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November 6, 2009 no comments

To be or not to be: The Pros and Cons of the Virtual Biotech Company

It is more than a decade since the classical model of a biotech company ruled unchallenged: the glass-fronted building on the gleaming modern science park, with the best part of a hundred doctoral level scientists working seemingly double shifts to deliver an entire pipeline of high value product candidates.  

The central principle underpinning the investment case for such a model was that a team of that kind, once assembled, could find and develop multiple assets that could be sold to big pharmaceutical companies.  The key word was ‘repeatedly’ – no single asset could justify the vast cash drain such a model demands.

Finding such opportunities, which can genuinely sustain this “company” model, has proven to be tricky.  Entrepreneurs would “pad out” a single high quality asset with several earlier stage opportunities that turn out to have considerably less value. After all, it is virtually impossible for any asset owner or research institution to generate genuine pipelines – large pharmaceutical companies with billion dollar R&D budgets can hardly even manage that feat.

A few exceptional technological breakthroughs have the capability to act as the goose that lays a clutch of golden eggs

Experience has taught many investors that the only exception to this rule is the platform technology.  A few exceptional technological breakthroughs have the capability to act as the goose that lays a clutch of golden eggs (humanized antibody libraries have been an obvious example of such a technology).  Presented with such an opportunity, the glass-fronted building may still be the right solution – but you better be sure the platform is all it is promised to be and not a sterile goose with golden feathers.

For the rest, the answer is “project” financing, not “company” financing.   Instead of seeking to balance risk at the level of the individual portfolio company, larger investors are increasingly seeking to balance risk across their whole portfolio.   Provided each asset gets less money invested in it than would have been the case with the big, old fashioned “company” model, then a proportion of those assets can be allowed to fail.  Looking now from the perspective of the investor, the game has changed: the “fail early, fail cheap” mantra of big pharmaceutical companies has replaced the “more than one egg in the basket” mentality that underpinned the old “company” model of biotechnology investing.

Typically, these “project” financed companies look very different from their predecessors.  The liturgy now consists of capital efficiency and of an unswerving dedication to moving to the next value-creation milestone even if doing so exposes the asset to the …


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