What would it take to build a Pharma today?
Quick note: I wrote a while back about biotechs underperforming tech- how SV-backed biotechs must uniquely justify tech valuations through a combo of faster value inflection + higher ceiling cap. This writing is an amendment of sorts on that piece (an update on my thoughts re: bucking the trend and creating a massive scale, independent drug company today).
Post-ZIRP shock jolted many people to an unfortunate truth: The economics of biotech is broken.
XBI has been nearly flat for over a decade. And (arguably) there hasn’t been a new Pharma company since the 80s. The business model doesn’t work. Making drugs simply isn’t that valuable today.
In light of this reality, will we see an emergence in different breeds of biotechs?
Beyond the canonical biotech (one asset/platform/etc), I’ve become extremely interested in the makings of modern day Pharma (pipeline/commercial activity). Is it possible today? How would it be different?
Solving the science alone ≠ solving the structural challenges of scaling a biotech
There is a dominant narrative that creating novel technologies will birth new Pharmas and this is the biggest lever to buck the trend. I’m not convinced this is true. Obviously, better drugs will be commercially successful, but technological progress has been ongoing since the inception of biotech in the 80s. New technologies (base-editing, CAR-T) are scooped up and advanced by Pharma once sufficiently de-risked by biotechs. There appear to be structural issues at play, preventing more companies from maturing, commercializing on their own, and scaling.
But barring variables beyond your control (macro system/drug development costs), the more interesting question to me is: What are the tactical elements of a biotech that we can change to maximize success at becoming a Pharma?
Biotechs need leverage to stay in the game
Leverage traverses all industries. In the case of drug startups, it means maintaining a market (potential buyers and funders) for your company until you are self-reliant (aka revenue-generating).
Often, biotechs have no choice but to flip before Ph3, let alone growing into a Pharma. Why? Late stage drug development is *extremely* capital intensive, and there are limited investment dollars to compete for [1]. Without other cards to play, Pharma acquisition is the only option to get the drug to market. So how does one create leverage in what has become a predominantly ‘package & sell’ business?
Rather than an IP or technology moat, I believe leverage lies in something much more obvious. For biotechs to stay in the game, they need to take up critical mass (of drugs) quickly [2]. At the surface level, this builds resiliency against uncontrollable aspects of bio (i.e. binary clinic readouts). More importantly, it creates optionality for the future existence of the company (that does not entirely hinge on X partnership for Y drug program) [3].
The Pharma Startup: Start by aggregating a pipeline
Names are pure semantics [4]. But since I’m characterizing a specific phenotype of drug startup, I will (perhaps indulgently) call it a Pharma startup here.
I’d distinguish it from the canonical biotech by its explicit focus on pipelines, not assets. Most biotechs are born, fundraise, and survive driven by a singular narrative, whether it be asset-centric, target-biology or technology-focused. This means all of the assets are derived from X thesis, and they must ignore any assets that don’t fit, however promising. Pharma takes the opposite approach. They build pipelines, and each asset is individually selected for its promise. No narrative required to tie the R&D pipeline together, other than drugs that are likely to treat a disease [5],.
Similarly, the Pharma startup focuses on aggregating a pipeline of drugs (in a synergistic cluster of therapeutic indications) from the start [6]. By function of this, Pharma startups have an edge to become enduring companies:
Critical mass of assets (10 - 12 drugs in a large therapeutic area)
The exact number of drugs is arbitrary but having an actual, meaty pipeline changes the way companies make R&D and clinical decisions (given the company’s existence does not hinge on a single asset). It also anchors the company’s value beyond one lead asset. The ‘how’ is the million dollar question. Getting lots of good drugs into clinic in a reasonable time period is the underlying allure of many modern platform companies.
One interesting emerging playbook to achieve this: PE-style asset-aggregated New Cos. They start out the gate with a set of licensed, clinic-ready drugs. So far, they have been flipped back to Pharma after some level of clinical de-risking, but I could see this becoming an interesting springboard to amass a larger pipeline and double down on translation & commercial capabilities
It goes without saying that the science is sound, and you have a high quality bar for each asset as a drug. You want critical mass of thoughtfully selected drugs. Not a lottery portfolio of randomly selected drugs [7]
Long capital (necessary for independent, commercial launch)
The type of capital you raise matters in an industry where you are constantly raising and dependent on social signals. Most critically, long capital provides an option for companies to commercialize drugs themselves (it all goes back to leverage). For therapeutics, venture time horizons must be at least 7 - 10 years with checks large enough to bridge towards commercial activities. This is one reason I suspect tech-funded therapeutics have struggled (no late-stage, long capital ecosystem beyond series A/B).
Team moat (build a company, not a vehicle advancing an asset)
In my observation, team is not valued as highly in bio M&A as in tech. Mainly since biotech valuation is underwritten to the assets themselves. But a strong R&D/translation/commercial machinery of a company will have compounding returns towards building an enduring drug company.
[1] There’s always non-traditional sources of money but in most cases, it can only be unlocked after stamp of credibility from a biotech/specialized fund via their own investment check.
[2] Quickly for bio can sound generous for tech (7 - 10 years)
[3] Because I am hard-wired to include caveats ;) I’d like to say: I do not believe this is the only or the best way to build a biotech or Pharma. Biotechs engaged in early research or bravely pioneering new technologies are every bit as important and worth doing. However, in the context of considering how to make biotechs into larger companies (which in the long run, is equally quite important for a healthy drug translation ecosystem), this is an approach that is both, under-discussed and makes most sense to me. Which naturally made me want to write about it.
[4] After all, biotech was originally defined as ‘the use of cells/living organisms for products’
[5]You could technically counter that Pharma R&D is driven by a different non-scientific motive: commercial activities.
[6] Many tech people will groan and tell me ‘startups must only focus on building one thing’. I’d argue that we are. Given it is a small company, the pipeline of drugs will be limited to one or a synergistic cluster of therapeutic indications. You are building an obesity drug (preclinical studies, designing clinical trials, building expert team, commercial scale-up) but with multiple mechanistic shots on goal.
[7] This is part of what sounds so appealing with many AI-drug discovery platforms (there’s a supposed method to the madness)