Building a Biotech Company with the End in Mind
Building a biotech company can be an exciting and rewarding endeavour, but it can also be a challenging and complicated one. Therefore, it’s important that everyone involved shares a vision of success at the end of the journey.
Success in biotech ventures may mean different things to the different stakeholders involved. For founders, it could mean a simple validation of the concept, before letting others take on the job of turning this into a product. Or for some, it may involve a move from the lab bench to the board table permanently.
Whatever the situation, any criteria of corporate success usually requires income to be generated from the venture. For a private company this means some form of “liquidity event” where the founders or stakeholders have an opportunity to sell some of their shares or IP rights and gain some income: the exit.
The Benefits of Working Backwards
Many veteran biotech entrepreneurs will already have an exit plan in mind before starting out, and this should be a major driving force behind the business plan. On a personal level, as a founder, this means deciding where you want the business to end up and what your eventual role will be. However, for other stakeholders and investors, your exit plan will be a critical factor in deciding whether they join you in your journey.
There are a few good reasons why it is prudent to start planning your exit early:
- Set Expectations for Initial Stakeholders. This allows everyone in the business to work towards a common purpose. Employees are less likely to get impatient and leave if they understand the exit timelines. Similarly, early investors (e.g. friends and family), who may not be familiar with long biotech development timelines, may be more supportive for longer.
- Find Investors that Share your Vision. Professional and institutional investors will generally have very well-defined requirements for any investment. It is important that your ideas on exits match their criteria on how they would like to get their capital returned.
- Inform Your Operating Business Model. The type of exit will inform the development plan and the extent to which you invest early in building in-house capabilities (versus outsourcing) and whether you run comprehensive studies in the early days.
- Lay The Corporate Foundations. Incorporating an organisation involves many choices and – once set in place –– they can be difficult and legally expensive to change later in time. For example, how the shares are structured, how the articles of association are worded and where the company (and therefore IP) is registered may well be critical to the decision making of future investors and acquirors.
- Plan Your Life. Lastly and possibly most importantly, as a founder, you need to program the challenges of running a biotech company into your own personal situation. If you wish to drive a company from inception all the way to a successful IPO then do not expect to spend a lot of time relaxing on the beach - this is a long journey.
Considering the Options
In an ideal situation, founders and their investors may have multiple exit options, allowing them to realize the value they have created in their ventures.
- Acquisition: The Whole 9 Yards. One common exit strategy is for the biotech company to be acquired by a larger pharmaceutical or biotech company. This typically involves a buyout of the biotech company's shares, providing liquidity to the founders and other shareholders. Common pharma acquisition strategies are designed to strengthen pipelines and expand therapeutic areas.
- Mergers: Getting Together. This is typically found at later stages where there may be a strategic rationale to bring the pipelines, infrastructure or expertise from two companies together. The economic case will be made that the whole is greater than the sum of the two parts. These exercises typically involve restructuring of teams and facilities and usually some trade in capital which presents an opportunity to exit for some.
- Reverse Mergers are a special case whereby a biotech company with promising IP is acquired by a company that is already publicly listed.
- Initial Public Offering (IPO): Ringing The Bell. This involves offering shares of the company to the public for the first time, allowing founders to sell their shares and raise additional capital for the company's growth. The timing of IPOs has changed over time and is heavily influenced by the macroeconomic environment, investor sentiment and the regulations of each exchange.
- Special Purpose Acquisition Vehicles (SPACs). The last few years have seen a rise in mergers between private Biotechs and publicly-traded, built-for-purpose SPACs, offering biotech companies an easier route to access capital from public markets.
- Secondary Sales and Offerings: Pocket Money. Founders may choose to do a secondary offering after an IPO, where they sell additional shares on the public market to further monetize their ownership or raise new funds for the company. Selling secondary shares of private companies is also possible and is used in Tech startups frequently. This is where shares would be transferred directly from an existing investor, founder or other shareholder to some other party. Kruze has a good article on the subject.
- Licensing or Partnering: Doing the Deal. Founders can also explore licensing or partnership agreements with larger pharmaceutical companies. The extent and scale of any deals can range from a simple one-off licensing transaction to long term collaborative engagements. These deals often involve a combination of upfront payments plus milestone payments and/or royalties based on the success of the licensed technology or drug.
- Royalty Licensing: Selling the Future. In some cases, founders may choose to exit their biotech company through royalty licensing. This involves licensing the intellectual property (IP) rights of the company's products or technologies to other firms. Shareholders receive ongoing royalty payments based on the sales or usage of the licensed IP. This option allows shareholders to retain ownership and potentially generate long-term revenue without the need to sell the company.
Planning for Exits
When planning an exit, you should first align the company's long-term goals with your personal vision—whether it's scaling the company independently, pursuing licensing deals, becoming a fully integrated company, and/or seeking acquisition. Additionally, it's critical to consider the needs and expectations of your current and future investors, as their timelines and financial goals may influence the preferred exit path.
Another key to this exercise is understanding the scope of your IP and its potential impact. If your company is narrowly focused on developing a single drug, you may have different exit options than one working on multiple candidates using a novel modality, which could attract more and broader strategic partnerships.
At this point, it’s also important to gather some intelligence about your target markets and the broader ecosystem. At Probacure, we’ve spent a lot of time helping biotechs to understand the market and define their exit options. In a challenging fundraising environment, the articulation of credible exit options, backed by comparable real-world events has been a make-or-break factor in deal discussions.
Ask yourself the following three questions:
- What exits have similar companies achieved (e.g. with similar IP, or in similar therapeutic areas, etc.)?
- How can recent trends in investing (in the private and public markets) affect my exit options?
- How can recent trends in partnering, mergers and acquisitions affect my exit options?
An attractive, credible exit strategy can be a positive driving force, but remember that preparing for these exits can take many years. Trends, options and market conditions may change over time so, although the primary focus should always be on the science, it is worth keeping an eye on the exit door.
