Top 10 mistakes biotechs make (and how to avoid them)

In his 18 years as an attorney, Stephen Ferruolo (right) has seen plenty of mistakes. He’s a partner in the Business Law Department at Goodwin Procter, an 850-person firm that has helped large and small companies alike negotiate the development process. Ferruolo has worked on public and private financings, acquisitions, joint ventures, strategic partnerships and technology licenses. In the course of his work he has witnessed the same mistakes repeated time and again, giving him insight into the best ways for companies to minimize risk, as well as save time and money. From the mismanagement of IP to not knowing when to partner, Ferruolo discusses the blunders he regularly sees small drug development companies make–and what you can do to avoid them.

1. Not thinking strategically about IP

Intellectual property and licenses are at the core of everything a biotech company does. But too often, biotechs don’t think strategically about their licenses and patents–both what they own and what they’ll have to license from others. In order to be successful, a company needs to think about the IP relating o its drug candidates on a variety of levels early on. How strong is the patent protection? Will the company have freedom to operate? How will a buyer or partner view the terms and conditions of your licenses? How well will the patents hold up against challenges from generic companies?”Think globally,” encourages Ferruolo. What plans are in place to develop and commercialize the drug in the U.S., Europe, Asia and emerging markets? Companies need to think strategically about IP and spend their money wisely. “The key is to have the right advisors internally or externally who think long term.” So what can you do to avoid an IP nightmare? Instructs Ferruolo, “Ask yourself this: If I were a buyer or partner doing IP due diligence, where would I poke holes and see issues? Identify the and fix them now.”

2. Not understanding the target market

Before investing millions of dollars and many years into a drug, biotechs should think about the commercial viability of the end product. “Don’t treat your R&D process as just a research project,” advises Ferruolo. Not only should your company assess the drug’s activity, management must also determine if there’s a reasonable and timely path to approval. As for its market potential, ask yourself this: Can the drug be differentiated? Will it be reimbursed? Study Medicare and Medicaid and find out how drugs or other products like yours are being reimbursed in the current market. Have realistic expectations, because healthcare costs are on the rise and there’s less tolerance for expensive meds. A super-expensive drug–even an effective one–may not be worth pursuing if there are alternatives on the market.

3. Not raising enough money

Too often, biotechs don’t raise as much money as they could because management wants to avoid dilution. Often, the decision is made to raise just enough money to the next development milestone, with the assumption that the company will then be able to raise a new round at a higher valuation and thinks the company has enough cash to get by. “That is just plain dumb,” Ferruolo says bluntly. Drug development inevitably takes more money and time than anticipated, so biotechs should raise as much money as they can, when they can. “Alex Zaffaroni use to say, “It’s not the size of your slice of the pie; it’s the size of the pie that matters,'” notes Ferruolo. Too often founders and investors fight over the relative size of their slice of the pie. “Even in this environment, people continue to have unrealistic expectations about valuation.” As a result, a lot of money is sitting on the sidelines and not being put to work in the industry.

In addition to raising as much money as possible, biotechs need to pick their VCs wisely. It’s important to pick an experienced VC with deep pockets to lead, one that will be able to syndicate of similar investors. Those are the investors you want on your board to support subsequent rounds, even if they grind you down some on the initial valuation.

4. Not having a regulatory strategy

Early on, get the latest and greatest in regulatory expertise. Make sure your chosen advisor is well-versed in current FDA requirements and issues so that he or she can recommend the best strategy for clinical development and regulatory approval. According to Ferruolo, it is important for biotechs to identify the best regulatory strategy for getting approval, including understanding alternative clinical designs and exploring other indications or endpoints that may be a more viable path to regulatory approval. “Too often companies pursue a regulatory path without critically assessing other possibilities that may be reasonable given the company’s resources and objectives,” says Ferruolo.

5. Not listening to the FDA

It’s crucial for biotechs to engage the FDA throughout the course of drug development; not having a dialogue with the agency can delay or even kill a drug. Have a pre-IND meeting with the FDA, if possible. Ferruolo notes that the agency has been reluctant to have IND meetings recently, but companies should try to keep an open line of communication anyway.

If your company does manage to score a meeting, take to heart what the agency says. “When the FDA says ‘we think you ought to consider’ something, that should not be viewed as a suggestion, but as a mandate,” he explains. “Companies are foolish if they don’t follow what the FDA has suggested.” A biotech takes on significant and unnecessary risk if it doesn’t follow an FDA suggestion or proactively address the FDA’s concerns.

