From the Lab to the Market
Commercializing Life Sciences Requires a Community
Developing a life sciences company from the lab to Wall Street is no easy task, as many a failed and successful life sciences entrepreneur can attest. Building a young company out of university-based research depends first on the university’s willingness to invest in the concept of startup-based commercialization. Then the start up must find the early cash needed to start a new company to commercialize its as-yet-untested intellectual property.
Running this gauntlet of financing is not easy for life sciences companies.
But that’s only the beginning. Young life sciences startups then need to access additional capital and early business know how from economic development agencies and additional donations from federal research grants just to stay alive. They then need to attract angel investors, venture capitalists, and corporate strategic partners to build their businesses, and then if all goes well by this point—no mean feat as the science the company is commercializing has to prove not just safe and efficacious but also marketable—perhaps they can make an initial public offering on a stock exchange, becoming a public company.
Each of these factors are critical not just to commercializing new biotechnology innovations but also to creating new communities of regional innovation where startup companies succeed in traversing this difficult financing path. Many research papers on high-tech clusters have explored the need for a critical mass of life sciences expertise, business acumen, and financing muscle for not one but many startups to thrive. Each step is crucial for each individual company, though as you’ll see, there are several ways to take a product from the lab to the marketplace. So let’s consider each step in turn.
The Climate at Universities
There is a great deal of variability among academic institutions about technology transfer. Some universities have people that are full of ideas and are eager to commercialize them. Others have people that have some ideas but no interest in commercialization. This strongly influences the overall technology climate at that university.
Next, one must consider the university’s technology management office. Sometimes the influence of a technology management program will encourage innovation, and sometimes it will hinder it. Sometimes, even, there’s no technology management program at all. Finally, we must consider the endowment status from the university’s standpoint. If a university is working on building an endowment and they’re doing well, why put it at risk by seeking to commercialize novel bioscience?
All of this contributes to the fact that, from the standpoint of many academic institutions, technology licensing arrangements are often preferable to company formation in a bid to commercialize directly any intellectual property. If someone has an idea, then they can license it, and there’s no risk. The worst risk is that they will not get the money. But if that person forms a life sciences company, then that’s very risky financially. With a license arrangement, somebody gives them the money, and that’s that. It does not matter to whom they license to the IP.
The person or company seeking the license probably will not be someone in the same geographic area, and therefore won’t build any local business at all. The individual or university simply receives money, which does not stimulate the local economy.
Some universities, however, take advantage of the so called “grateful donor syndrome.” These universities understand the long-range return that they can get from a group of grateful inventors who develop a company and then have a success. Often these inventors will give large donations to their alma mater, and the cycle continues as the university attracts more and more brilliant students.
Direct revenue for the university, in the form of fees and royalties, is very positive from straight tech transfer licensing deals. Yet universities would benefit more if their graduates founded a company nearby that goes on to become a major company, or gets sold to a bigger company for a huge sum of money, or goes public on a major stock market through an initial public offering.
Economic Development Agencies
The next major factor affecting life sciences technology transfer is the role of economic development agencies, or EDAs. Firstly, they have limited fiscal resources. Secondly, there are always are more companies that need money and management expertise than the economic development people can provide for. Thirdly, these agencies are rarely focused on life sciences.
Early stage life sciences companies, or those new companies that boast little more than intellectual property and some laboratories to test their ideas, need more money and advice than EDAs can provide. The value of EDA advice is difficult to gauge, but how much money is it going to take for a new company to get to the point where getting venture capital would be cost effective? A new company needs around $1 million to $2 million dollars of economic development money to get to the stage where it has a fighting chance of attracting venture capitalists who want to see even an early stage company poised to commercialize their science.
This $1 million to $2 million dollars must come from the combination of EDAs and perhaps small business innovation research, or SBIR funding, which flows from the federal government. However, because this donated money comes at the very beginning of a long commercialization process, the return on the donation takes too long to be politically useful for EDAs.
Consider this scenario: If a politician decides to fund the construction of a building, in two years the building is complete and the politician can put his or her name on it. But if that politician decides to fund a startup company, then they’re probably going to be out of office well before that company goes public or gets sold—the point at which a politician can take credit for the initial decision to provide funding to the company. That politician’s successor’s successor might be able take credit for it. Therefore funding small businesses that will take years to make significant profits is not going to help the EDAs appear to be effective—and thus continue to win funding for themselves from taxpayers.
