Chapter 12

Understanding Biotechnology Business

Models and Managing Risk
Craig Shimasaki, PhD, MBA
CEO, BioSource Consulting Group and Moleculera Labs, Oklahoma City, OK, United States

Chapter Outline
What Is a Business Model? 163 Platform Instrument/Menu Content Business Model 169
The Virtual Company Business Model (A Temporary Start-Up Clinical Laboratory Service Business Model 170
Model) 165 Subscription Business Model 171
Virtual Companies Grow and Eventually Need Space 165 How Do You Determine the Best Business Model for a
Business Model Examples 166 Technology 171
Therapeutic and Biologics Companies 166 Entrepreneurial Leaders Are Risk Managers 172
Diagnostic and Research Tool Companies 166 You Cannot Manage a Risk You Do Not Identify 173
Therapeutics and Biologics Companies 166 Evaluating Your Company 173
Fully Integrated Pharmaceutical Company Business Model 166 Interpreting the Results 173
The Drug Repositioning Business Model 167 Biotechnology Company Evaluation Tool 174
Enabling Technology Business Models 169 Summary 176
Diagnostic and Research Tools Companies 169 References 176

Biotechnology companies are started with the intent to and adopt a commercialization strategy at the outset of
commercialize products based upon novel technology the business, because it will become a part of the value
concepts and ideas. In order to build a company that proposition of the company. Sometimes entrepreneurs
becomes profitable and generates sustainable revenue, it may believe they “thought through” their business model
is critical to choose the right business model at the outset choice, when in reality, they simply presumed a model
in order to give your company the best chance of success. that was familiar to them. If you do not understand the
Business models are important to both entrepreneurs and strengths, weaknesses, and strategic value of any business
their investors, because business models are the method model, the model you choose for your company may
and manner in which a company makes, or intends to result in limited success.
make money. Sophisticated investors are familiar with the
required components for building competitive companies
that generate sustainable revenue. If the company and its
What Is a Business Model?
founders adopt a business model that is neither competi- When describing business models, individuals often
tive nor sustainable for their type of product, there will be attempt to explain them in abstract concepts that are diffi-
limited investment interest in the company. cult to understand. In one sense, business models are
Often, eager entrepreneurs believe that decisions about abstract. However, in simpler terms I like to define a busi-
company business models and commercialization methods ness model as, the method by which a company makes
are made after the company has completed product and sells its products and services, which includes the
development and has an approved product to sell. interrelationship of all its component parts, and the man-
Entrepreneurs must resist the erroneous belief that busi- ner in which the company creates value and makes
ness model decisions are deferred far into the product money. All companies operate with an underlying busi-
development future. Rather, entrepreneurs must identify ness model, whether recognized or not. Therefore, an

Biotechnology Entrepreneurship. DOI: https://doi.org/10.1016/B978-0-12-815585-1.00012-7

Copyright © 2020 Elsevier Inc. All rights reserved. 163
164 SECTION | IV The Innovative Technology Component

entrepreneur should purposefully select and adopt the momentum and the company’s future. Some companies
optimal business model for their company, because a det- have attempted to change their business model after com-
rimental one may be entered into by default. mercialization with limited success; usually it is done
Building a company around an optimal business model because their current business model is not working. In
can be likened to an engineer who draws a set of plans, reality, this is usually an attempt to salvage the most valu-
then has a construction team erect the envisioned building able parts of the business and jettison the parts that are
according to a set of prescribed architectural drawings. not working. These efforts are usually a survival response
Long before the first steel girder is laid, the designer con- rather than growth or expansion plans.
ceives the structure and the architect draws out the plans A development-stage biotechnology company has the
based upon the desired functions and optimal usage of the opportunity to select and implement the ideal business
structure. Based upon the proposed function of the envi- model at the outset, and it should be one that fits their
sioned structure, the architect draws an “internal frame” technology, products, and services and is optimized for
and determines the interconnectivity of each segment to their competitive advantage. To reiterate, a business
all other segments of the whole structure. The internal model is simply the collective means and methods in
frame predetermines the height, width, and breadth of the which the company makes its products or provides its ser-
structure, and it also sets its limits (see Fig. 12.1). A team vices, and the means by which the company makes
of builders then follows the plans and sets the frame in money. It is the sum total of all the strategic business
place, and the final exterior construction conforms to the approaches and their interrelationship to other parts of the
limits of the structural frame. If the frame does not reach business and their relationship to the external world. A
a necessary height or extends in a critical direction or company selects a particular business model in order to
have connectivity to another necessary component, no give them a competitive advantage over other companies
exterior work can compensate for these limitations. Your and their products.
business model is analogous to this “internal frame” or In this chapter, we will review representative exam-
structure, and it is the support upon which all the parts of ples of business models used in, or adapted for, different
the business (internal and external) are built and intercon- sectors within the biotechnology industry. We will discuss
nected. As in this example, just as it is essential to prede- representative business model and their benefits and lim-
termine the strategic and optimal frame prior to beginning itations for certain products or services. The reader should
construction, so it is vital to choose the right business realize that there are endless permutations of business
model prior to building your business. This is because it models; however, at this time we will cover only a
is extremely difficult to change a business model once the selected few. Fortunately, most business models follow a
organization is fully developed. Rarely can a company limited number of basic characteristics, and these will
successfully change its business model once it is estab- become familiar to you as we review this in the following
lished, and certainly not without risking forward sections. Before we delve into the various business model

