Shimasaki Craig D. The Business of Bioscience: What goes into making a Biotechnology Product
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BookID 185346_ChapID FM_Proof# 1 - 16/05/2009
I welcome any comments that you, the reader, may have on ways to improve this
resource so that biotech leaders and entrepreneurs can be better equipped to lead our
industry into the future. Additional information can be found on various topics
helpful to the biotech entrepreneur at my website, www.businessofbioscience.com
Best Wishes for Your Success!
Craig Shimasaki, PhD, MBA
Edmond, OK
Preface
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Acknowledgments
This book would not be possible without the many helpful individuals who read,
reviewed, and proofed this manuscript and provided many helpful suggestions
along the way. Thanks to Anil Gollahalli for his helpful review and comments and
edits on intellectual property and university licensing. Thanks to Carl Gibson for
his thoughts and helpful suggestions on the financing chapters. Thanks also to Tom
Dickerson, who graciously shared information on the number of technologies
reviewed and funded, and for his helpful advice over the many years. A special
thanks to Anthony Hickey and Sean Ekins for taking the time to review portions of
this manuscript and provide additional helpful insights and comments. Many
thanks to my wife, Verna Shimasaki, for her helpful comments, edits, corrections
and unwavering support throughout this process. Sincere appreciation goes to my
new son-in-law, Adam Zarlengo, for the sharing of his experiences in a start-up
company. A special thanks to the Gooden Group, the owner, Brent Gooden along
with his business partner Jane Braden, who saw the value of what we were doing
at two of the companies that I was a part of cofounding, and continued to stay with
us throughout the tough times. A special thanks to Dale Hagaman of Accord
Human Resources, whose company has supported our entrepreneurial work with
their excellent services and with financial help. Grateful appreciation goes to the
Founders and Board Members of the Presbyterian Health Foundation, who have
always been supportive of biotechnology, and of our efforts in start-up companies.
A very special thanks to Bill Swisher and his family. Bill has been one of the most
ardent supporters of medical technology, and possesses an unwavering commitment
to those he believes in, and is truly a man of his word. There are numerous support-
ers and friends that I would like to acknowledge and thank, who have stood by and
supported the many company endeavors that I have been involved in over the years
– but this would take an entire chapter. So I gratefully acknowledge them, as the
“host of angels, supporters and colleagues,” who tirelessly give of their time, and
work behind the scenes.
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Contents
1 Introduction .............................................................................................. 1
Biotech in Its Infancy ................................................................................. 1
The Business of Biotechnology Is Like No Other ..................................... 2
What Exactly Is Biotechnology? ............................................................... 2
Biotechnology Clusters and the Decentralization of Biotech Hubs ........... 3
Is the Biotechnology Business Model Broken? ......................................... 6
2 What Makes a Biotech Entrepreneur? .................................................. 9
A Different Breed ....................................................................................... 9
Know the Challenges: Count the Costs...................................................... 10
Do You Have What It Takes? ................................................................. 11
Personal Costs ........................................................................................ 11
Four Backgrounds of Biotech Entrepreneurs ............................................. 12
For the Scientist: Things vs. People ....................................................... 12
For the Businessperson: Communication with Scientists ...................... 13
First Time Entrepreneur, First Time in Business ....................................... 14
Alternatives to Consider Before Taking the Leadership Role ................ 14
Acquiring Additional Business Skills .................................................... 15
For the Young MBA ............................................................................... 16
Be a Life-Long Learner .......................................................................... 16
Essentials of a Biotech Entrepreneur ......................................................... 17
Passion and Vision .................................................................................. 17
Assess Your Strengths and Weaknesses ................................................. 17
Learn New Skills Quickly ...................................................................... 18
Good Business Sense ............................................................................. 19
Have the Ability to Speak Two Languages:
Be a Multi-Disciplined Translator .......................................................... 19
Beware of the Unknown Unknowns ....................................................... 21
Gain Knowledge and Wisdom ................................................................ 21
Persistence .............................................................................................. 22
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Contents
Having a Deep Sense of Responsibility ................................................. 23
Be a Negotiator ....................................................................................... 24
Enlarge Your Circle of Influence ............................................................ 24
On Creativity and Change ...................................................................... 25
Leadership and Core Values ................................................................... 25
Summary .................................................................................................... 26
3 Start with the Idea: Licensing and Protecting Core Assets ................. 27
What to Consider Before Licensing ........................................................... 27
Is There a Real Market for This Product? .............................................. 27
The Quality of the Science ..................................................................... 29
Is It a Core Technology or a Single Product? ......................................... 30
Great Technology is Associated with Great Scientists ........................... 31
What To Do Next? .................................................................................. 31
What Is Intellectual Property? ................................................................... 32
What Is a Patent? .................................................................................... 32
How Is a Patent Obtained? ..................................................................... 33
Types of Patents: Traditional, Regular (Nonprovisional) ....................... 34
Types of Patents: Provisional ................................................................. 35
Types of Patents: International ............................................................... 35
Get a Freedom-to-Operate Evaluation.................................................... 36
Trade Secrets .......................................................................................... 36
