Biotech firms, 2

(Continued)

Only established pharmaceutical companies (“big pharma”) are capable of
financing all activities along the value chain. Therefore, biotech companies usually
focus on the early steps and have their core competencies in initial screening and
discovering of new drug candidates by employing their innovative technology.
Typically, they develop drug candidates jointly with pharmaceutical companies after
Phase I or II clinical testing in form of a strategic alliance. Since alliance agreement is
often associated with upfront and milestone payments or equity investments by the
incumbent, it allows the biotech venture to generate revenues although its products are still under development. Moreover, alliances also save costs through pooling of resources.

From the perspective of the pharmaceutical companies, there is a high need of filling up their R&D pipeline because many firms are about to loose patent protection for their best-selling products within the next years. Since modern biotechnological methods are most efficiently invented and developed in an academic and entrepreneurial atmosphere, it is difficult for pharma firms to build up these
technologies internally. Therefore, they are dependent on the foundation and emergence of small bioventures from which they in-license promising drug candidates. In a number of cases, this leads to an equity participation of the pharmaceutical incumbent, or to total acquisition. 

The development of complex new technologies does not only require substantial financial resources, but also competencies in different scientific and technological fields. The increasing speed of new product development in global markets further complicates the entrepreneurial task. In order to ensure a quick and efficient acquisition of resources, many biotech start-ups share resources with other firms and enter into strategic alliances or mergers and acquisitions. 

Strategic alliances are “voluntary inter-firm agreements aimed at achieving competitive advantage for the partners”. They cover a wide variety of
contractual arrangements including licensing, joint R&D agreements, technology
exchange, joint ventures, and minority equity partnerships. All forms of alliances have in common that firms pool some of their resources and capabilities and therefore generate new combinations with the aim of achieving sustained competitive
advantage. 

As many young biotech firms do not yet have a product on the market, their valuation is substantially based on the product candidates they have under development,
often referred to as their “pipeline”. These products in development are the embodied capabilities of the venture. The development of biopharmaceuticals, for example, is a 12-year multi-step process and drug candidates can fail at any stage of development with only about 6 % of initial candidates reaching the market. The value of a product candidate thus significantly increases with its development stage since the probability to achieve market launch becomes higher and the company needs to spend less time and money on further development. Managers of biotech firms must seek to build up a risk-adjusted pipeline which contains products in late development stages, and a sufficient number of early stage follow-ups in order to compensate for late stage failures.

As new product development in high tech industries essentially depends on basic scientific research, highly reputable scientists provide the firm with links to universities and research institutes, which contribute to firm performance. If the innovator has a strong intellectual property position, this buys the innovator time and competitive space needed to continue to develop the innovation, which places little pressure on the innovator to immediately seek an alliance partner to expedite the development process. Thus, a high patenting activity is often seen as an indicator of a high tech venture’s innovative activity, and has an important signalling effect for investors. 

Since most biotechnology ventures do not earn significant revenues yet, they essentially depend on the infusion of capital from investors. Raising money at the capital markets is thus one of the main tasks of biotech managers. However, the availability of money at capital markets changes over time. In particular the market for venture capital, the main financing source for young technology ventures, is highly cyclical. Similarly, the possibility to acquire capital from equity markets through an IPO changes in simultaneous cycles.

Further advancement of these products is only possible when the firm is sufficiently liquid to finance the expensive subsequent clinical trials otherwise it will need to form alliances with other corporations. Similarly, if a venture has products in late Phase III clinical trials, it needs access to production and marketing facilities which it can only build up internally if it is sufficiently liquid. Otherwise, it must enter into strategic alliances with large pharmaceutical firms to access these required capabilities. Moreover, consider a biotechnology venture whose team consists of top scientists. These scientists are only able to fully exploit their knowledge and skills if they have access to modern devices and research facilities. 

Comment: Faron seems to be well positioned to 2026!

Xmas holiday  - have a nice time!