FIGURE 12.1 The internal frame determines the

use and function of the future structure.
 Understanding Biotechnology Business Models and Managing Risk Chapter | 12 165

examples, we want to talk about a business model that and receive stock option incentives, while the company
almost all biotechnology companies (irrespective of sec- contracts out most of their activities. In order for R&D
tor) should operate under for a period of time during their outsourcing to be successful, there must be a good work-
early development. ing relationship with the contracted R&D group. For com-
panies that are early-stage university spin-outs, the
organization that performs the R&D may be the foun-
The Virtual Company Business Model der’s/cofounder’s own laboratory. This type of arrange-
ment often works out well in the beginning because they
(A Temporary Start-Up Model) have the specialized expertise and equipment to advance
A virtual company is an organization that outsources the the translational research and advance the development of
majority of all its activities and owns or leases little, if the product. In a virtual mode, additional R&D personnel
any, physical space and possesses few full-time employ- may be contracted and operate under temporary agree-
ees in order to keep overhead expenses at a minimum. ments or work part-time. Typically, these individuals are
There are extreme variations of virtual companies. Some compensated with a combination of incentives such as
can be quite frugal such as one that has no full-time stock, stock options, or restricted stock for professional
employees, utilizes a home address or post office box to services, in addition to nominal salaries or fees. Be sure
receive business mail, borrows equipment or barters for to discuss all employment and compensation commit-
time on equipment, and leases facilities which may be the ments with your corporate attorney in order to draft the
academic laboratories of the founding scientists. necessary documents that will protect intellectual property
Operating as a virtual company means that the company (IP) and avoid ownership issues in the future.
does not perform all the necessary functions internally—
yet the company still accomplishes all the necessary
Virtual Companies Grow and Eventually Need
activities as if it was vertically integrated. I am a strong
Space
proponent of operating as a “virtual company” during the
start-up phase, regardless if it is a biotherapeutic, diagnos- At some point in time, virtual companies grow and may
tic, medical device, Ag Biotech, or any other sector of need dedicated laboratory and office space in order to con-
biotechnology. The way this is accomplished is by care- tinue their pace of progress toward product development.
fully selecting outsourcing partners. For many early-stage When making a move to dedicated space, be sure to look
companies the extent of outsourcing may be significant, into the availability of space within a technology incubator,
and in some cases, most all development functions may since some incubator programs may subsidize a start-up
be performed under contract by outside organizations. company with reduced rates that escalate later when certain
Because of the great expense associated with research and financial milestones are met. Many technology incubators
development (R&D), preclinical, and animal testing, most may also have some support services and/or shared equip-
early-stage biotherapeutic companies operate as a virtual ment available for a small fee. When deciding on space,
company until significant funding is acquired, which can be sure to anticipate your needs now and your growth
support internal staffing, capital equipment, and in-house needs into the near future but balance that by the current
activities. Sometimes the type of R&D activities required funding and the timeframe to reach your next product-
by some early-stage biotechnology companies are so development milestone. As you may already know, renting
unique and specialized that their only option is to perform biotechnology space is not cheap. Depending on the geo-
these functions in-house; however, the more common graphic location of your company and the mix of labora-
functions can still be outsourced to keep costs down. tory to office space, rent may cost between $30 to as high
During a start-up stage, capital is usually quite limited, as $90 per square foot per year. Often times incubators rent
and a company cannot hire many full-time employees, but lab benches rather than rent space calculated by the square
substantial progress must still be made in order to gain foot. If you can negotiate it, ask for month-to-month leases.
interest from investors. Operating as a virtual company If this is not possible, be sure to know the impact of any
during the formative stage allows entrepreneurs to extend long-term lease and how these obligations may impact the
the time horizon of their operations, and it requires much overall burn rate of the company and the risk when raising
less capital to maintain and sustain the company while another round of capital.
their product is initially being developed. I know of com- It is prudent for most start-up biotechnology compa-
panies that have successfully advanced their therapeutic nies to initially operate as virtual companies in order to
product through animal studies and into early human clin- efficiently utilize capital and create early value. By being
ical testing as a virtual company. These organizations a virtual company, it provides time to raise start-up, seed,
may have only a few key employees, but they utilize or Series A financing, and it also provides time for the
many experienced consultants who are paid nominal fees company to increase in value as product development
166 SECTION | IV The Innovative Technology Component

progress is made. A virtual company can conserve cash clinical testing, regulatory approval, manufacturing, and
which can then be properly deployed toward advancing marketing of all their products. The advantage of the
the technology rather than supporting overhead that limits FIPCO business model is that the company can control all
their existence. However, a virtual company business aspects of the development through to marketing and
model is not a permanent or long-term business model commercialization of the product. As a result, many of
choice for most companies. Virtual companies must still the early biotechnology companies wanted to follow this
create internal value and ultimately possess some internal model. However, achieving this was attained by venerable
expertise that is not effectively reproduced by others. pharmaceutical companies with 100 1 years of history
While most companies should start as a virtual company, and resources, but it was challenging for early-stage bio-
this should be transitionary, and the company must have a technology companies to become a FIPCO at the outset.
commercialization business model selected and adopted Regardless, in the early days of the biotechnology indus-
that is long-term in nature. try, that is what most of all biotechnology companies
aspired to become. It was soon discovered that it took an
enormous amount of time, resources, capital (and good
Business Model Examples fortune) for a biotechnology company to become a
In this section, we will review a few business model exam- FIPCO. Many failed along the way trying to achieve this
ples that are used in the biotechnology industry. Many of goal. Some fortunate ones such as Genentech, Amgen,
these examples can be applied to different sectors such as Genzyme, and IDEC became FIPCOs. However, over
medical devices, agricultural and industrial biotechnology, time, as companies were forced to focus on capital effi-
digital health, and biofuels. These examples are presented ciencies due to the limitations in available capital and
to help understand the ways in which different models are lowered sales revenue, even some major pharmaceutical
applied to different biotechnology sectors. Later, we will companies realized that the FIPCO business model was
discuss the different business model segments and how not the most efficient one. Pharmaceutical companies rec-
they are assembled to create new models. Some of the ognized that without a continual source of innovative
business models we will review include the following: therapeutic ideas, drug development pipelines can quickly
dry up, and the company is left with underutilized
resources in regulatory, clinical trials, formulation,
Therapeutic and Biologics Companies manufacturing, and marketing.
G Fully integrated pharmaceutical or biotechnology com- To be more competitive and efficient, these companies
pany (FIPCO or FIBCO) business model modified the FIPCO business model in ways that allowed
G Fully integrated pharmaceutical network (FIPNET) or them to continue generating the types of profits expected
biotechnology network business model of these multinational companies. Some of these modifica-
G Research intensive pharmaceutical company (RIPCO) tions include reducing downstream capabilities to base
business model levels that can be efficiently utilized but can be outsourced
G Drug repositioning business model beyond that capacity, and eliminating some functions
G Enabling technology business model entirely in favor of using contract research organizations
(CRO). In addition, instead of attempting to internally dis-
cover all their drug candidates, pharmaceutical companies
Diagnostic and Research Tool Companies augmented their R&D capabilities by in-licensing
G Platform instrument/menu content business model development-stage products from other biotechnology
G Clinical laboratory services business model companies, or by acquiring these companies outright. This
G Subscription business model alternate business model is called a Fully Integrated
Pharmaceutical Network (FIPNET) or a Virtually
Integrated Pharmaceutical Company Organization
Therapeutics and Biologics Companies (VIPCO). FIPNET and VIPCO companies have realized
improved productivity and increased efficiency, because
Fully Integrated Pharmaceutical Company
they can outsource and/or contract for services at any point
Business Model
in their value chain and have access to complementary
The FIPCO model is a standard business model that was abilities outside the company. This model still allows a
previously utilized by all pharmaceutical companies and company to maintain control of the product development
is sometimes referred to as a “vertically integrated” or process and yet leverage the abilities of others at any point
“fully integrated” model. In this model, the company per- in the value chain. For biotechnology companies, FIPCO
forms (in-house) all the functions of the business—from is referred to as FIBCO where the “B” refers to “biotech-
initial R&D drug discovery, animal testing, human nology” or “biopharmaceutical” (see Fig. 12.2).
 Understanding Biotechnology Business Models and Managing Risk Chapter | 12 167