Trademarks ............................................................................................. 37
Technology Licensing and Negotiations .................................................... 37
What Does a Typical License Structure Look Like? .............................. 38
Factors in Licensing Negotiations .......................................................... 39
Exclusive Licenses ................................................................................. 40
Nonexclusive/Coexclusive Licenses....................................................... 40
Summary .................................................................................................... 41
4 Significance of the Right Business Model and Managing Risk ............ 43
Business Model Examples ......................................................................... 43
Biotechnology Business Models ............................................................ 44
The Drug Repositioning Business Model .............................................. 45
Molecular Testing Business Models ....................................................... 46
How Do You Determine the Best Business Model
for a Technology? ................................................................................... 47
Becoming a Risk Manager ......................................................................... 48
Why Risk Assessment and Risk Management Is Important .................. 49
What Are the Risks That Need to be Managed? .................................... 49
Biotech Evaluation Tool ............................................................................. 50
Summary .................................................................................................... 52
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5 Legally Establishing the Company ......................................................... 53
The First Step: Find a Good Attorney ........................................................ 53
How Many and What Types of Attorneys Do I Need? ........................... 54
Corporate Attorney ................................................................................. 54
Patent Attorney ....................................................................................... 55
Securities Attorney ................................................................................. 55
How Does One Find a Good Attorney? ................................................. 56
How Much Will This Cost? .................................................................... 57
Choosing a Company Name ...................................................................... 58
Why Is a Company Name Important? .................................................... 58
Can a Company Name be Changed? ...................................................... 59
Incorporating the New Company ............................................................... 60
Ownership: Issuing Stock .......................................................................... 61
What Types of Stock Should be Issued? ................................................ 62
What About the Founders? ..................................................................... 63
What Agreements are Needed? .................................................................. 63
Setting Up a Board of Directors ................................................................. 64
Importance of Directors and Officers Insurance .................................... 65
Responsibilities of Your Board of Directors .......................................... 65
How Should a Board of Directors be Compensated? ............................. 67
Setting Up a Scientific Advisory Board ..................................................... 67
Who Are They and What Do They Do? ................................................. 67
How Often Should the SAB Meet? ........................................................ 69
How Should the SAB be Compensated? ................................................ 69
A Clinical Advisory Board ..................................................................... 69
The Virtual Company ................................................................................. 70
Summary .................................................................................................... 70
6 The Product Development Pathway:
Charting the Right Course ...................................................................... 73
It Is About Creating Value ......................................................................... 73
Biotechnology R&D: Little R, Big D ........................................................ 74
A Sense of Urgency Down an Unfamiliar Path ......................................... 74
Two Types of Product Development Categories ........................................ 75
Product Development Stages ..................................................................... 76
Development Stages for “Treatments” ....................................................... 76
Treatments: Basic and Translational Research Stage ............................. 76
Treatments: Development Stage ............................................................. 77
Treatments: Lead/Process Optimization Stage ....................................... 78
Treatments: Preclinical Testing Stage .................................................... 79
Treatments: Clinical Testing Stage ......................................................... 80
Treatments: Regulatory Review Stage ................................................... 83
Treatments: Scale-Up and Manufacturing Stage .................................... 83
Treatments: Marketing and Growth Stage .............................................. 84
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Development Stages for “Analytics and Tools” ......................................... 84
Analytics and Tools: Basic and Translational
Research Stage ....................................................................................... 84
Analytics and Tools: Proof-of-Concept Stage ........................................ 85
Analytics and Tools: Prototype Development ........................................ 85
Analytics and Tools: Clinical Validation Stage ...................................... 86
Analytics and Tools: Regulatory Review Stage ..................................... 87
Analytics and Tools: Scale-Up and Manufacturing Stage ...................... 87
Analytics and Tools: Marketing and Growth Stage................................ 87
Product Development Milestones .............................................................. 88
Commit Your Plan to Writing ................................................................ 89
Product Development Assistance ............................................................... 89
Significance of Winning Competitive Grants ......................................... 90
Commercialization Help from SBIR ...................................................... 91
Market Development and Business and Organizational
Development Paths ..................................................................................... 91
Summary .................................................................................................... 92
7 Developing a Marketing Strategy ........................................................... 95
What Is Marketing? .................................................................................... 95
Misconception 1: What Is So difficult About Marketing?
