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Want to get your biotech start-up financed? Then begin by thinking of
an exit
strategy, advises Bob Mulroy, President and CEO of Merrimack Pharmaceuticals.
Mulroy gave a presentation on April 16 to the Harvard Biotechnology Club.
Merrimack Pharmaceuticals is a start-up with a protein array platform.
The company
is focused on developing immune-related therapies.
“The biotechs are the solution to the pharmaceutical pipeline problem,”
said Mulroy,
referring to the industry’s new-product shortfall. “The number
of biotech products in
clinical trials and the number of new biotech/big pharma collaborations
are soaring.
Biotech is the future of our drugs.”
But despite the demand for new products, new biotechs won’t find
it easy to get
those products to the market. The cost of developing a single drug is
about $200
million, and it is rare that a company’s first product ends up also
being its first
launch. To avoid ending up bankrupt and with no products in sight, Mulroy
advised
careful attention to key business factors.
Smart investors, he pointed out, are most likely to stick with the company
over the
longer term, and to have a positive impact on its progress. These kinds
of investors
want to know exactly what they are putting their money into, and how they
will get
it out. Because biotechs don’t traditionally make profits and pay
dividends, that’s
one exit strategy you can rule out. That leaves going public or being
purchased for
cash/public stock as the other main alternatives.
“The secret to raising money is that you have to figure out the
end point first, and
that requires a long term vision,” said Mulroy. “That vision
has to account for the
fact that you have to weather the storms that arise over 10-12 years.
”
Having a “milestone focus” is another key, and Mulroy also
advised new biotechs to
“Take money whenever you can get it, not just when you need it.”
Many biotech
executives become concerned about dilution, and so they resist giving
away too
much of their company. “The biggest risk a biotech faces is under
funding a
development program. Too great a focus on dilution– or what percent
do I own? –
can be a destructive if it prevents an inflow of capital that could otherwise
address
significant areas of scientific risk. If you have a successful product,
the returns are
large enough that dilution is a nonissue,” he said.
Mulroy’s list of the most common pitfalls for biotech startups included:
1) Founders syndrome – Remember that once you sell part of your
company, all
the owners have rights. Scientific founders are passionate about their
technology and as a result not always the most objective when it comes
to
commercial development decisions. Scientific founders often end up at
odds
with the other co-founders or investors. When confronted by bad data,
the
scientific founder usually says “We will find a way through it,”
while the other
investors are saying, “Let’s not throw another dollar at it.”
You need to build
objective oversight in early.
2) Naïve investor syndrome --When you hit the first bumps in the
road, investors
who do not understand the industry may panic, and can often lead to
shareholder fights that can put a hold on any scientific progress. Hence,
the
importance of finding “smart money,” investors who have expectations
in line
with reality.
3) Inexperienced management – Building a successful biotech requires
experts
across a wide range of disciplines. All of those people are equally critical
at
different points in the process. Most entrepreneurs believe that they
can do it
all, but successful biotechs make the transition away from single founders
to
multidisciplinary teams.
4) Focus on Valuation – Scientific founders tend to put a high value
on their
technologies. But the higher you value it, the less you sell, and the
bigger the
risk is that you will run out of money
5) Under financed products – A lot of biotechs will raise $5 million
to get to a
major milestone, such as a first animal model. But because the first try
rarely
works, (are dosing or formulations right?) you need to be prepared for
possible failure, and raise enough money to get through that.
It is also particularly important to get some well known figures onto
your advisory
board, and not just your “friends,” said Mulroy. “Most
VCs get 200 plans a week.
They will flip each book open and look through it for a name they recognize,
and
then call that person to find out about the company,” he explained.
This will also
help out down the road, when you can refer these experts to analysts and
others
who are interested in getting an educated opinion of your company.
A typical VC’s checklist, Mulroy said, might
include the following:
1) Can the product be commercialized? Is there valuable, unique IP, is
it truly
marketable, what is the opportunity vs. the risk, has there been any proof
of
principal?
2) Is there in place a practical, milestone oriented operating plan that
is tied to a
future funding strategy (e.g. future rounds of financing--a clear exit
strategy).
3) Experience and validation. What is the experience of the team, is that
experience validated?
Ironically the most important experience may be that of weathering hard
times, and
learning from failures. “Some of the best managers I’ve seen
have been beaten
several times,” Mulroy said. “They have seen great technologies
lose and they are
humble, but they have learned to manage the risk and let the upside take
care of
itself.”
Despite all these hurdles, entrepreneurs continue to flock to biotech,
because of the
thrill of discovery and the great rewards in contributing to the betterment
of human
health. New approaches like that being pursued at Merrimack, Mulroy says,
will
hopefully play a big role in developing more effective medicines.
“At Merrimack, we’re focused on understanding the complex
protein interactions
that mediate cellular pathways via a high throughput, multiplexed array
platform,” he
explained. “In doing this, we are improving targeting and screening
to account for
the inherent complexity of the cell. If the technology continues to move
at the rate
it is going, we will be able to answer some of the FDA’s most important
questions
even before we get to clinical trials.” These kinds of advances
raise hopes that
biotech will pull out some blockbusters. “Will we ever have perfect
computer models
of cells, or perfect functional assay,” asks Mulroy, “Maybe
not soon, but exciting
things are still happening.”
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