For start-up therapeutic and biologics companies, companies (approved or not approved) and finds alternate
becoming a FIPCO is not the optimal business model intended use populations or finds a population in which
choice; and at the outset it is not a realistic or believable the drug has fewer side-effects and greater efficacy. A
one because doing this is even difficult for major pharma- biotech drug repositioning company uses specialized
ceutical companies. Though it is possible that any start-up know-how to identify an alternate or narrower population
biotechnology company can become a FIPCO sometime in that can benefit from a shelved drug and that is usually
the future, it is hardly a business model that an early inves- based upon understanding the drug’s mechanism of
tor would take seriously. In fact, a start-up biotechnology action. These older or unused drugs are those that have
company that is declaring a FIPCO business model would already passed safety testing in humans. In order to speed
likely frighten sophisticated investors, and they would dis- up the development, some therapeutic biotech companies
appear quickly. However, becoming a FIPNET company have adopted a drug repositioning business model to
can be a long-term business model realized for biotechnol- reduce the lengthy R&D timeframe and leverage the pre-
ogy companies focused on therapeutic and biologics. Over viously conducted drug safety profile. By adopting a drug
time, a few highly innovative research-intensive compa- repositioning business model, a number of biotech compa-
nies recognized that their strength was in their novel nies have shortened the drug development time and
research functions and not their downstream activities. advanced rapidly into initial human safety testing. The
Hence, there arose another business model called a support for the potential success of a drug repositioning
Research Intensive Pharmaceutical Company or RIPCO business model came from the many drugs that failed for
where they focused only on the R&D and licensed out all one particular indication but were later found to have suc-
their product candidates to other organizations. cess for use in another indication. One historically
notable drug that failed as an antihypertensive drug and
was later repositioned successfully was Viagra (sildena-
The Drug Repositioning Business Model
fil). Although human clinical studies did not demonstrate
The drug repositioning business model (Fig. 12.3) is a the desired antihypertensive effect, “side-effects” were
therapeutic business model that focuses on repositioning noted by Pfizer scientists who then repositioned it as an
abandoned drugs from other pharmaceutical or biotech erectile dysfunction drug. Other examples of successfully

Sales and marketing Sales and marketing

Manufacturing Manufacturing
Regulatory Regulatory
Human clinicals Human clinicals
Formulation Formulation

Animal testing Animal testing

In vitro testing In vitro testing

R&D R&D

FIPCO model FIPNET model

All activities are internal Internal and outsourced activities

FIGURE 12.2 FIPCO and FIPNET business model structures. FIPCO, Fully integrated pharmaceutical company; FIPNET, fully integrated pharma-
ceutical network.

R&D Phase 1 Phase 2 Phase 3 Approval Launch Postmarketing

FIGURE 12.3 Drug repositioning model.

168 SECTION | IV The Innovative Technology Component

Drug Original Indication New Indication FIGURE 12.4 Examples of repositioned drugs. Source:
Allopurinol Cancer Gout Jaswanth K. Yella, Suryanarayana Yaddanapudi,
Amantadine Influenza Parkinson´s disease Yunguan Wang and Anil G. Jegga “Changing Trends in
Amphotericin Antifungal Leishmaniasis Computational Drug Repositioning” Pharmaceuticals
Arsenic Syphilis Leukemia
Aspirin Inflammation, pain Antiplatelet
2018, 11, 57.
Atomexetine Depressive disorder ADHD
Bimatoprost Glaucoma Promoting eyelash growth
Bromocriptine Parkinson´s disease Diabetes mellitus
Bupropion Depression Smoking cessation
Colchicine Gout Recurrent pericarditis
Colesevelam Hyperlipidemia Type 2 diabetes mellitus
Dapsone Leprosy Malaria
Disulfiram Alcoholism Melanoma
Doxepin Depressive disorder Antipruritic
Eflornithine Depression ADHD
Finasteride Benign prostatic hyperplasia Male pattern baldness
Gabapentin Epilepsy Neuropathic pain
Gemcitabine Antiviral Cancer
Lomitapide Lipidemia Familial hypercholesterolemia
Methotrexate Cancer Psoriasis, rheumatoid arthritis
Miltefosine Cancer Visceral leishmaniasis
Minoxidil Hypertension Hair loss
Naltrexone Opioid addiction Alcohol withdrawal
Naproxen Inflammatian, pain Alzheimer´s disease
Nortriptyline Depression Neuropathic pain
Premetrexed Mesothelioma Lung cancer
Propranolol Hypertension Migraine prophylaxis
Raloxifene Contraceptive Osteoporosis
Sildenafil Angina Erectile dysfunction; pulmonary hypertension
Thalidomide Morning sickness Leprosy; multiple myeloma
Tretinoin Acne Leukemia
Zidovudine Cancer HIV/AIDS
Zileuton Asthma Acne

