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How to build a “European Amgen”

Written by DS on in the category VC Views with the tags , , .


There are still very few large European biotech companies to compete with the Amgens and Gileads of the world.  Only a handful of European biotech companies have managed to stay independent, grow, develop a drug and commercialize it successfully.  In this article we will try to analyse what tricks an ambitious CEO of a life sciences start-up needs to build a fully integrated, commercial stage biotech company. To illustrate the point, we picked some examples from the Belgian biotech landscape.

Let us start with a recent example: the takeover of Ablynx by Sanofi. Voices have arisen saying too many early stage biotech companies get taken over by pharmaceutical companies before they have a chance to flourish and become profitable. Let’s examine how you, as a CEO, can get your start-up company to reach the top of the food chain, before losing control to a larger entity. How do we build a “European Amgen”?

The life cycle of a typical biotech company goes from a founder/scientist with a great idea, to a small start-up with a few employees, to larger companies with several hundred employees and finally ends with a large vertically integrated biopharmaceutical company with its own products and sales force. To beat this obstacle course, they will have raised several hundred million Euro at various stages. We have summarised these main four hurdles for you:

Read more about the dynamics that push pharmaceutical companies towards acquiring innovative drugs to fill their portfolio, to diversify and remain profitable here.

Hurdle 1: From start-up to billion-dollar company

At first, a seed or series A round of a few million euros by a small group of VCs can get you started.  However, that money rarely gets you beyond the preclinical research stage.  To get a drug into a clinical study, which may give you safety data and some indication of activity, will likely cost around 10 million euros. To get to the true value inflection point (i.e. a randomized, proof-of-concept, phase 2 trial in patients), you will need more cash, ranging from 20 to 50 million euros. For a phase 3 study, where you test in large patient populations, you need 100 to 500 million euros.

Where can you get financing like this?  Not many European VCs have the means of funding a company that is raising more than 50 million euros, although their numbers are growing steadily. Most often, biotech CEOs look to pharmaceutical companies to finance their growth. A licensing deal with upfront cash and milestone payments can help you get to that next point. Still, the earlier the developmental stage of your drug, the lower the amounts will be, so don’t partner too soon. 

Many roads lead to Rome, but some are taken more often than others.  Either way it will take hard work, a lot of money, great people and a pipeline of good ideas to get there. - Ward Capoen
 

The money can take you to a point where you can get better deals for other drugs in the pipeline, or you can take them all the way yourself.  Inevitably, licensing your key drug will transfer significant value to the licensee, and a small biotech will sacrifice significant value to remain independent. Yet if you have a long-term plan to stay independent, is that necessarily a bad thing? Recent examples here are: Galapagos, that received $725 million from Gilead with Phase2b data in hand, and Argenx, who out-licensed a pre-clinical anti-GARP antibody to AbbVie for $40 million (note the different economics for a more derisked drug). 

To become a company like Amgen you need a pipeline with many drugs, ideally including a drug that has made it to the market and generates top line revenues. Financing should be sufficient to also take your other programs a step further.

Hurdle 2: Fighting off the vultures?

When you have developed your flagship product without a partner (e.g. by raising money from deep pocketed US investors, or via public markets), you are in some ways more vulnerable for a takeover.  Why?  Because most of the value is in the flagship product and so it’s there for the taking.  This was the basis of Novo Nordisk’s bid for Ablynx, which had an unpartnered asset about to hit the market. Sanofi outbid Novo because it saw additional value in the platform technology.  Similarly, Ogeda, after showing Phase 2 data for their main drug, was acquired by Astellas for well over 500 million Euro. 

Hurdle 3: Keep your shareholders happy with an IPO?

So you’re halfway there, but your first investors are getting to the end of their shelf life?  Most VCs have funds with a finite time horizon and need an exit.  This usually means selling the company, lock, stock and barrel, to return the money to their own investors. 

There are many hurdles along the way, but if it was easy we’d already have more Amgens around. - Ward Capoen
 

Of course, this clashes with your vision of a large independent biotech. So, you need to provide your investors with a profitable way out, which most often means going public. That way, investors can create liquidity for the shares they hold. Companies with a pipeline of products on the verge of showing clinical data, e.g. iTeos, are perfect IPO candidates.

Hurdle 4: Can you retain too much upside?

Suppose you have safely navigated hurdles 1, 2 and 3: you have a young, promising pipeline and plenty of money to develop your own drugs. Can this be too much of a good thing? What if you extract such great economics from your pharma partner that it becomes problematic?
Galapagos licensed their lead drug filgotinib to Gilead, retaining certain copromotion rights, billions in milestone payments and up to 30% royalties on sales.  At what point does Gilead’s accounting department ring the alarm bell and suggest to the CEO to just buy Galapagos rather than pay billions in royalties?

This scenario is not as strange as it may seem and is exactly what Galapagos’ management is trying to stop from happening. You can get several large investors on board that can block any sale, or hold companies that control voting or block majorities. The downside to these poison pills is that other investors will no longer believe in M&A scenarios for your company, which may impact your stock price.

Is this the one and only formula for making a new Amgen?  Probably not.  According to Ward Capoen, senior analyst at V-Bio Ventures: “Many roads lead to Rome, but some are taken more often than others.  Either way it will take hard work, a lot of money, great people and a pipeline of good ideas to get there. There are many hurdles along the way, but if it was easy we’d already have more Amgens around.”

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