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So you want to build a life sciences company? Scientifically speaking, you have some very promising ideas. Entrepreneurially speaking, you could use some advice. The sine qua non to success of an emerging life sciences company is the creation and development of innovative human therapeutics, from small-molecule chemicals to larger-molecule biologics. But good science will not succeed alone. There are a number of critical components to building a biotech business, many legal or quasi-legal in nature: (a) protection of intellectual property rights, (b) navigation of the IP rights of others, (c) management of the product life cycle, (d) development of skilled leaders at each stage of the company’s growth, (e) an expert board of directors, (f) a well-thought-out commercialization strategy, (g) a sound financing plan, and (h) a strategy for maturation. Let’s explore each component. AGGRESSIVE IP PROTECTION Developing drugs or other therapeutic products and bringing them to market is an enterprise laden with risk: Drugs are exceedingly expensive to develop and often relatively simple to copy. An emerging life sciences company must therefore take steps early to recoup its investment. An aggressive patent strategy designed to protect the product throughout its life cycle is key. Savvy investors will closely examine the nature and strength of such protection in making their decisions. There are generally three types of patents that provide significant protection in the therapeutic context: composition, method-of-use, and process. Composition patents can cover active ingredients, drug formulations, or metabolites of drugs. A patent covering an active ingredient is often the most valuable because it prevents others from making or selling anytherapeutic product containing that ingredient. Patent rights directed to a drug formulation can also be valuable, especially where a particular formulation is uniquely superior, such as where an inactive agent enables controlled release of the active ingredient. Method-of-use patents cover the use of certain products to treat a specific disease or condition, such as taking aspirin to treat a headache. Their protection can be less valuable because they do not cover use of the drug for any purpose other than that claimed, such as taking aspirin to prevent coronary disease. Since often the consumer is the only direct infringer, it is frequently not practical to enforce these patents. Establishing infringement against the manufacturer of the substance usually requires a claim that the manufacturer is inducing infringement. Proof of inducement generally requires a showing of specific intent, and where there are legitimate noninfringing uses of the product, that can pose significant challenges. But these challenges are not insurmountable. While a method-of-use patent may not be sufficient protection alone for the company’s new drug, it is an important part of the full patent portfolio. Process patents are generally directed to a particular process for making a drug or other therapeutic product. Like method-of-use protection, these patents have a role to play. But where there are alternative noninfringing processes for preparing a particular drug, the practical value of the patent may be marginal. To ensure maximum protection of its innovations, a developing life sciences company should build a portfolio of all types of patents in tandem with its product development cycle. NAVIGATION OF OTHER IP RIGHTS To succeed, the life sciences company must be free to operate in the space it has defined for itself. For example, if its core business involves developing sulfur-based drugs and the only viable process for generating sulfur compounds is protected by another company’s patent, that’s a problem. So-called blocking patents generally force the company to develop a noninfringing process (easier said than done), establish that the patent is invalid or otherwise unenforceable (usually by securing a legal opinion), or license the patent/purchase the product from its owner. Such hurdles must be recognized early and resolved at a manageable cost. LIFE-CYCLE MANAGEMENT Where the therapeutic product is a “drug” for purposes of the federal food and drug laws, the Hatch-Waxman Act will ultimately govern the extent to which generic manufacturers can make and sell copies of the drug. In theory, generics appear once a patent has expired, and that’s that. In practice, Hatch-Waxman creates a more complicated process that can be handled well, or mishandled to the detriment of the innovator company’s patent rights. For example, in certain circumstances, Hatch-Waxman provides for extension of patents relating to approved drugs. An effective strategy should be in place long before key patents expire. THE EXECUTIVE TEAM Different skills are required to manage a developing life sciences business through its different stages of growth. In the research-and-development phase, the most important management skills (in addition to pure scientific and technical talent) are best characterized as entrepreneurial. Can management maintain morale, find the minimum financing required, and inspire early employees to make the sacrifices in current income and personal time required to bring a product into existence? As a company progresses to the mid-stage of drug development, it must tackle regulatory obstacles, protect intellectual property, and deal with new investors and strategic partners. Different management skills are required to manage product testing, to pursue Food and Drug Administration approvals, and to implement a comprehensive IP strategy. Important decisions made now with potential financial or business partners could preclude more attractive opportunities in the future. On the other hand, early alliances may be necessary to give the company’s new drug a competitive edge in the race to market. Early alliances may also forestall the need to raise more capital, avoiding dilution of stockholders’ equity. As the company reaches late-stage development, yet another kind of management talent is required. With approvals from the FDA (hopefully) imminent, the company should prepare for commercialization. A new product is going to market. The focus shifts to making the drug in quantity, selling it widely, and financing those efforts. It is not uncommon for a life sciences company to pay insufficient attention to the need for professional business management until the lack thereof precipitates a crisis. The crisis is usually some breakdown in the company’s corporate backbone: consistent problems in financial reporting that eventually undermine investor confidence, dramatic failure to protect IP rights, festering personnel problems that boil over, or discovery of product development problems hidden by a well-intentioned cover-up. While some company founders develop the skills to lead a more complicated and mature business, unfortunately many do not. Of course, a key player in monitoring a company’s evolving management requirements must be the board of directors. THE BOARD OF DIRECTORS The role of the board as the governing body of a business has taken on new meaning in the wake of recent corporate governance scandals. Just like large public companies, an emerging life sciences company needs a hands-on board. Directors are responsible for knowing