensing any resulting IP or they may have a time window in which they can negotiate to license any technology.
Some institutions claim ownership of discoveries coming from any work done by their employees, regardless of where it was done, so make sure you check your employment contract before doing work in a Community Lab or other premises.
For any discoveries made at a university or research institution, report your IP to your TTO and they will assess the commerciability of your discovery and work with you on drafting patent claims. If they do decide to patent it, you may be able to negotiate later to license the technology back from them so you can commercialize it.
If you are a solo entrepreneur who invented your technology outside of a company or research organization, these are the steps to work out whether your technology can be commercialized:
· Who owns it? Was it derived from your previous job?
· How strong is the science?
· Can you defend your IP and how will you do so?
· What products, platforms or services can you create from your science?
· Is there a market need for these applications?
· What is your market size?
· Who are your competitors?
· How difficult/expensive will it be to develop these applications?
Note: This article is an excerpt from my book ‘How to Start a Life Science Company’ available on Amazon now as an eBook and paperback. It covers all the concepts outlined in this article in more detail and offers a blueprint of how a first-time entrepreneur can start a successful life science company.
Do you own it?
Ownership of a scientific invention comes down to three things: who did the work; where the work took place and who paid for it. If you did the work in independent lab space such as a community lab, incubator or accelerator and you paid for it, then you are the owner.
To stay away from sticky ownership fights, make sure you read the fine print in any contract you sign with an independent lab. If they don’t have a clear ownership policy or contract, you might want to draft one and ask them to sign it. Also use Material Transfer Agreements (MTAs) if using materials from collaborators or other researchers. These should clearly state who is using what and who owns any IP resulting from the use of these materials.
If you are still working at a university or research institution while doing your independent work, you may need to sign a consulting agreement with them to be sure that they don’t have an ownership claim to any of your IP. Whether or not this is possible depends on the source of your funding and varies from institution to institution so check with your TTO or your human resources department. Also, if you are an expat working on a visa, you have to follow different rules, so check out the rules specific to your visa before you spend time and money on creating independent work. You may not be allowed to do so under your visa regulations.
You may be able to ask your institution for a non-assert letter stating they will not contest ownership of your IP. Naresh Sunkara developed the technology for his company Nosocom Solutions while he was a postdoc at the University of California, Berkeley. He did his work at independent facilities outside of the university. He told Berkeley what he was doing and they wrote a letter for him starting that the university had no ownership rights over his technology.
How strong is the science?
Pharmaceutical companies conduct research in a very different way from most academic labs. Their end goal is to create products and platforms. This means that all research must be well documented and reproducible. Otherwise the company could spend millions or billions of dollars and many years running down dead-end paths. Companies want to get to a ‘go/no-go decision’ as fast as possible to save time and money. They are biased towards no. Academic labs on the other hand, are often trying to find new knowledge, not create products. They are biased towards yes.
As basic research funding dwindles, many universities and institutions are moving towards ‘translational research’ so many more academic researchers will need to think about how their work can be turned into products.
If you want to go down the harrowing road of spinning out a startup company based on your research, you need to know that the science is solid. This is one of the first questions that early stage investors will ask. They want to know that you have novel technology that can be used to make a product that solves a problem for a big market. Peer review of your work can provide some external validation of your science. Securing grant funding, winning business competitions and being accepted into an incubator or accelerator program all involve peer review of your science.
If you are at the earliest stage of your entrepreneurship journey, and haven’t yet had the chance to apply for grants or enter competitions, you need to objectively assess the quality of your science. It might help to ask a couple of colleagues to do this, particularly if they are well known in your field. These same colleagues may write you letters of support to strengthen your grant applications or investment pitch.
Investors will analyze your data themselves. They will look at the robustness of any patents and academic publications. They will also assess the strength of your scientific advisory board.
Can you defend your IP?
The best way to protect IP is to apply for a patent. Investors prefer to invest in life science companies that own patented technology, rather than those that rely on trade secrets to protect their IP. However, not all ideas and technologies are patentable. For example, software is very difficult, if not impossible to patent.
You can only patent and defend IP that is ‘new’. That means you cannot publicly disclose or publish your work in any way before applying for a patent. If in doubt, ask a patent lawyer or TTO.