You Just Make It and Sell It! .................................................................. 96
Misconception 2: The Better Your Technology,
The More People Will Want to Buy Your Product ................................. 96
Misconception 3: I Do Not Need to be Concerned
with Market Strategy Now Because I Have Plenty
of Time to Think About Marketing Later ............................................... 97
The Evolution of the Marketing Concept .................................................. 97
The Production Concept ......................................................................... 98
The Sales Concept .................................................................................. 98
The Marketing Concept .......................................................................... 98
Understand and Appreciate the Market for Your Product ...................... 99
Marketing Tools ......................................................................................... 100
Segmentation .......................................................................................... 100
By Geographic Location ........................................................................ 100
By Demography ..................................................................................... 101
By Behavior and Usage .......................................................................... 101
Targeting ................................................................................................. 102
Positioning .............................................................................................. 102
Branding ................................................................................................. 103
Market Research and Assessment Tools .................................................... 103
Primary and Secondary Market Research .............................................. 104
Market Size and Opportunity ................................................................. 104
Biotechnology Products Typically Have Three Customers ....................... 105
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Who Is the Patient? ................................................................................. 105
Who Is the Physician? ............................................................................ 106
Who Is the Payor? .................................................................................. 106
Five-Step Process to Applying Market Concepts ...................................... 106
Step 1: Determine Your Potential Market Size ...................................... 107
Step 2: Define Your Target Market Segment .......................................... 107
Step 3: Articulate Your Product’s Value Proposition
to Your Target Market ............................................................................ 108
Step 4: Select a Market Channel to Reach Your
Target Market Segment .......................................................................... 108
Step 5: Validate and Refine Your Market Strategy ................................. 109
Using Biotech Product Examples .............................................................. 109
Example: Molecular Genetic Test for the Assessment
of Breast Cancer Risk ................................................................................ 110
Determine Your Potential Market Size ................................................... 110
Define Your Target Market Segment ...................................................... 110
Determine a Value Proposition to the Target Market ............................. 111
Evaluate and Select a Market Channel to Reach
the Target Market ................................................................................... 112
Validate and Refine the Market Strategy ................................................ 112
Example: Nasal Spray Vaccine Against Influenza Virus ........................... 112
Determine Your Potential Market Size ................................................... 112
Define Your Target Market Segment ...................................................... 113
Determine Your Value Proposition to Your Target Market .................... 113
Evaluate and Select a Market Channel to Reach
Your Target Market ................................................................................. 114
Validate and Refine Your Market Strategy ............................................. 114
Market Development Milestones ............................................................... 115
Biotechnology Product Adoption Curve .................................................... 115
Summary .................................................................................................... 116
8 Financing Your Company – Part 1: Raising Money, Capital
Needs, and Funding Sources ................................................................... 117
Raising Money ........................................................................................... 118
Why Does It Seem Like All Our Time Is Spent
Raising Money? ...................................................................................... 118
Raise Money on Strength ....................................................................... 118
Raise More Money Than the Anticipated Need ..................................... 118
Do Not Wait Too Long to Start Raising Your Next
Round of Capital .................................................................................... 119
Do Not Overvalue Your Company ......................................................... 120
New Money Trumps Old Money ............................................................ 120
Just Because Investors Are Interested, It Does Not
Mean They Will Make an Investment .................................................... 120
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How Much Money Does a Company Need to Raise? ................................ 121
Therapeutic Estimates ............................................................................ 123
Diagnostic Tests Cost Estimates ............................................................. 123
Medical Device Estimates ...................................................................... 124
Clinical Laboratory Services: Genetic and Gene
Testing of Molecular Markers ................................................................ 124
How Long Does It Take to Raise Money
for a Start-Up Company? ........................................................................... 125
Academic Scientist or Physician ............................................................ 125
Industry Scientist or Industry Physician ................................................. 126
Businessperson (Nonscientist/Nonphysician) ........................................ 126
Spin-Off Group from Industry ............................................................... 127
Geographic Location Effects .................................................................. 128
Where to Go to Raise Capital? ................................................................... 128
Personal Money ...................................................................................... 129
Friends and Family ................................................................................. 130
Peer-Reviewed Grant Funding ............................................................... 130
State and Local Financing Program Support .......................................... 131
Angel Investors ....................................................................................... 132
Private Placements or Private Offerings ................................................. 133
The Venture Capital Industry ................................................................. 134
Venture Capital Brings More Than Just Money ..................................... 135
Finding the Right VC ............................................................................. 135
How NOT to Find a Venture Capital Firm ............................................. 136
The Dark Side ......................................................................................... 138
How Do You Approach Venture Capital? .............................................. 138
The Term Sheet ...................................................................................... 139
What Is Due Diligence? How Long Does It Take? ................................ 140
The Funding Chasm: Bridging from Angel to Venture Capital ............. 140
Nonprofit Foundation Partnerships ........................................................ 141
Industry Corporate Partnership .............................................................. 142
Institutional Debt Financing ................................................................... 142