repositioned drugs include Eli Lilly’s anticancer drug Today there are some companies that are doing well using
Gemzar (gemcitabine) that was originally developed as an this business model, but there are also a number of compa-
antiviral agent, and Evista (raloxifene) that was originally nies that are no longer in business or have switched to
developed as a birth control drug, then repositioned as a another model. This does not mean that the drug reposition-
successful osteoporosis drug, and later, another indication ing business model cannot be successful, it just emphasizes
as a prophylactic for the prevention of breast cancer. It is that the selection of your business model is an important
important to note that many drugs and biologics that were component, but without a good technology application, IP
approved or launched in the United States were drugs protection, the right team, and adequate funding, no
repositioned for new indications, reformulations, or new business model can guarantee success.
combinations of existing drugs [1] (Fig. 12.4). There are some biotechnology companies that do not
The advantage of a drug repositioning business model is operate as a drug repositioning company but they possess
that a company may be able to leapfrog over much of the a repositioned drug candidate as their company product
safety and in vitro toxicity testing and have early support and are having great success. For instance, the reposi-
for safety in in vivo testing. This can save literally tens of tioned drug idea is a fantastic concept, but starting as a
millions of dollars and multiple years of development company whose sole mission is to continuously identify
depending on the product’s previous development stage and successful candidates for repositioned drugs across a myr-
its new indication for use. However, as with any business iad of different indications may be quite challenging.
model, there are weaknesses, and they must be evaluated in However, there may be a sweet spot for an existing
the context of the competition and based upon the proof that FIPCO therapeutic company that focuses on, for instance,
a model can be supported and become truly successful. One rheumatoid arthritis anti-inflammatory compounds to
disadvantage of the drug repositioning model is that a com- reposition other company’s failed drugs that also carry
pany must convince enough investors that they can continue anti-inflammatory properties and develop them for differ-
to reposition other company’s previously failed drugs and ent anti-inflammatory indications. In essence, they can
biologics based upon some novel technology or idea that leverage their internal anti-inflammatory drug screening
they possess. In addition, the drug repositioning business capabilities and accelerate product development for their
model does not remove all drug development risks; it just anti-inflammatory-focused indications.
reduces some of them. In the early 2000s, there was a large For an example, Otologic Pharmaceuticals, a virtual
number of biotech companies that started as drug- therapeutic company, repositioned two different individ-
repositioning companies because of the heightened interest ual drugs as a combination drug and entered Phase 1
and the success of several repositioned drug examples. human clinical trials for the treatment of noise-induced
 Understanding Biotechnology Business Models and Managing Risk Chapter | 12 169

hearing loss. One of the repositioned drugs was a novel Johnson & Johnson for approximately $10 billion. By
free-radical scavenging compound that successfully com- applying their technology for delivery of drugs across the
pleted human clinical Phases 1 and 2 but failed in Phase 3 skin barrier, they created an opportunity for their com-
as a stroke drug. They combined this drug and an FDA- pany to improve or expand access for many other pro-
approved product used for a totally different indication ducts. Other applications of enabling technology business
because the compound had a mechanism-of-action as a models include servicing companies that focus on certain
free-radical scavenger. When the combined product was types of drug screening, animal testing, and even CRO
tested in the new indication, the in vitro and animal testing and contract manufacturing organizations (CMO), which
showed synergistic results for the effective prevention of all provide specialized services or technology as the value
noise-induced hearing loss resulting from new noise for their business.
insults. This company successfully completed Phase 1 and
has advanced into Phase 2 human studies. The company
reached this milestone using approximately 30% 40% of
the typical expenses in about 50% of the typical drug
Diagnostic and Research Tools
development time. As a result, this combination product Companies
and other chemical derivatives of these compounds became Platform Instrument/Menu Content Business
the basis for a company with a technology having broad
Model
application for the treatment of hearing health. Although
this company is not a “drug repositioning company,” the A successful business model in the clinical diagnostic and
genesis of its first product utilized one aspect of the “drug molecular testing industry is the development of tests that
repositioning” business model, but they adopted an opti- run on proprietary platform instruments that are produced
mum business model for the future commercialization of and manufactured by the same company. Diagnostic
their current product and future products for improvement tools and instrument companies that use this Platform
of hearing health and for the growth of the company. Instrument/Menu Content business model are Luminex,
Becton Dickenson, Roche, Affymetrix, and Illumina to
name a few. In this business model the company develops
Enabling Technology Business Models and markets content (different tests) that only operate on
A company operating with an enabling technology busi- their instruments and cannot run on a competitor’s testing
ness model is focused on a “platform technology” and platform. The success of their business model works
can use it to enable or improve applications of other com- when the company can develop or adapt the largest num-
pany’s products. I have categorized this business model in ber of needed tests on their platform equipment and place
the Therapeutics and Biologics Company section, but it them in the greatest number of clinical and research labo-
can be applied to a number of other biotechnology sec- ratories possible. In order for customers to have a desire
tors. Sometimes this business model is referred to as a to purchase these instruments, the company must develop
“horizontal model” or a “platform model,” because the a desirable menu of testing content that these customers
company will focus on a single aspect or single segment want. The “Instrument and Test Menu” business model is
of the value chain of a business. For example, drug deliv- an adaptation of the Razor Handle and Razor Blade busi-
ery is a segment focus using the enabling technology ness model because the principles are identical. The com-
business model delivering drugs into the body that other- pany creates and sells a tool, instrument, or platform and
wise would not have any application. One early biotech then perpetually sells to that same customer, specialized,
example of this type of business model was ALZA, a high-margin consumables. Similar to the very early days
drug delivery company formerly based in Palo Alto, in the shaving industry, Gillette and Schick understood
California, was founded in 1968 by entrepreneur they could essentially give away the razor handle and
Alejandro Zaffaroni (hence the name ALZA), had a focus build a successful business. They understood that when a
on drug delivery platforms and pioneered the transdermal customer adopted their brand of razor handle, the cus-
delivery technology. The company successfully applied tomer was committed, and the company generated the
its skin-patch platform technology to existing drugs such majority of their profits on reoccurring purchases of high-
as Nicoderm as an aid to help quit smoking, and margin disposable steel razor blades. Another similar
Procardia XL for both angina and hypertension, business model is the ink-jet and toner printing industry.
Duragesic (fentanyl) for the management of cancer pain, Companies such as Hewlett-Packard, Canon, and Epson
and Glucotrol XL for the treatment of type 2 diabetes. In compete for consumers to purchase their printers. Often
the mid-1990s the company added other segments of the they may even sell their printers at a loss because they
vertical value chain and successfully transitioned to a know their profits come through the perpetual selling of
FIPCO. ALZA eventually was acquired in 2001 by branded high-profit margin ink and toner.
170 SECTION | IV The Innovative Technology Component

FIGURE 12.5 Affymetrix gene chip: example of instrument and

menu content business model. Source: (Courtesy of Affymetrix,
Inc., Santa Clara, CA, USA).

