Biotech business models

Biotech companies have traditionally used a variety of business models to enter the healthcare market (see my diagram). Here’s a very straightforward (and simple) framework to understand the basics of it. Understanding the different business models is essential to entrepreneurs and investors. Different business models need different capabilities. We can find at least four different positionings:

(1) Start-ups that rent/sell their technology to pharma companies (technology platform model): Some start-ups have developed an enabling technology that can be applied in a stage of the drug discovery and development process. For example, a technology able to produce proteins faster. When positioning their start-up as a technology platform, entrepreneurs are not interested in developing drugs or diagnostics, they just want to exploit their technology. Key factors to success:

• the higher the perceived value (the more useful it is to pharma companies), the more likely to attract the interest of investors.

• the stronger the IP protection (patents), the longer the company will be able to generate revenues from it without competitors eroding their marketshare

• understand that if a better technology comes to the market, the sales will be over pretty quickly.

(2) Start-ups that research and develop a new drug to finally license it to a big pharma company in exchange for a royalty on sales (RIPCO model): Sometimes, the technology is so powerful and gives such a competitive advantage to the start-up, that the entrepreneurs use it to research and develop their own products. The Royalty-Income Pharmaceutical Company (RIPCO) usually pushes its first product through the early stages of clinical development, creating as much value as possible, and then transfers this value to a big company able to finish research, produce and commercialize the drug. Key factors to success:

• the larger the market of the new drug, the higher the value

• the sooner the drug can get to the market (the more advanced in the clinical development), the higher the interest of investors will be.

(3) Start-ups that launch their own drug (FIPCO model): Sometimes (very rarely), in the Fully Integrated Pharmaceutical Company model (FIPCO), the start-up wants to push its own product through all stages of the value chain, using technology to research and develop the drug, produce it, and finally bring it to market. Given the large amount of capital needed to develop one drug and the high risk associated with it, few companies have been successful at this strategy. Key factors to success are:

• the ability to raise large amounts of capital (the whole process is very capital-intensive)

• having more than one drug in the pipeline to diversify the risk

• Again, the larger the market, the more interesting the start-up will be.

(4) Start-ups that buy a “discarded” promising drug from big pharma and use their technology to bring it to market (NRDO model): In the No Research-Development Only (NDRO) approach, a start-up licenses from a big pharma a drug that is already in preclinical or clinical testing stage and that has no interest for the pharma company, and then uses its technology to produce it in a very efficient way, making it profitable. Key factors for success:

• access to promising new molecules and drugs on a sustained basis

• speed and competitive advantage when producing and commercializing the drug.