This funding gap is perhaps the greatest hurdle for young life sciences companies. Some states’ EDAs recognize the problem but are either limited in what they can do or are only now beginning to experiment with so-called gap funds. Other states are turning to the state pension funds, directing them to invest a small portion of their total money under management in promising local startups. And some forward-looking universities provide more than seed money to help their young companies get to the next stage.
This kind of financial assistance helps a young company so that it can present a credible story to a venture capital firm looking to invest in early-stage life sciences startups, or perhaps an “angel” investor—a wealthy individual looking to make a high risk, high reward private investment. Both venture capitalists and angel investors behave similarly. They do not want to invest unless they are relatively sure of success. This leads to the next major factor in this process: venture capital.
Venture capital investors are picky investors, and they are finicky according to the demands of the marketplace. Today, the big pharmaceutical companies are not buying as many young companies for their applied science and intellectual property as they once were. The major focus at the present time is on Phase II or Phase III pharmaceutical products, or those drugs very close to possible commercialization, as well in basic medical devices. Companies with these life sciences products have a clear “exit strategy,” or way for venture capitalists to make money on their investments.
For example, if a startup biotechnology company is making something that venture capitalists are pretty sure that, say, Johnson & Johnson is going to want to add to its product line, then the startup will get money from VCs. Problem is, some life sciences venture capital firms want “an arm and leg” from smaller companies. Perhaps they’ll invest $500,000 for a 50 percent stake in the smaller company. This may not even be enough to match the money that the company has already spent. Then, when other venture capital firms invest in the company as it (hopefully) proves the effectiveness of the science its developing, the original inventor sees more and more of his or her stake in the company diluted.
Therefore, these early stage companies have to get their next rolling start in some other way. This leads directly into the next contributing factor in the life of a life sciences company: corporate strategic partners.
Strategic partners, or bigger companies on the prowl for commercializable science, have very focused interests and very specific targets that can sometimes match up with young life sciences companies. It is difficult for an early stage startup company to find a good “exit,” or sale to a bigger company, because a little company with very little money is not going to be able to knock on enough doors of big companies to find out who would want to buy them. But fortunately, many big pharmaceutical companies tend to outsource various procedures, such as toxicity tests, to smaller companies. These large, public companies do not want to deal with these tasks, so they allow smaller companies to do them for them.
This helps the smaller company grow as it now has a source of recurring income with which to continue to work on its own proprietary R&D. Sometimes these strategic partnerships result in the startups being purchased by the bigger companies—an exit that will encourage nearby universities to consider tech transfer to other young university-backed startups. This begins a sort of virtuous cycle. As the company exits and makes money, and then the university makes money, even the skeptical universities will be encouraged to fund companies rather than license their discoveries.
Initial Public Offerings
The final factor in life sciences commercialization is an initial public offering on a major or smaller stock exchange. The IPO, or the listing of a company’s shares for sale on a stock market, is an essential engine for corporate formation. Unfortunately they’re very limited now because startup life sciences companies require a very long period of time and a large level of funding before reaching the point where public investors would be interesting in buying its shares. Sometimes it takes more than 15 years.
Profitability is often required as a basis for the IPO, which hurts the chances of many private life sciences companies, most of which want to go public to raise a final pool of money to bring their new product to the marketplace. That means investment banks that bring the company to market are reluctant to underwrite their new shares. There is definitely a need for more speculative markets that could handle IPOs for companies that do not yet produce much in the way of profits.
Running this gauntlet of financing is not easy for life sciences companies. But it would be infinitely easier if universities embraced the idea of commercialization to build a community of innovation around their campuses, if economic development agencies were better-funded and more willing to look at long-term community development, and if venture capitalists, corporate strategic partners and investment banks were eager to invest in young life sciences companies operated in these same communities. Creating this critical mass for life sciences startups in places other than around Boston and Silicon Valley, New York and New Jersey, San Diego and Research Park Triangle, should be a key policy objective of the federal and state governments, alongside universities and the communities in which they reside.
Ed Paisley is the Editorial Director for Science Progress and the VP for Editorial at the Center for American Progress. Jennifer Nelson is a undergraduate at MIT and an intern for Science Progress.
Comments on this article