Another example of a biotechnology company using these companies. In this model, molecular and diagnostic
Platform Instrument/Menu Content business model is companies perform unique and proprietary tests as a ser-
Affymetrix. The company designs, manufactures, and vice, operating through a single company-owned clinical
sells platform instruments based upon a microarray tech- laboratory, instead of manufacturing a “kit manufactur-
nology they have developed, which performs a variety of ing model” which would be sold to others. There are sev-
different types of genomic analyses. The chips are con- eral advantages to the Laboratory Service business model
sumables that are purchased to run on Affymetrix’s dedi- over the “kit manufacturing model” which include the
cated instrument platform and operate on their proprietary following:
software (see Fig. 12.5). G shorter timeframe from inception of test technology to
The Platform Instrument/Menu Content business
product commercialization,
model can be applied to many other tools and instrument G typically lower costs of product and service
companies and also medical device and diagnostic compa-
development,
nies. The advantages of this business model are that the G usually fewer employees required to begin commer-
company has a captive customer base with continual reoc-
cialization, and
curring revenue streams that would be proportional to the G an alternative regulatory path (Clinical Laboratory
total number of instruments that are placed into the mar-
Improvement Amendments (CLIA)) rather than the
ket. Often the company’s consumable have a very high-
FDA regulatory approval (note that the regulatory
profit margin and can offset even an initial loss on the
approval route is being evaluated and may change in
instrument placement due to the long-term and perpetual
the future).
purchasing of the company’s consumables. One disadvan-
tage of this business model is that competing technologies There are also disadvantages to this business model
from other companies can sometimes quickly replace or over the traditional diagnostic kit manufacturing model,
even obsolete another company’s platform technology, which include the following:
and therefore within a short period of time, the reoccur- G The testing services can only be performed in one lab-
ring revenue streams may disappear. It is therefore imper-
oratory location, potentially limiting the volume of
ative for companies that adopt this business model to
testing and potentially creating a bottleneck.
continually invest in R&D and improve, advance, and G Testing requires specialized employees who have the
innovate so as to keep customers attached to their branded
expertise to perform these testing services.
platforms and wedded to their expanding test menu. G Regulatory approval includes biannual laboratory
inspections and proficiency testing which, if not com-
Clinical Laboratory Service Business Model pliant, can shut down or restrict all services for a
period of time.
In the diagnostics sector, a company will develop a detec-
tion technology for an analyte of interest (molecule, bio- Diagnostic testing companies choose one business
marker or chemical) then produce and manufacture a model over the other for strategic reasons and for compet-
“kit” which is sold to commercial laboratories who per- itive advantages. For instance, a very complex and highly
form these diagnostic tests. The Clinical Laboratory technical test that is very difficult and labor intensive to
Service business model can be a viable alternative for perform may be challenging to reduce to a “kit” allowing
 Understanding Biotechnology Business Models and Managing Risk Chapter | 12 171

others to perform these tests proficiently and accurately. G Implement future royalties on products developed
Such a complex test may require specialized equipment from the data/information
that must be developed so users can adequately perform G Charges for R&D for specialized data mining or data
the test with consistent results. In this case, the Clinical manipulation services
Laboratory business model may be a better choice. G Increased fees for access to additional or restricted
Examples of companies using this business model include data/information that is not available to those with a
Myriad Genetics and Genomic Health. Myriad Genetics “regular” membership
has research, development, marketing, and sales functions
The benefits of the subscription business model are
for its clinical laboratory molecular tests that are focused
that the company has predictability of ongoing revenue
on predicting risk of hereditary-based cancers. They oper-
and low revenue risk for the period of time that the cus-
ate a single CLIA-certified clinical laboratory that is
tomer is committed. Also, the company usually receives
appropriately certified and accredited to perform these
their revenue upfront, and therefore the incremental cost
laboratory testing services. Because their tests cannot be
of servicing another customer with the same information
licensed to other clinical laboratories, all testing is per-
is nominal compared to the revenue received. In other
formed at the company’s sole clinical laboratory in Salt
words, the gross profit margins are extremely large for
Lake City, Utah—they also control and retain all the prof-
the company as they add additional customers. The risks
its. Genomic Health, based in Redwood City, CA, also
of this business model are similar to those in the enabling
operates as a CLIA laboratory and performs its testing
technology business model in that competing technology
services using a similar business model. Both these com-
companies can obviate or reduce the value of your service
panies have had tremendous success in using the Clinical
by providing more relevant or more valuable data.
Laboratory Services business model for their products. It
However, this risk is mitigated if the company holds
is conceivable that both Myriad Genetics and Genomic
unique, specialized, or proprietary data such as genomic
Health could also create an instrument platform that could
information for certain types of tissues, diseases, condi-
run their genetic tests as “kits” and sell their instruments
tions, microbes, or analyses of specialized information
to multiple laboratories under the Instrument/Content
such as gene methylation patterns and copy-number varia-
business model. However, their existing business model
tions to name a few. The risk comes when competitors
choice provides them with superior financial, market, and
have access to the same or similar data (possibly because
regulatory advantages and gives them the ability to rap-
it is in the public domain), or competitors provide signifi-
idly introduce new testing services or make rapid modifi-
cantly improved methods of data interpretation because of
cations or improvements to their testing menu.
their developed algorithms or better software systems.
One way to mitigate this type of risk for those who adopt
this particular business model is to continue advancing
Subscription Business Model
product improvements to the point of even displacing
Companies can have three options for the mode in their current products through perpetual improvements. In
which they deliver value to their customers: a product, a the biotech industry few companies were able to sustain
service, or a subscription. The subscription business this type of business model success over the long term, as
model was utilized by many of the early genomic dis- several moved from providing access to data, to develop-
covery companies in which they sold subscriptions to ing their own therapeutic products from their own data.
their valuable databases (Incyte Genomics, Millennium One example is Incyte Genomics who changed their busi-
Pharmaceuticals, and Celera and Gene Logic). These ness model and moved to a business model of drug dis-
organizations (some are no longer in business) sell/sold covery and development based upon their own data and
information, or access to information and data that is changed their name to Incyte Corporation.
considered valuable to other companies. There are mul-
tiple options and iterations of the revenue portion of
this business model which can include one or many of How Do You Determine the Best
the following options: Business Model for a Technology
G Charging an initiation fee or membership fee for initial Sometimes the product opportunity is straightforward and
access to data/information the business model is clear. However, remember there are
G Charging ongoing subscription fees (annual or multi- multiple segments to a business that can result in hybrid
ple years) for access to the data/information models that are optimized for your specific business.
G Adopting increased fees for increased number of Don’t assume that your technology or industry sector will
“seats” or users that a company utilizes to access the automatically dictate the best business model strategy.
data/information Always start by first examining the unmet needs in your
172 SECTION | IV The Innovative Technology Component

