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PharmaDeals Business Commentary

Bio-Diversity (2008-10-13)

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I am always intrigued by the CEOs of biotech companies – either emerging or mature – who stress to their investors that they are focused on a specific technology or therapy area. Of course, I know that in their minds that this is the last thing that CEOs want to be, but it’s the sort of thing that they know their investors will want to hear. It is often implied that the last thing a young company should do is to start off thinking of diversity; rather, it is suggested, that it is best to focus on one thing or, at best, two things, at which they can excel.

As we all know, biotech is high risk, and in my mind, when you delve into risky projects, it is essential to spread your risk. Now, the problem, from a CEO's perspective, is that investors already spread their risk by taking stakes in a diverse group of companies. They have already built into their investment model the fact that some of their investments will go ‘belly-up’ – and yes, that means that you, the CEO, could be the one that does go belly-up! This situation is a true dilemma for biotech CEOs: should they persist with a focused development model, or spread risk by adopting a diverse portfolio of projects, or, at the very least, a dual business model?

When I worked for Europe’s first biotech company (Celltech) in the 1980s, venture capital investment, or, for that matter, any type of investment in biotech was extremely immature. In fact, unlike many US biotechs at the time, there was essentially no real investment model based on a series of financing rounds. At that time, Celltech came to develop a strategy of spreading its risks, which involved both joint ventures: the creation of Boots–Celltech, a diagnostics business with Boots, and of Apcel, an industrial enzymes business with the US company Air Products. In addition, Celltech sought revenues through collaborative research, contract manufacturing and contract research. The joint ventures were short-lived, and failed for reasons beyond the scope of this commentary, but the contract services provided much needed revenue to keep the business going without the need to call in additional rounds of equity financing. At the time, people criticised Celltech for having a diverse range of activities; however, without these activities, I do not believe that the company would have survived. Importantly, circumstances did change over time, and this allowed Celltech to sell off its contract manufacturing (or Biologics Division) to Lonza. It also stopped its contract research services, but continued with its collaborative research model. Amazingly, Celltech never made a call for additional rounds of equity financing right up to the time of its sale to UCB. There a numerous biotech companies that have survived to this day because they adopted a dual business model balanced between revenues and expenditure on R&D. They include companies like Galapagos, Cellzome, Evolutec and, of course, every large pharmaceutical company on the planet.