How to Make Money in Biotech With No Hope of Going Public, Slim Odds of Getting Acquired

5/23/11Follow @xconomy

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as a limited liability corporation, instead of a typical corporate entity. Most VCs have never invested in a deal structure like this, Posada says. Others have done it—San Francisco-based Ablexis is a noteworthy example—but Posada said he encountered some curiosity and a lot of skepticism while pitching this idea to investors over the past year.

There are tons of different business models in biotech, and you can find examples of success in all of them. There is the classic fully integrated biopharmaceutical company (think Gilead Sciences, Biogen Idec, Dendreon, Vertex Pharmaceuticals), which seeks to capture the entire value chain for itself by discovering, developing, and marketing its own products. There is the platform technology play (Alnylam Pharmaceuticals, Regulus Therapeutics), where a company has a novel technology that it licenses to numerous partners that use the platform to try to develop multiple products. There are virtual companies that have no labs, but form small teams of crack scientists and developers that push one or two drug candidates through some critical early tests (VentiRx Pharmaceuticals).

Each business model can work depending on the situation, but none of those approaches changes the cold reality that most drugs fail in clinical trials, and that even if successful the drug development process takes a decade or more and costs hundreds of millions of dollars.

Posada is the first to admit his model isn’t a silver bullet for what ails the biotech industry. He says it can only work in certain situations where you can gather really strong medical evidence on a tight budget. That’s not really possible in most types of cancer drug development, where you often need months or years of follow-up on patients. And this model is absolutely lean and mean—Resolve is a virtual company in the sense that it doesn’t have fancy company labs, and it relies on a small team of consultants and a network of contract research organizations that must deliver on aggressive time frames, and on slim budgets.

But until we come up with a really revolutionary technology that makes drug development much cheaper, faster, and more predictable, entrepreneurs are going to have to think hard about new business models like the one Resolve is putting to the test. If everyone continues with business as usual, a lot of people betting on an IPO or the M&A deal are going to end up very disappointed.

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  • Kerry Dolan

    Luke –I don’t see what’s new about this. Biotech companies have been licensing drugs to big pharma for quite a while. It’s been a lifeline for many of them, too.

  • Rogan

    Kerry — I think the big change is that the company is set up to only do the licensing deal. After they make a deal, the company essentially disappears.

  • http://www.xconomy.com/author/ltimmerman/ Luke Timmerman

    Rogan—thanks. I agree, licensing deals like this have been around a long time, but they haven’t really served as the liquidity event that rewards investors and provides the “exit” strategy for management.

  • http://www.locustwalkpartners.com Geoff Meyerson

    I couldn’t agree more with the “new” model. As a Managing Director of a business development advisory firm that focuses on partnering, we’ve heard these comments on numerous occassions with few people acting on it. One of our clients, in fact, is structured as an LLC and enjoys these benefits. Partnering happens much more frequently than M&A so it is really the only “liquidity” option for most companies. http://blog.locustwalkpartners.com/frontpage/2009/7/31/is-licensing-the-new-ma.html

  • http://jherriman.com Jim Herriman

    I worked on the selling side of the recent SmartCells/Merck deal and we took this general approach from the start (2004). With Pharma/Biotech getting out of in-house R&D, outsourcing early development to specific-purpose entities makes operational and financial sense.

    There are a few issues that Resolve may want to address, including reliance on CROs for mission-critical work and the total tax burden to an investor (a license though an LLC does not give them the best rates). Finallly, using the the assumptions for development cost, upfront earned (both very optimistic) and investor return leaves nothing for the insiders.

    That said, best of luck to them. They are on the right track.

  • http://www.northcoastbio.com Johnny T. Stine

    There’s something about this that sounds so liberating……

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  • D Symmes

    So i don’t think he’s saying the licensing exit itself is what is new… I believe he thinks the LLC structure gives him greater control in some way to exit, and distribute? is that right? I have always thought the LLC is NOT helpful in that situation. This will hit investors P&L as income as well, is that correct? …big tax implications for ROI of course.

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  • Brenda Izzo

    Luke,

    Sorry to be so late to the party – I just ran across this article.
    I work with life science companies in raising funds and M&A advisory. While much of Mr. Posada’s strategy is admirable and not new, it is easier said than done.
    Those Phase I results had better be revolutionary or no pharma – big or small – will care, let alone the investing public. Almost 85% of Phase I trials proceed to Phase II. That’s where the real sticker is.
    Also, Big Pharma is notoriously sneaky about licensing and payments. It often seems like nothing is “de-risked” enough for them.
    Micro companies now have a bit of competition from universities/teaching hospitals who are finally developing better tech transfer departments to monetize research.
    Having said all that, yes it is a good strategy and I wish him luck for success.

  • http://jotabiz.net John

    Good article straight to point. Keep more like coming. Money tips are welcome.

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