target market and then think about the best way your tech- these business model components and adjust them to
nology can help meet these needs through your choice of changes and improvements in the market, you still must
business model. Examine the value provided by your cur- first identify the most strategic model at the outset because
rent or future competitors and look for better ways that this becomes the foundation of the business strategy, and
your value can be provided to your target market. all components are interconnected to this “frame.”
In order to identify the best business model strategy The objectives for selecting a particular business
for a technology, the first step is to know the answers to model include the following:
the following questions: G To maximize the profit potential of the company
G Who are the target customer groups that need and G To minimize or reduce the commercialization time-
want your product? frame and costs of product development
G What are the needs your product will be satisfying for G To leverage your IP protection
the target market? How will this be accomplished? G To provide a competitive advantage over other compa-
G Does your company have intermediaries in the value nies or products in the field
chain between itself and the end-user customers? Is G To provide long-term sustainability in a changing mar-
there a way to leverage this relationship to improve ket or regulatory environment
the company’s success?
G
For more information on selecting the right business
Are there any other external players in the value prop-
model for your company, see Chapter 13: Directing Your
osition to the customer that are required in order to
Technology Toward a Market Problem: What You Need
sell your product?
G
to Know Before Using the Business Model Canvas?, in
How does your company intend to reach these
which I review a very useful tool called the Business
customers?
G
Model Canvas [2] and discuss some of the things you
What is the nature of the relationship between the
need to know before applying this tool to your business.
company and its vendors and suppliers required to pro-
duce the product or generate the service?
G Are there relationships that can be leveraged and are
synergistic? Entrepreneurial Leaders Are Risk
G How will the distribution of the product be carried out Managers
and by whom?
G
A key objective of the proper selection of an optimal
How does the company intend to make money?
G
business model is to maximize the opportunity for success
What is the process used to develop and produce the
of your company and to reduce the risks of failure.
product?
G
Throughout the process of establishing, building, leading,
Are there alternative ways to reduce the time, costs, or
and managing a biotechnology company, the leaders and
risks during development of this product?
G
managers can be characterized as “risk managers.” As a
Does a third party receive a benefit when the company
result of the many decisions that the leaders make, a
sells its product or service to the target market? If so,
course is chosen to reduce risk and improve success of
can these relationships be leveraged to bring additional
the business. The business model selection is just one of
benefits to the company?
those decisions. Every choice an individual makes,
These questions simply represent a starting point to whether in business or in life, carries some measure of
help you arrive at the best business model to leverage risk with consequences, and some measure of opportunity
your technology and product opportunity into a market. for success. For instance, when making a decision on pur-
There are a number of related questions that should be chasing an automobile, deciding on a particular make and
addressed when thinking about the optimum business model, whether new or used carries a risk as to reliability
model for your company. By knowing the answers to and repair frequency and costs, as well as safety and com-
these questions, the optimal business model can be identi- fort. The level of risk for these choices is usually moder-
fied to maximize the benefits and efficiently deliver your ate and the consequences of these decisions are usually
product’s value proposition to your target customers. minimal—unless of course you are in a major accident
Remember that some components of a business model are and you chose a poorly designed or poorly maintained
dynamic, and these can be optimized as the market automobile. However, choosing a cardiac surgeon to oper-
evolves or new channels and methods become available ate and perform a coronary artery bypass surgery carriers
or changes occur in the regulatory environment for your a much higher degree of risk and potentially greater con-
product. Who would have predicted 40 years ago the mar- sequences than the previous example. Each decision a
ket value of the Internet on advertising, social media, and biotech entrepreneur makes requires a risk assessment,
on sales strategies? Even though you can refine some of because there are differing consequences for a poor
 Understanding Biotechnology Business Models and Managing Risk Chapter | 12 173

