By Cathy Yarbrough
A strong management team and ironclad intellectual property protection are the most critical success factors for starting a life sciences company, according to a survey of first-time entrepreneurs and CEOs at the 2011 Biotechnology Industry Organization (BIO) International Convention. Although the survey was informal and not designed to achieve statistically significant results, it produced insights about the factors that entrepreneurs and executives regard as crucial when determining whether to launch or invest in a life sciences company in today's economic environment.
Raymond Miller, partner at Pepper Hamilton LLP, the survey's sponsor, was not surprised that a company's technology was not identified as the # 1 ingredient. "A strong management team and IP protection always trump the science in the minds of life science executives and investors," said Miller, a leader in the law firm's patent and life sciences group.
At the BIO convention, Pepper Hamilton conducted the five-question survey at the Biotechnology Entrepreneurship Boot Camp and an annual dinner for life sciences companies' CEOs. Both events were sponsored by the law firm. Attending the boot camp were 50 scientists and other first-time entrepreneurs as well as executives with just a few years of start-up experience.
Group discussion at the CEO dinner revealed a bonus insight. "The CEOs said they were the most surprised by how much time they were having to spend on planning their companies' next round of financing," said Miller.
The questionnaire was designed to help Miller and his colleagues better understand the business opportunities and challenges for entrepreneurs as well as CEOs. Because limited financing remains a constant challenge, the survey included the following question:
Your company receives $1M in nondilutive, "no strings attached" funding. Rank the following in order of priority (1 being highest priority) in allocating this funding:
a) market studies and prospective customer feedback
b) additional patent applications
c) building out the management team
d) additional bench or animal testing
e) in-licensing complementary technologies
"Notably, the CEO dinner attendees ranked building out the management team as the first priority," said Miller. The CEOs' # 2 priority for $1M in non-dilutive funding, which includes licensing fees and other financing that does not dilute the shareholders' stakes in the company, was "market studies and prospective customer feedback."
Spending Priorities For Nondilutive Funding
The boot camp group's #1 priority for $1M in nondilutive funding was additional bench or animal testing. Its #2 priority: strengthening the management team.
Both first-time entrepreneurs and CEOs realize that the management team is crucial to starting a company — and jumpstarting one that is already established. "It is not unusual at all for an asset to be reinvigorated by a new or more experienced management team," said Miller. As an example, he pointed to the privately held Vicept Therapeutics, Inc., which was acquired by Allergan, Inc. in July 2011.
"The recent transaction involving Vicept Therapeutics was an example of a management team being hired to further evolve the asset," Miller said. "In just two years and for an investment of $16M, the company was able to execute a merger having a potential value of $650M." The asset is potentially the first effective topically applied treatment for the erythema (skin redness) associated with rosacea.
In the views of both the CEOs and the boot camp attendees, the ability to achieve cash-positive operations is one of the two least important factors in deciding whether to launch a life sciences company. As least important, the CEOs also cited clarity of the regulatory approval pathway, while the boot camp group chose the ability to build a sustainable company.
The survey results suggest that the first-time entrepreneurs may not fully appreciate the importance of regulatory exclusivity and freedom to operate, which are the building blocks of an ironclad IP strategy. Freedom to operate refers to the company's ability to make, use, or sell a product or service without infringing a third party's intellectual property rights, particularly patent rights. "Freedom to operate is separate and distinct from whether the company has its own patents protecting the product," Miller explained.
Regulatory exclusivity covers the period of time in which the FDA's ability to approve other identical or similar products is prohibited or limited. One example of regulatory exclusivity is new chemical entity (NCE) exclusivity. If the FDA designates a product as an NCE at the time of that product's market approval, even if the company has not yet obtained patent protection for the NCE, it has up to five years of protection via regulatory exclusivity as an incentive to develop the product.
"No longer is the ultimate measure of a small-molecule product's success inextricably tied to whether the company has obtained composition of matter patent protection on the active pharmaceutical ingredient," said Miller. "Instead, a product's success is heavily dependent upon the company's integration of patent protection, regulatory exclusivity, and product life cycle management."
Entrepreneurs' and CEOs' ability to formulate and communicate a robust IP strategy that addresses these factors influences their ability to secure investments, strategic partnerships, or licenses with third parties. "Any such company should expect to undergo due diligence that will be heavily focused on the strength of its IP and regulatory exclusivity strategies," said Miller. "Those that are prepared flourish, and those that are not struggle through the process." The boot camp entrepreneurs' not fully appreciating the importance of a vigorous IP strategy is understandable, said Miller.
Freedom To Operate Differs From Patent
"It would be hard for early-stage entrepreneurs to appreciate the nuances of regulatory exclusivity and its integration with patent exclusivity," he explained. "While they have notions of their importance, they likely have not yet experienced them in the evolution of a life sciences company." Part of the boot camp education is directed to understanding the differences between patentability and freedom to operate and to reflect this in a company's overall approach to its technology.
To confirm that their company does in fact have the right to commercialize the product without infringing upon the rights of others, life science executives should search the patent literature to identify whether any third party has a patent right that could dominate or cover the use, manufacture, or sale of their product, Miller added.
In the survey, a majority of the boot camp entrepreneurs indicated that the freedom-to-operate analysis should occur before bench testing is completed, while most of the CEOs voted for conducting the analysis before the "first-in-human" trial.
Miller pointed out that life science executives also must understand which patents and applications within their company's IP portfolio actually cover the product and/or its intended indication. "Frequently, a company is not able to explain what its core patent assets are that cover the product, nor does it know the strength or weakness of those assets," he explained.
The term or life of an issued patent is crucial. "A company needs to know the natural expiry date of the patent and to understand whether the term can be extended through statutory mechanisms such as patent term extension or patent term adjustment," he said.
During an internal intellectual property audit, one late-stage company learned that the market exclusivity for its patent would end sooner than management realized. If the company had not discovered this information and acted upon it by augmenting its "Orange Book" listing with additional patents, it would have lost one year of market exclusivity if a generic company had submitted its own abbreviated new drug approval (ANDA) and received FDA approval. With the listing of additional patents in the "Orange Book," the company was able to build a more robust firewall around its original patent and take full advantage of its period of regulatory exclusivity.
The "Orange Book" refers to the FDA electronic database, which has the formal name of "Approved Drug Products with Therapeutic Equivalence Evaluations." For every drug product approved by the agency on the basis of safety and effectiveness, the "Orange Book" contains the active ingredient, proprietary name, applicant holder or applicant number, as well as updated patent and exclusivity data relevant to the approved drug product.
Because of the economic impact of IP, it should be regularly assessed by management and a focus of discussion at the board level on at least a quarterly basis, added Miller.
The insights provided by the survey hopefully will inform first-time entrepreneurs and remind seasoned CEOs about the factors that matter the most to investors, business partners, board members, and other stakeholders.