To work out whether your technology is ‘new’, you will need to do a patent analysis. This means searching the US Patent Office database, and equivalent databases in other countries, as well as all published scientific literature and conference proceedings, to check whether similar technology has already been patented for the same applications.
Patent applications are technical documents that can be difficult to understand without the help of a professional. Scientists and engineers are smart and used to learning quickly about new techniques and new fields. However, there are two areas in the product development pathway where life science entrepreneurs consistently recommend getting help and that is with IP protection and with regulatory compliance concerns.
If you are at a university or academic institute, your TTO will do a patent analysis for you or will work with patent lawyers to ensure that your technology is patentable. If you are a solo entrepreneur, it is worth speaking with a patent lawyer.
What products, platforms or services can you create from your science?
You can’t sell science to customers. You have to sell a product, a platform or a service. Each of these is a different application of your technology.
Your science is commercially valuable only if you can turn it into one or more applications that people will buy. That last part is key. Even if your product or service is one of the most innovative things ever created, if people don’t need it, you will find it almost impossible to sell.
Make a list of possible applications
Make a list of all the possible products, platforms and services that you could make from your technology. There will be some obvious ones but you also want to take the time to think about the less obvious options. This may help you to pivot and grow later as a company and realize the true value of your technology.
Search the internet for companies with similar technologies and see what they are developing. Ask co-workers to give you five possible applications. Talk to your TTO. Talk to entrepreneurs in your city, especially if there are any at your institution, and ask them, without giving away too many details, for potential applications. Investors are also very good at coming up with new ideas for technologies and can help you to pivot your entire company.
Rank all the applications you come up with in order of how easy or difficult they would be to make and how well they fill a market need or solve a problem that a large number of people have. There’s a method to do this in the ‘Viable Option’ section below.
Is there a market need for these applications?
The next step is to decide whether there is a true market need for each potential application. Ask yourself:
1. ‘What problems does this product or service solve?’
2. ‘Who has those problems?’
3. ‘How do these potential customers currently solve those problems?’
4. ‘How is my solution better?’
Customer interviews
If you don’t create a product, platform or service that customers want, you will find it very difficult to build a successful business. The best way to avoid this is to go out and talk to potential customers.
If you are developing a therapeutic drug for an obvious unmet medical need with a big market, it is easy to believe that doctors and patients will want to use your product. However, you can still benefit from talking to doctors and asking them how they currently treat patients with this medical need and what their ideal treatment would be. You can also ask doctors what problems they have that you might be able to solve. You may be surprised to learn that your technology could be used to solve physicians’ problems as well as patients’ problems. You can also ask physicians what other problems their patients have and how they work to solve those problems.
Speak with patients and ask them how they want to take their medicine. Would they be willing to inject a treatment three times a day, or use an inhaler several times a day or have a slow release capsule implanted under their skin? These conversations can teach you a lot about different formulations and preferred delivery systems as well as acceptable and unacceptable side effects in this patient population.
This is even more important if you are creating a medical device. Just because you think your medical device is better and faster than what is currently available, doesn’t mean doctors will prescribe it or patients will use it and it definitely doesn’t mean that insurance companies will pay for it.
You will learn a huge amount by talking to people. You will find out whether they would use the application you are thinking about creating, how they would use it, what other products or services they wish existed and much more. You can take all this information and use it to create the best product or service possible.
Customer interviews also give you the chance to start building relationships with potential customers. Some of these people may become your most loyal early adopters and help you to build your brand recognition even before you launch your first product or service. Invite key opinion leaders, particularly those working in prestigious hospitals and training the next generation of physicians, to join your scientific advisory board.
You can also ask potential customers and key opinion leaders, whether they are patients, doctors, patient advocacy groups, health insurance companies or hospitals, to write letters of support stating that they would buy your product or service if it were created. This will help you later when you are ready to look for investment.
Investors will speak to actual and potential customers when they are assessing your company and deciding whether or not to invest.
End-user or customer?