Investors Expectations for Return on Investment ...................................... 143
Learn to Appreciate the “Beatings”........................................................ 143
Summary .................................................................................................... 144
9 Financing the Company – Part 2: Funding Stages,
Valuation, and Funding Tools ................................................................. 147
Financing Stages for a Life Science Company .......................................... 147
Start-Up or Pre-Seed Capital .................................................................. 147
Seed Capital ............................................................................................ 148
Early Stage Capital: Series A/B Preferred Rounds ................................ 148
Mid-Stage or Development-Stage Capital: Series C/D
Preferred Rounds .................................................................................... 148
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Later-Stage and Expansion Capital: Series E/F
Preferred Rounds .................................................................................... 149
Mezzanine Capital .................................................................................. 149
Initial Public Offering or Acquisition .................................................... 149
Funding Gaps: Convertible Notes or Convertible Bridge Loans ............ 150
What Is the Typical Sequence of Funding Events? ................................ 150
How Much Money is Raised at Each Funding Stage? ............................. 151
How Is Company Value Determined? ...................................................... 152
How Much Will the Founders Own? ....................................................... 155
How Much of the Company Is Given Up in Each Round? .................. 156
Communicating to Your Shareholders ..................................................... 156
The Value of Public Relations in Raising Money .................................... 157
Exit Planning: Sooner not Later ............................................................... 159
What Are the Exits? ............................................................................. 159
The Tools .................................................................................................. 160
The Business Plan .................................................................................... 160
The Presentation ....................................................................................... 166
All That is needed to Raise Money is a Good
PowerPoint Presentation ...................................................................... 166
What is Contained in Your Presentation .............................................. 167
Pointers on Giving a PowerPoint Presentation .................................... 167
Presentation Body Language ............................................................... 168
Other Presentation Points ..................................................................... 169
Building a Web Presence: Putting Your Best
Foot Forward ............................................................................................ 169
Final Comments About Funding .............................................................. 170
10 Corporate Culture and Core Values
in a Biotech Company ............................................................................ 171
Why is a Company Culture Important? ................................................... 171
Development of a Company Culture ........................................................ 172
Individuals Define the Culture and Core Values ...................................... 173
Examples of Core Values ......................................................................... 173
Company Core Values .............................................................................. 174
Guiding Principles Based On Core Values .............................................. 175
Core Values Begin With the Leader ......................................................... 175
How to go About Improving a Company Culture? .................................. 176
Communication in a Biotech Company ................................................... 177
Core Values Apply to Partnerships Even Suppliers
and Service Providers............................................................................... 177
A Good Corporate Culture is a Strength That Cannot
be Easily Copied ...................................................................................... 178
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11 Hiring a Biotech Dream Team .............................................................. 179
For the Start-Up: Virtual is Vital .............................................................. 179
Renting and Leasing Space .................................................................. 180
Who do You Hire First? ........................................................................... 181
Category I Functions ............................................................................ 182
Category II Functions........................................................................... 182
Category III Functions ......................................................................... 183
General Recommendations ...... ........................................................... 183
Employee Benefits Challenges ................................................................ 184
Key Employee Compensation .................................................................. 184
Diversity is Essential ................................................................................ 185
A New Hiring Approach .......................................................................... 186
Relevant Experience ............................................................................. 186
Ability-to-Execute ................................................................................ 187
Shared Core Values .............................................................................. 187
The Hiring Process ................................................................................... 188
Have the Interviewee Give a Presentation ........................................... 188
Face-to-Face Time................................................................................ 189
Use a Work Behavior Assessment Profile............................................ 190
Use Informal Meetings ........................................................................ 190
Have Them Talk with a Professional ................................................... 190
Making the Final Decision ................................................................... 191
How to Find These Individuals? .............................................................. 191
Management Skill Sets ............................................................................ 192
Five Skills of Successful Mangers ....................................................... 192
Letting Some Go ...................................................................................... 193
When to Use Separation Agreements .................................................. 194
Summary .................................................................................................. 194
12 Strategic Alliances and Corporate Partnerships................................. 197
What Are Alliances and Partnerships?..................................................... 197
Why Are Partnerships Important?............................................................ 197
What Does a Biotech Have That a Strategic Partner Would Want? ......... 198
What Does the Biotech Get from a Partnership? ..................................... 199
Can’t a Potential Partner Just Acquire the Biotech Company?................ 200
The Partnership ........................................................................................ 200
What Is the Partnership Process? ......................................................... 201
Making Alliances Work ........................................................................... 202
Why Do Alliances Fail? ....................................................................... 203
Summary .................................................................................................. 204
13 The Regulatory Process for Biotech Products ..................................... 205
Alphabet Soup .......................................................................................... 206
Biotechnology Regulators: The Food and Drug Administration ............. 207