choice. The choice of a business model is critical, and the evaluation tool. Therefore, I strongly advise utilizing this
proper selection will greatly reduce the future risk to the tool as it is likely to be similar to what investors may uti-
business by selecting the best one. Spend the time neces- lize when evaluating companies for investment interest.
sary to select the proper business model for your company. Such a tool is helpful when preparing for investor presen-
tations and in writing your business plan and preparing
your pitch deck. The Biotechnology Company Evaluation
You Cannot Manage a Risk You Do Not Identify
Tool is a worksheet I developed for assessing a company
Entrepreneurs and managers can greatly improve the odds business and technology for the evaluation of investment
of their success if they begin their business with a thorough advice, or potential for success and risks to be managed.
understanding of the business and technology risks that When formally evaluating biotechnology companies, one
they could face based upon the objectives they must can use a more detailed set of questions and analysis, but
accomplish. There are innumerable ways a company can this list serves as the basis for an initial evaluation.
fail but relatively few ways a company can succeed. One The purpose of the Biotechnology Company Evaluation
way to facilitate the success of your company is to identify Tool is to objectively rate your company as compared to
and assess the risks, prioritize them as to the level of risk others, and to identify your company’s current strengths
and impact, and address them by having mitigating plans and weaknesses. Use this tool with the categorized ques-
for facilitating success. In order to do this, you must have a tions to determine a ranking for your business. Score your
method of risk assessment. I have found that we can group company on a 1 5 scale, with 1 being the worst, and 5
the risks of biotechnology companies into five categories being the best as compared to the best in the industry. After
that are fundamental for success. These categories are evaluating each question in each of the categories, average
the scores in each section. A composite criteria score of 3.0
1. Management, leadership, and past success;
or below in any of these five risk categories reveals an
2. Technology robustness, applicability, and the scien-
unacceptable level of business risk that must be addressed.
tific team;
This tool can also measure the overall strengths of the com-
3. Market demand and positioning;
pany, as well as point to areas that need help. Another
4. Regulatory hurdles and barriers to entry; and
important purpose of this tool is that it provides a snapshot
5. Future funding and financing suitability.
in time for your company’s strengths and weaknesses.
No doubt more than five categories of biotechnology
company risks can be identified. However, if you examine
the issues leading to failure of many biotechnology com- Interpreting the Results
panies, you can trace their problems back to one or sev- It is absolutely certain that a start-up or development-
eral failures within these five risk categories. Each of stage biotechnology company will not score well in all of
these risk categories is exceedingly important to success, these categories. When that happens, do not become dis-
and a company must be strong in each of the five areas in couraged—it does not mean that the company is destined
order to succeed. A company that possesses exceptional to fail. Having a low score at one point in time can be
strength in four of these categories must recognize that transformed into a company strength years later if these
this does not compensate for a weakness in the fifth one. risks have been addressed and overcome. It is essential to
A company must have strength in each of these five cate- use this tool critically so you can identify your company’s
gories. The entrepreneur needs to integrate and manage weaknesses, because it will direct your focus on what
all five risk categories in order to have the best opportu- should to be done to improve and focus on over time.
nity for success. Integrative risk management is the ability Remember, it is impossible to deal with an unidentified
to manage all risks simultaneously and understand how weakness. Once your company’s areas of weakness are
one risk impacts each of the other risks. Occasionally, identified, draft a plan on how you will overcome these
activities or decisions in one area impact or cause chal- shortcomings with a timeline and responsible person(s) to
lenges in another area as a consequence. Integrated risk manage them and their progress. Entrepreneurs don’t do
management evaluates each decision in light of all the themselves any favors by overlooking problems or by
risks that must be managed. using a biased ranking in this exercise. I would encourage
you to be critically objective, because it is certain others
evaluating your organization will. If the entrepreneur or
Evaluating Your Company leadership team has trouble being critically objective,
Assessing your company’s strengths and weaknesses is enlist the help of others to give you feedback and com-
necessary before beginning to raise capital. Potential ment on each of these categories. The opinion of outside
investors also evaluate a biotechnology business opportu- experts can be very valuable when assessing your com-
nity based upon similar criteria listed in the following pany’s risk. This tool should also be dated and used at
174 SECTION | IV The Innovative Technology Component

regular intervals, and the results periodically assessed

II. Technology Robustness, Applicability, and Scientific
throughout your organization’s development to evaluate
Team
improvements and assess the effectiveness of changes
made. If a company’s key risks are properly managed, Score Questions
these scores will significantly improve over time. By
demonstrating that you are successfully managing each of 1. Is the technology and product application truly
these risks, investors will be more favorable with your innovative relative to other new concepts and
technologies in the industry?
ability to lead your organization’s development future.
2. Are the opinion leaders in this field positive,
complementary, and excited about this product and
Biotechnology Company Evaluation Tool technology?
3. Does the company have a team of top-notch
r 2020 BioSource Consulting Group, All Rights Reserved. Permission is
scientific and technical staff who has demonstrated
granted to reproduce and individually use if properly referenced, except for
scientific leadership in this particular field?
commercial purposes.
4. Has the scientific team members published multiple
proof-of-concept studies or other supporting data and
I. Management, Leadership, and Past Success
studies in top-tier peer-reviewed journals?
Score Questions 5. Has this scientific team been awarded multiple
peer-reviewed government grants which validate that
1. Does the CEO/entrepreneur/leader have previous
their work is respected by their peers as this field?
successful experience in a similar leadership
capacity and demonstrated that he/she is the right 6. Is there a universally clear scientific
individual to successfully lead this organization? understanding of the biology of the disease or
condition, such that the target or product chosen has
2. Is the Leadership Team passionate about their
a high likelihood of success?
mission and work, and do they fully believe in its
future success? 7. Are the underlying technology, intellectual
property, and product(s) protected by issued patents?
3. Is the Leadership Team complete and in place
with all members having directly applicable 8. Is there a freedom-to-operate opinion that has
experience and success? been performed, concluding that, the company does
not have challenging intellectual property barriers?
4. If the management team is incomplete, are there
sound plans to bring on the remaining leaders, and are 9. If the technology is licensed, is there a perpetual
the plans sufficient to overcome current weakness? exclusive license having conventional royalty rates
and reasonable milestone fees, and the freedom to
5. Is there a Core Leadership Team in place, which
sell the technology without approval from the
is a group capable of managing the current and near
licensee? (If the technology is wholly owned by the
term company needs and has previous experience
company outright, score 5.)
and success?
10. Is this product based upon a core technology
6. Are all the Leadership Team members seasoned and
that has the potential to produce multiple products
do they have directly related expertise applicable to
rather than just a one product idea?
this type of company and in this particular industry?
Total score
7. Does the Leadership Team collectively have
——— Average score (divide by 10) 5
complementary abilities and expertise and do they
share common core values and work extremely well
together?
8. Is the Leadership Team accustomed to a start-up III. Market Demand and Positioning
environment and do they have past success
accomplishments in a start-up situation? Score Questions
9. Does the Leadership Team have all the ability to
fully execute the current business plan and strategy, 1. Has the company selected the best target market
and have they demonstrated performing these activities and demonstrated that there is significant unmet
successfully in the past or through previous experience? demand for their future product or service, without
having to create this demand?
10. Are all the Leadership Team members aware of
their weaknesses individually and as a collective 2. Is the marketing strategy to the target market
whole, and enthusiastic and willing to seek help to based upon solid evidence supporting that there is
fill this gap? an unmet market need for this product where
substitutes don’t adequately satisfy the true need?
Total score
——— Average score (divide by 10) 5 3. Is the market large enough to support the types of
returns needed for the company to become a sustained
success once the product is commercialized?
 Understanding Biotechnology Business Models and Managing Risk Chapter | 12 175