Be careful to distinguish between end-users and customers. Customers are the people who pay for your product or service and the end-users are the people who use it. If you are creating a product or service that people use in a hospital, then the hospital is your customer and the patients are your end-users. Likewise, if your application will be used by people enrolled in a certain healthcare plan, the health insurance company is your customer and the employees are the end-users.
You should look to get input from both end-users and customers when designing and developing your applications.
Braykion is a startup company in San Diego developing a system to monitor handwashing in healthcare workers. Poor handwashing compliance causes 100,000 preventable deaths and costs $40 billion per year in the US alone. In Braykion’s case, health care workers are the end-users. They wear Braykion’s monitoring system. However, hospitals are the customers because they pay for the product.
Viable option list
Once you know there is a market for an application, you can put it into your ‘viable option’ list. To work out which application you should pursue first, you need to know which has the largest market, the fewest competitors and will be the quickest and easiest to design, test, manufacture and receive regulatory approval. There may be no one application that scores best for all these parameters, but you can use a scoring system that takes all of them into account when you decide which application is most likely to be successful. Here is an example table that you could use:
What is your market size?
Market size is often called the Total Addressable Market or TAM. TAM is the revenue you would earn if you could reach 100% of your target market. However, TAM is not really your market size. Even with the most innovative technology and marketing plan, you will never reach 100% of any market.
The available market is the amount of the TAM that you can reach with your marketing. The obtainable market is the segment that will buy your application. That is your true market size. There is a general consensus among entrepreneurs that you need a market size of at least $1 billion to be able to attract angel or venture capital investment.
To work out the market size for each application on your viable option list, you need to do market analysis. This means understanding who is your customer, the number of these potential customers, how many of these people you can reach and how quickly you can reach them.
There are two ways to calculate market size: top down and bottom up. In the top down approach, you estimate the total dollar value spent on similar products. For example, if you are developing a spinal implant and $4 billion is spent each year on spinal implants worldwide, then your TAM is $4 billion. Your obtainable market is how much of that market will buy your implant rather than competing implants.
In the bottom up approach, you calculate TAM by working out how many people need your product or service and multiplying this by the average sale price. In the example of spinal implants, you would work out how many people need spinal implants each year, then multiply that by the average sale price of each implant. Your obtainable market will depend on how many people will use your product instead of competing products. This is your market penetrance and depends on the visibility of your product i.e. how well you market it.
Market size = number of customers x penetrance x average sale value
To make this calculation, you need a rough idea of the average value of each sale of a ‘unit’ of your application. You’ll need to factor in the estimated cost of production for your application as well as acceptable price points for your target customers. Customer interviews, customer personas and competitive analysis can help you work out these numbers. If you know a competitor drug sells for $5,000 per month, it is reasonable to predict that your drug could sell for at least that amount.
Building customer personas is big outside of the life science industry. It is more than just doing customer interviews. You also need to research their spending habits — their disposable income, what they purchase and how, the price bracket in which they will buy an equivalent product and their design preferences. Intuitively this appears to be less important in healthcare, as patients will want a new treatment or device that helps them better manage their disease. However, in many cases, the patients are the end-users, not the customers. Your customers are hospitals, insurance companies or national public healthcare systems like Medicare in Australia or the National Health Service (NHS) in the UK. It can be very helpful to work out how much insurance companies spend on equivalent products and services.
You can do this by searching for reimbursement codes. These codes tell you what similar products have been covered by insurance companies or national healthcare programs and how much payers paid for these products. You can hire reimbursement consultants or agencies to help you with these searches.
When calculating market size, you also need to work out the number of potential customers. You can search the scientific literature for disease prevalence and incidence and use census data and information from the World Health Organization and patient advocacy groups.
It can be much harder to estimate how many of these customers you can reach and how quickly you can do that. This depends on many factors, some of which you can control and some of which you can’t. Depending on how much capital you have available, you can have a reasonable amount of control over your marketing, public relations and industry partnerships. All of these will help spread the word about your product or service. However, you can’t control patient demographics such as income and health insurance status. Also, while you can work with regulatory and reimbursement experts while designing and developing your application to try and ensure that insurers and other payers will ultimately pay for your product or service, this is another factor that you cannot completely control.
