As a small biotech company proceeds from startup phase through rapid growth of its operations, it will face many critical decisions along the way. Indeed, many of the decisions will be pivotal to determining whether the company will successfully move from a small incubator of ideas to the ability to shepherd a R&D asset through its pipeline to achieving commercial success. This article will provide readers with selected examples of such decisions, plus questions or factors to be considered when making decisions that will have significant impact on the future of their growing firm.
Developing a clearly articulated company strategy
As the saying goes, “There is no better place to start than at the beginning.” In the excitement to launch a new company, it is prudent to step back and pressure-test the fledgling company’s strategy by asking questions such as the following:
• What is the specific opportunity in the external marketplace that we are trying to seize?
• What is our firm’s unique and sustainable competitive advantage?
• What is the source of that sustainable advantage? Can it be easily replicated by potential competitors? If not, why?
• Have we thought through where we will operate and find customers?
• Have we formulated a timeline with key milestones to lay out the launch path and trajectory of our firm? Have we formulated base-case, best-case, and worst-case scenarios with key assumptions and risks?
Ironically, developing the strategy may be the easy part; adhering to the strategy may prove to be more difficult. Having the discipline to ensure that work being done in all areas of the company, specifically, the R&D function, is aligned to the company’s strategy is essential. This leads us to the next topic: the criteria to be used for advancing programs in the R&D pipeline.
Establishing criteria for making go/no-go decisions for R&D assets
Senior management may set thresholds and other guidelines to determine whether a project must seek approval to proceed. For example, different thresholds can be established for feasibility studies (e.g., $1 million) vs. a full-scale Phase II or Phase III program (e.g., $10 million). In addition, one could envision a different set of material for a senior management meeting to discuss the commencement of a new clinical study vs. a clinical team seeking approval to incur an additional $5 million in expenses than initially projected.
The analysis conducted for the meeting should be consistent for each R&D project to allow for an “apples-to-apples” comparison. It will also help presentations to have a uniform look and feel where senior management will know what will be reviewed for each project and when they will see it. The chapters of the story may be the same, but the content and conclusions will be different depending upon the project. The analysis will include the following: A) An overview of the current and expected competitive landscape for therapeutic area in which the project is expected to reside, B) NPV analysis for the project life, highlighting key assumptions, risks, peak year of sales, year in which NPV turns positive, and primary drivers of value (e.g., price, volume, first-in-class, best-in-class, dosing regimen, etc.); C) Sensitivity analysis on sales, operating expenses, number of patients under treatment; D) Scientific merits of the study, including objective opinions from key opinion leaders, if required; E) Data and timing for essential regulatory and compliance filings; F) Demonstrated alignment with the company’s strategy.
Developing an understanding of which aspects of the firm’s operations to keep in-house vs. outsource
As the firm continues to grow, management will need to revisit one of the key tenets of its strategy: What is the source of our firm’s sustainable competitive advantage? Coming back to this question will give clarity to which functions, or parts of functions, should remain in-house so the company can “stick to its knitting.” It may be the case where a third-party vendor can perform the function cheaper or faster, or perhaps even has greater capacity to conduct an operation or function. However, before deciding to enter into an agreement with another party, your firm would do well to consider the effort that will be required to monitor and manage the relationship. At the end of the day, it is senior management of the sponsor company that will bear the consequences if the third party cannot perform up to expectations.
Best practices leveraged from other industries can be brought to bear to create win-win relationships for both the sponsor and the third-party vendor. These include, but are not limited to, the following:
• Defining key assumptions regarding relevant projections (e.g., sales, expenses, patient enrollment, etc.).
• Clarifying roles and responsibilities and who is accountable for specific aspects of the function/process.
• Developing metrics and key performance indicators (KPI’s) that will be monitored for performance goals. Defining base-case, worst-case, and optimistic projections for the KPIs.
• Instituting incentives and penalties for each party if performance goals are exceeded/underrun.
• Agreeing that the financial books of each firm may be audited by the other party’s internal audit team (only as it pertains to the operations for the function/process in question).
• Deciding the frequency with which the senior management of both firms will meet (at a minimum, quarterly, and perhaps more frequently if there are any difficulties encountered during the term of the agreement).
• Sharing of any underruns/overruns of expenses and/or revenues, with specific formulas for each.
Possessing the tools to monitor costs
The rate at which a rapidly growing startup is consuming cash is one of the most important financials for which the firm must have a very firm grasp. The company must possess the processes and tools to answer the question “Where and when are we spending cash internally and externally?” Senior management and the board of directors will want to keep a close eye on the amount of time, or “runway,” left before the firm runs out of cash and must either raise additional capital or face the possibility of declaring bankruptcy.
It has been my experience that companies can readily address the question relative to how much cash they are spending externally. After all, there is a paper trail of invoices received and checks issued. It is the question concerning internal spend that proves to be more vexing. For example, in the R&D function, deeper questions to be answered include: What programs are people working on? Have we confirmed the programs are directly aligned to the company’s strategy? Are the proper number of people, across levels and functions in R&D dedicated to the program? Given that payroll and benefits is one of the largest expenses in any organization, it follows that a firm strapped for cash needs to have the proper analytics to allocate resources effectively.
Recruiting and retaining top talent
With this topic, we have in many respects come full circle back to the first subject of this article—the company’s strategy. The firm could have a perfectly articulated strategy and have addressed the other topics above, but the future path of the company will ultimately depend upon the intellectual power and commitment of its employees. The senior management of the firm will have to make very important decisions regarding who to hire as full-time employees, and likely, as contractors. For small companies, assessing “fit” by way of specific skill sets and personality traits is imperative given that people will be expected to work very closely and fluidly with others, both inside the firm and with a few selected external partners.
It is to be expected that the executives of the startup firm will be seasoned professionals with extensive biotech/pharmaceutical industry experience. They will, therefore, have robust networks from which to recruit the initial talent of the organization. Retaining employees, especially as the company will go through its inevitable ups and downs, can become a challenge as the long hours and uncertainty about the viability of the company may start to erode allegiance to the firm. Cash and stock options will go only so far in keeping employees on board when the company confronts challenging times—an affinity to the mission of the firm and commitment to other employees are intangible factors that can help retain key talent.
The topics highlighted in this article are by no means the only ones that will be top of mind for smaller biotech and emerging biopharma companies (for example, financing is clearly another subject of critical importance). However, they are no doubt crucial items to be addressed and fully vetted by the senior management of a rapidly growing life sciences enterprise. I am confident they will provide any firm in this phase of its life cycle a good list from which to start to pressure-test some of its key strategic and operational assumptions and priorities.
Read it as it originally appeared on Pharma Exec here.
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Dan Patrick | Principal Consultant | firstname.lastname@example.org | LinkedIn