4. Does the company understand the real 5. Are the regulations for marketing approval clearly
competitors and product substitutes that could defined without the possibility of dynamic and
displace market demand for their product, future changes anticipated for the product or the
and is there sufficient value proposition market the company is entering?
within their product to rapidly grow the customer
6. Are there impending regulation changes for the
base? company’s product or market that are not yet
5. Are market forces converging toward this product completely defined? (If the answer to this question is
need such that demand will increase rather than "yes" rank this with lowered scores based upon
migrate away from where the product will be increasing uncertainty).
positioned in the future?
7. Does the company have a well-developed and
6. Is there an existing and reliable distribution detailed plan in place with the expertise in the
channel in place to reach this market without having regulatory strategy and process to assure that the
to create a new one for this product to be regulatory steps are accomplishable by this team?
successful? (If the company is a traditional biotech
8. Does the company possess three or more significant
therapeutic model that will be licensed to a barriers to entry that have been identified such that
pharmaceutical company, do not score this these pose formidable challenges for competitors to
question) successfully compete in this product market?
7. Are the Pro forma projections based upon tested 9. Is the product offering free from debatable ethical
assumptions and are the market penetration plans
or unresolved societal issues such that the product
for this product realistic and reasonable? growth and market acceptance would not be
8. Does the company have the necessary personnel hampered anywhere in the world?
and expertise with the capabilities and know-how to 10. Is there clear regulatory guidance for the product
lead and penetrate this market? (If the company is a offering in the major countries throughout the world
traditional biotech therapeutic model that will be
such that the regulatory approval requirements are
licensed to a pharmaceutical company, do not score clearly understood?
this question)
Total score
9. Does the company have a well-thought-out ——— Average score (divide by 10) 5
branding and positioning strategy to successfully
distinguish its product and services from others? (If
the company is a traditional biotech therapeutic
model that will be licensed to a pharmaceutical V. Future Funding and Financing Suitability
company, do not score this question)
10. Is the product offering quickly scalable and is Score Questions
there a worldwide need for the product offering?
1. Is there very high potential for continued funding
Total score of the company based upon similar types of
——— Average score (divide by 10) 5 organizations and funding trends, or based upon
expressed or stated interest of investors?
2. Are the business, product, or target market very
good candidates for venture capital or institutional
IV. Regulatory Hurdles and Barriers to Entry funding based upon venture capital funding trends
or directly expressed interest?
Score Questions
3. Does the company currently have Institutional
1. Does the Leadership or Management Team have Investors, those with large cash investing reserves, or
previous experience with regulatory success for Venture Capitalists who are positive on the company
approval of similar products or services? and the product’s future success potential?

2. Does the Leadership or Management Team know 4. Is the exit strategy attractive enough to show a
potential greater than 10 3 return on investment
the process and the length of time estimated to
obtain regulatory approval? and is there a reasonable likelihood of achieving the
exit goals based upon the current economic metrics
3. Does the Leadership or Management Team know in the industry?
the risks for regulatory approval with this type of
product, having identified successful examples of 5. Is there sufficient cash on hand to carry the company
at least 18 months at its projected burn rate, or well
others, without the possibility of classification into a
totally new regulatory category? past the next significant value-enhancing milestone?

4. Has the Leadership or Management Team had 6. Has the company identified fundable value-
recent and direct communications with regulatory enhancing development milestones that can be
reached which will significantly improve the
agencies or industry experts who are intimately
familiar with the current regulatory issues for their valuation of the company and the likelihood of
product? securing follow-on funding?
176 SECTION | IV The Innovative Technology Component

7. Are the outlined use-of-proceeds for the model works in one particular business and why the same
development of the organization reasonable and business model might be a failure in another business.
effective throughout the product development cycle? Think about the overall strategies that give a company a
8. Are the current investors supportive of the sustainable competitive advantage over the competition
company, product, and Leadership Team such that and lead the company to sustained profitability.
they would add to their investment or recommend As an entrepreneur or company leader, you are also the
this investment to others?
risk manager of the business. In order to manage the risk,
9. Does the company reside in a geographic you must first understand what they are, and then actively
location that historically has access to Venture
manage them. Leaders can reduce risks by making sound
Capital or Institutional Funds and/or located in a
geography that is considered a biotechnology decisions and identifying ways to mitigate these risks.
cluster or hub? Remember that in the early stages of any business, many
10. Does the Leadership Team have experience in decisions have long-term impact such as determining your
successfully raising the total amount of capital product development pathway, protecting your IP, deter-
projected to reach the exit or to reach profitability? mining the method and timing of financing, deciding upon
Total score which individuals to hire, and choosing your marketing
——— Average score (divide by 10) 5 strategy. To help assess your company’s risks, utilize the
Biotechnology Company Evaluation Tool to rank the five
Summary risk categories. Be sure to objectively assess your strengths
and weaknesses and then develop a plan for how to bring
These biotechnology business model examples show how those areas to a level of excellence. This tool will be help-
a business model can help a company become competitive ful when preparing to raise capital, and it will also establish
with their technology or product. Recognize that there are a reference point during your company’s development that
numerous business models in the therapeutic, biologic, will help you gauge future progress and your overall
diagnostic, medical device, clinical laboratory, and improvement. The information gained from critically
research reagent industry, and many are adapted and mod- answering the questions in each of these categories will be
ified for a company’s competitive advantage. The process helpful when creating your business plan as discussed in
of selecting the optimal business model must involve the Chapter 22: Your Business Plan and Presentation:
collective assessment of all the various business segments Articulating Your Journey to Commercialization.
essential for your business, while taking into account all No entrepreneur can be expected to completely elimi-
their associated risks. Choosing the best business model nate risk, but it is extremely hazardous if the leader does
provides your company with the greatest opportunity for not even know what the risks are to the company. The
success, and it is the first step in managing the business entrepreneurial team’s objective is to understand the risks
risk and should be selected and implemented during the associated with accomplishing the core objectives of the
company’s inception stage. It is important to know the company and to identify ways to mitigate these risks. It is
business models of your competitors in the industry and important to recognize that success does not come solely
to identify what aspects of their model make them suc- by making the right choices when presented with deci-
cessful. There are multiple components within any single sions. Much of the success is influenced by one’s creativ-
business model. Some components may be strengths, and ity in finding ways to effectively and resourcefully
some may be weaknesses, so understand what they are circumvent challenges rather than simply by choosing the
before making a choice. Study alternate business models path holding the lowest risk.
in adjacent sectors and in totally different industries and
consider if portions of these may be adaptable and
improve competitiveness or reduce business risks for your References
company. As with the razor-handle/razor-blade model, [1] Yella JK, Yaddanapudi S, Wang Y, Jegga AG. Changing trends in
portions of old business models may be applicable and computational drug repositioning. Pharmaceuticals 2018;11:57.
transferable to new products or technology depending on [2] Osterwalder A, Pigneur Y, Smith A. Business model generation.
your needs or objectives. Identify the reasons why one Hoboken, NJ: John Wiley & Sons, Inc; 2010.