Building best case and worse case scenarios for market size will help you decide whether or not to move forward with any of your viable options. Making a list of all the risks involved at each step and of the assumptions you have made in your calculations will also help.
Note: Keep watch on the total addressable, available and obtainable markets throughout your product development pipeline and beyond. These can change over time which may have a devastating effect on your business. Also keep an eye on competitors. New ones will pop up all the time.
Who are your competitors?
The next step is to analyze your competitors. How many of them are there? Who are they and how are their applications different and similar to yours? This will help you understand your point of difference or unique selling point, that is what makes you better than your competitors.
Who your competitors are will depend on both your technology and your application. If you are developing a new therapeutic for lymphoma then all other companies creating lymphoma therapeutics are direct competitors. But what about companies developing therapeutics for other cancers? Could any of these also be used to treat lymphoma? Are there any companies creating medical devices to either help treat or diagnose lymphoma? What about companies developing medical devices or diagnostics for other cancers? Does anyone have a cancer diagnosis platform? These could be indirect competitors. For example, if a new drug is initially approved to treat leukemia but subsequent trials show it is also effective in treating lymphoma, then this company would then become a direct competitor.
It can be very difficult to find out about new biotech and life science companies. Many operate ‘under the radar’ while they are in preclinical development. However, you can look at the product pipelines of large and mid-sized pharmaceutical and biotech companies as well as any smaller companies with websites. There are also many company aggregators like Crunchbase and AngelList that you can use to search for competitors.
Make a table or a list with each potential competitor, their products, the mode of action (MOA) of each product and the price of each product.
How are you different? Are you developing a drug with a new mode of action to treat this disease? That is called first-in-class. Or are you developing a drug or device that works in a similar way to the market leader but has better pharmacokinetics or performance? This is called best-in-class. Or does your platform allow new medicines to be produced significantly more quickly or cheaply than competitors? This would give you a price advantage.
Each of these points of difference comes with its own risks. If you are aiming for first-in-class, your drug mechanism will never have been tested in your target patient population. So, there is a good chance that the drug will fail clinical trials. If you are going for best-in-class, then there will be more data showing that similar drugs do work in your patient population but your drug may not outperform these similar drugs. Or insurance companies and payers may not choose to pay for your drug instead of the old drug.
Competitive analysis is not only important as a tool to help you decide which application of your technology you should develop first, it is also an essential part of any pitch to investors. Investors don’t need to see every single potential competitor, at least in your initial pitch, but they do need to know that you know about every competitor and you know how you are different and why you are better. It will also help you work out appropriate pricing for your application and put a dollar value on your company when you are ready to look for investment.
When creating your pitch deck, you can show your competitive analysis as a graph, or if you want to show more than two variables, use a matrix.
Note: Just like with market analysis, you want to keep up to date with what your competitors are doing and regularly check for new competitors.
Product development plan
The US Food and Drug Administration (FDA) divides the healthcare product development process into five stages: Discovery and Development; Preclinical Research; Clinical Research; FDA Review and Post-Market Safety and Monitoring.
Although all products will need to pass through these five stages, your specific product development and regulatory pathway will depend on whether you are developing a pharmaceutical, a medical device, equipment, consumables or software. It will also depend on whether you are seeking regulatory approval in the US, Europe or other countries. All regulatory agencies, including the FDA and the European Medicines Agency (EMA) have specific guidelines and these must be met in order to receive approval. You can find out a lot of information from regulatory agency websites. However, when it comes time to plan your preclinical research, you can ensure that you have the right experimental design by consulting with a regulatory affairs expert.
Marketing plan
You will need an in-depth marketing plan when you start pitching to investors. This will form part of your business plan. At the early product analysis stage, when you are building your viable option list, you should have an idea of who your customers are and how will you get to them. You should also try to come up with a ball park figure of how much this would cost and how this would differ for the possible applications of your technology.
Conclusion
Once you have run through these steps, you should have a good idea of whether or not your science can be commercialized.
More information
This article is an excerpt from my book ‘How to Start a Life Science Company’ available on Amazon now as an eBook and paperback. It covers all the concepts outlined in this article in more detail and offers a blueprint of how a first-time entrepreneur can start a successful life science company.
