BUSINESS MODEL
The way in which a company operates is its business model. The tool model involves selling a technology or service that helps other companies develop drugs, whereas the product model involves actually developing drugs (or devices). Product companies, in turn, can have a drug discovery or licensing model, the latter involving licensing partially developed candidates from other companies.
Whether the company will commercialize drugs itself or find a partner is also an element of the business model. Even when a small company can afford to develop a drug on its own, sometimes it makes sense to have a partner if the market is so large and fragmented that only a larger company could provide an adequate-sized sales force.
Another important business model distinction is that between the one-trick-pony developing a single product and the platform company developing multiple products around a core competency (e.g. expertise in a disease area or formulation technology). A well-diversified company will have multiple products with few shared risk factors such that no single miscalculation or act-of-god could destroy the company altogether. A small company with its hopes pinned to one program may be tempted to disregard early signs of impending failure, while a diversified company can afford to prudently terminate weak programs.
Other aspects of a business model include product pricing and positioning. Generics companies, for example, offer products that are identical to branded drugs and try to win market share through discount pricing. Other companies position their products as better alternatives to existing drugs to justify premium pricing. It is often a question of being either better or cheaper but not both.
The business model should also specify whether your company will do its research and manufacturing in-house or outsource everything, thereby remaining 'virtual.' The virtual model is often a good way to start if you do not expect to have enough work to keep employees busy fulltime or lack the funds to purchase capital equipment. The downside is that you are subject to the third-party's way of doing things (e.g. speed, quality, expertise).
The FIPCO Model Large companies that have the ability to discover, develop, manufacture, and market their own drugs are called fully integrated pharmaceutical companies (FIPCOs). All major pharmaceutical companies are examples of FIPCOs, as are Amgen, Biogen Idec, and Genentech. A FIPCO enjoys the ability to market its own drugs, thereby retaining the majority of the profits. However, the price of integration is that a FIPCO’s internal R&D operation may not be as efficient and productive as that of a smaller company. To compensate, FIPCOs may outsource the early stages of discovery and development to biotechnology companies by entering into partnership agreements with them.
The nature of one's customers also influences a business model. Companies developing products for the military may be subject to the government's timelines and notions of fair pricing. The conditions of SBIR and DARPA grants can influence a commercialization plan, and not always in a positive way (see Government Grants chapter).
Key Questions:
- Why is the company's business model well suited to its products, markets, and capital resources?
- Are there comparables out there that suggest your business model is feasible?
- If the plan calls for partnerships, how will the company maximize the value of partnerships (i.e. increase the payments the partner will make to the company)?