6. Designing trials poorly

“I once heard a very experienced biotech pioneer say, ‘there’s no such thing as a failed drug, but there are failed trials,'” recalls Ferruolo. “If you have a drug/biologic that has activity, when it fails, it’s not because of the drug or molecule, it fails because you haven’t designed the trial properly.” Do you have the right endpoints? Are they appropriately defined? Are you pursuing the right indications? Know the answers to those questions before starting expensive clinical trials.

7. Not properly powering trials

Pivotal clinical trials must be properly powered based upon the level of activity shown in earlier trials and preclinical studies. Big Pharma typically powers their trials at no less than 80 percent. If you are an emerging biotech designing pivotal trials for the drug candidate that is going to make or break you, you should aim to power the trials at 90 percent. Admittedly, there may be reasons–above all limited financial resources–that will make that hard to do. But the alternative may be that tombstone press release where you have to disclose that while the data from the trials showed “positive trends,” the results were not statistically significant and the endpoints were not met.

8. Relying heavily on third parties, especially CROs

No third party will put the urgency and care into your development program that you will. When it comes to working with CROs, often your trials will be of a much lower priority than those of bigger company that are repeat clients. There is a strong trend to outsourcing, but frequently the more a small company can do in-house the better, according to Ferruolo. Of course, going it alone is expensive and companies have to find a practical balance between in-house work and outsourcing. “There will be a variation in how much outsourcing is necessary,” he explains. “But do as much as you reasonably can do with people who live, die, sleep and eat thinking about nothing but your program. What they lack in experience may be made up in commitment.”

9. Not being ready for success

At long last, you’ve finished your trials, your drug is approved and you’re ready to go–but you don’t have enough of the drug to initiate sales because a manufacturing and supply sources are not in place. It’s an understandable situation for small biotechs, says Ferruolo. Oftentimes they’re not prepared for large scale manufacturing. However, being unprepared to commercialize wastes valuable time and can substantially reduce the ROI. If it takes a company a year to get up to speed, that is one year of lost sales-and a year of patent protection squandered.

Especially in difficult funding times, biotechs have to marshall and conserve their resources, and often focus all their efforts on clinical trials. Planning and preparation for manufacturing and commercializing are deferred, often with unrealistic expectations for making up the tie or assuming a partner or buyer will resolve the problem. Lack of such planning has been fatal to many deals. And companies who choose to go it alone often admit they made they made it through pure luck. Ferruolo recalls the words of one Agouron exec talking about the experience of launching Viracept. “He said, ‘If we knew how difficult it was we would have never tried to do it on our own,'” recalls Ferruolo. Agouron was eventually bought out by Pfizer.

10. Not knowing when to partner

When it comes to partnering, “a lot of bad decisions have been made.” In the 1990s, biotechs partnered early and went public based on the validation provided by the partnering they did. Biotech companies then came to the view that companies were squandering their potential value by partnering too early. The preferred strategy for biotech became holding on to their programs and developing products themselves. “The problem with this is it almost always takes longer to develop a drug than you think. To advance a drug to its first pivotal trial, a private biotech company may have already raised over $100 million and will need access to the public market to raise more funding. What happens when the public markets are closed and the funds cannot be raised?” Waiting until late in the game to partner means your company is shouldering more of the risk.

Ferruolo recommends companies think strategically about partnering. Are you a platform company? Are you a product company? An indication company? What indications are you targeting? Are they chronic indications, like diabetes, that require large, long-term trials and a large sales force to market the drug? Or are you targeting a rare or fatal disease with no approved therapy that will require smaller trials with clearer endpoints and drugs that need only be marketed to a defined number of specialized centers. Each situation is unique so companies shouldn’t follow generalized trends about when and how to partner.

Ferruolo closes with a final warning: “Don’t make generalizations about the prospects for M&A.” Despite recent reports, Big Pharma is not buying as many companies and programs as anticipated. “There should be more deals given the situation of Big Pharma and the need to build product pipelines to replace blockbuster drugs coming off patent in the next few years,” he observes. “But it has become clear that you can’t count on a partner or an acquisition.” Even when deals get started, a lot of deals are not getting done. “All of us are seeing a lot of deals that have gotten past due diligence and the exchange of term sheets, even rounds of negotiation and drafting, only to have Big Pharma back out late in the game.” Pharma is increasingly risk adverse and the public markets are getting weaker. In these times, expect buyers to wait longer for values to go down and risk to be diminished.

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