Historical Context
Biotechnology companies have been touted as the dynamic offspring of the pharmaceutical industry. The business models employed by a biotechnology firm can be as interesting as the biological molecules being developed in their labs.
The earliest biotech players (Amgen, Biogen, Genentech) sought to mimic the fully-integrated pharmaceutical company (FIPCO) models that dominated the market during their launch. The companies that followed Amgen, Biogen and Genentech during the 1990’s could not compete with the large, established players in the industry and sought to drive revenue by licensing out their proprietary technology to the large firms. The royalty income pharmaceutical company (RIPCO) business model provided the revenue that could help an early-stage company survive as they strived to become a FIPCO and to share some of the risk that arose from developing new therapeutics. Some RIPCO’s found success not in trying to bring their own drug to the market, but in providing discreet services for established biotechnology firms. The evolution of these firms towards services by contract led to the Cxo business model, where a firm could supplement their own research from a CRO (contract research organization), CMO (contract manufacturing organization, or even a CCDO (contract clinical development organization).
Investments by venture capital firms were essential in the establishment and evolution of the biotechnology industry. In the early 2000’s though, approvals of new molecular entities by the FDA continued to drop and the industry sought a higher degree of mergers and acquisitions to fuel existing pipelines. The increase in acquisitions buoyed investments from VC firms, but only in the short term, with funding suffering in the mid to late 2000’s, especially after the financial crisis in 2008.
New firms responded to the resource limited environment by utilizing the CxO-like companies to support a virtual biotechnology business model. These companies managed to keep fixed costs low by employing relatively few employees and contracting out most services, such as research, development and clinical trial design/management, to outside organizations.
The Benefits of Virtual
The major benefits of employing a virtual biotechnology business model revolve around the limited infrastructure that is required to start the company. The utilization of a low fixed cost structure (i.e. low overhead) allows companies to control their burn rate and to focus on filling their pipelines with potential candidates, not building infrastructure. This limited infrastructure means that cash can go a lot further and provides the ability for firms to continue operations even when additional early-stage funding may be limited.
The virtual biotechnology business model also avoids the growing pains associated with developing internal specialized capabilities. Hiring external firms (CxOs) whose strategic capabilities are focused and already efficient means a better return on each dollar spent throughout the development period.
A final benefit for the virtual business model, and its investors, is if the new venture is not able to deliver a quick-to-market success, then the startup entity can be dissolved much easier than a fully integrated company.
From Virtual to Reality or Remaining Virtual; Challenges Exist
While the virtual biotechnology business model may seem like a golden opportunity and the future of the industry, it is not without its challenges. Notably, no firm has fully demonstrated success in employing this method and then converting to a fully sustainable organization. The industry has had many successful companies to date that have used this model to advance into later clinical trials and be acquired by a larger company. The very ideal (low infrastructure) will play out to be the challenge that any company will face if it decides to pursue an integrated business model.
Like any industry that functions by contracted outsourcing, a large amount of energy must be expended on overseeing project management and development and ensuring timely completion of tasks as specified. This level of oversight can be complicated even more as the locations for many CxOs are geographically distant, often spanning the globe. To effectively meet timelines and deliver on the promise of a quick-to-market strategy, advanced planning and coordination is necessary.
During the early years of the virtual business model, there were concerns with quality and scalability. Growing operations or focusing on multiple therapeutic areas will likely require the use of multiple CROs which complicates management and may diverge the focus of a project stream. These concerns have been slowly addressed as more companies seek to utilize the services of CxOs and as the virtual industry grows. Indeed, the rise in use of CxO services has resulted in increased scrutiny on quality, especially as established companies seek to buy or license the affected therapeutics. Increased use has also resulted in CxOs investing to develop greater capacity to meet the growing demand.
An Evolutionary (Business) Cycle
The business models of the biotechnology industry will continue to evolve as new companies are started in response to advancements in the understanding of disease states, mechanisms of action in disrupting disease pathways and novel technologies to address patient needs. At the heart of this pathway is the need for capital to sustain research and development activities so that novel technologies can demonstrate their promise. Greater growth within the industry is likely to lead to less available capital per start-up, which will drive the need for more adaptive business models given limited resources.
**Please note that the historical context of the evolution of the Biotechnology sector is more nuanced and complicated than presented here. For additional information on business models in the pharmaceutical or biotechnology industry, and greater detail on their development, please read “The Business of Healthcare Innovation” by Lawton Robert Burns, 2012 (http://amzn.to/UUPJ9D)**
Additional articles for more information on and examples of virtual biotechs:
- Aldridge, S. (2010). Biotechs go virtual. Nature Biotechnology, 28(3), 189. doi:http://dx.doi.org/10.1038/nbt0310-189b
-------- About the Author: Jared Worful -------------------------------
Jared is the President of the BioPharma and Healthcare Club. He graduated with his BS and MS in Biochemistry from the University of Maine. Before coming to Tepper, he worked as a Process Science Engineer for ImmunoGen in Boston. During his five years at ImmunoGen, he focused on developing antibody-drug conjugates to treat various types of cancer and worked to expand their conjugation platform technology.
At Tepper he is concentrating on Operations, Marketing and Strategy. He will be spending his summer at Bayer Healthcare in Whippany, New Jersey. In his spare time he enjoys hiking, playing volleyball and gardening.
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