when and how to attract appropriate managers at each stage of the business, and then overseeing those managers. The board must guide the transition from entrepreneurial to professional management without destroying the company’s goodwill or running afoul of legal or commercial requirements. Thus, as a group, directors should bring to the table scientific understanding, product development expertise, corporate governance skills, growth management experience, and financial acumen. A COMMERCIALIZATION STRATEGY Commercialization means the manufacture, marketing, distribution, and product support necessary to sell a viable product in the marketplace. This can be a tremendous challenge for what had been a small, research-focused company. And there are multiple commercialization strategies to choose among: • Build.A company could build its own manufacturing facility and develop marketing, distribution, and product support operations internally. But because of the lead time and cost involved, this is not usually an attractive option. • Buy.A company could purchase some or all of the functions required to commercialize. This typically requires some modification of facilities and some retraining of the new work force. • Contract.The manufacturing process can be contracted out to third parties, often abroad. Distribution and product support can be similarly outsourced. • Joint venture.In a collaborative effort, a partner firm may provide, or assist the life sciences company in providing, some or all of the commercialization functions. • License.A small life sciences company may license all commercialization rights and responsibilities to a much larger pharmaceutical company. Such wholesale delegation is a favored approach. Yet it is a “bet the farm” arrangement: If it succeeds, the developing company can win big; if it fails, disentangling the company and product from the deal may be impossible. When considering a one-stop license, the life sciences company should ask: 1. How will quality control over the product be maintained? 2. What geographic scope will be granted to the licensee? 3. How can it be assured that the licensee will put maximum effort into selling the product? 4. Will there be minimum sales commitments? 5. Will there be minimum advertising and marketing commitments? Who will control this spending? 6. Will the licensee agree not to develop, license, or otherwise sell a competing or overlapping product? 7. Who will control pricing? 8. Who will retain any residual rights, such as the development of other product uses, combination drugs, etc.? 9. How long will the license run? Under what circumstances will the licensor have the right to terminate it? 10. Will there be buy-out and other mechanisms that enable the licensor to regain control of its product? These complex issues need to be grappled with in the context of a particular drug, licensee, and other circumstances. They require significant thought and deliberation by the board of directors and careful negotiation and drafting. Given the likely long-term and comprehensive nature of such a license agreement, failure to reach a competitive arrangement can be detrimental — even devastating — to a company launching its first product. A PLAN TO FINANCE GROWTH A life sciences company on the threshold of commercialization faces one more critical question: how to finance it. Obviously, the answer begins with the commercialization strategy. Building or buying a manufacturing facility and developing internal support capabilities requires substantial capital. At the other end of the spectrum, a licensing arrangement may require little or no money. Financing commercialization generally involves a combination of venture capital funding and public offerings of common stock. Late-stage venture capital funds will invest when the company is on the threshold, but has not yet achieved, full regulatory approval. Once underwriters are satisfied with the prospects for securing that final approval and commencing the product launch, an initial public offering of common stock becomes the more likely source of further capital. Depending on market receptivity, a company may go public well before its product has won final approval. This was common in the last decade, with such notable examples as Millennium Pharmaceuticals and ImClone. Accessing the public markets can secure larger amounts of capital at potentially lower costs than venture capital financing. This in turn can help the company grow faster. When and if cash starts flowing from a successful product, the company may also be able to borrow, publicly or privately. Unlike equity financing, debt does not dilute stockholders’ shares, thus increasing their potential return. MODERN MATURITY If a life sciences company develops and commercializes its first new drug and becomes profitable, it will be faced with a new challenge: What does a successful one-product company do for an encore? There are several typical options: • Stay a one-product company.This is the “print money” strategy. The board of directors determines that there is no better opportunity for investors than to collect profits on the one product and distribute the profits through the product’s life cycle. The strategy is especially appealing for a company that has signed a one-stop license. • Sell the product or company in its entirety.This is the “cash out and go home” strategy. Like the board above, the board here concludes that there are no new fields to plow. However, this board believes that a starry-eyed buyer may pay a premium for the future growth potential of the one product. • Become a one-product-family company.In a variation on the first strategy, the company modifies and develops new uses and combinations of its successful product, but does not research new products. While this is risky, it is considerably less risky then taking the profits and investing them in speculative new R&D. • Grow and diversify.With this most ambitious and risky plan, the board gambles that a one-product company can be built into a major, diversified corporation. Diversification might involve researching and developing new products, acquiring other businesses, or a combination thereof. Typically, a one-product company that aspires to be more will buy other companies with products at various stages of development with the goal of repeating its singular success. Maturity is also the stage at which the previously ignored pitfalls of a one-stop license or joint venture can hurt. An agreement earlier entered into commercialize a product may now be a very “rich” arrangement for the licensee or partner. The deal may have effectively transferred significant equity value to that licensee or partner, thereby limiting the life sciences company’s ability to grow, diversify, or sell itself. Which approach a company should take after commercialization will depend upon its products, management, access to capital, and R&D talent. Indeed, that is true at all stages of the company’s life. With the right components in place, building a successful life sciences company is still a gamble. But without proper planning, you’re betting against yourself. Elizabeth Stotland Weiswasser and Christopher K. Aidun are partners at Weil, Gotshal & Manges. Weiswasser’s practice focuses on IP and related regulatory issues in the life sciences industry. Aidun’s practice focuses on corporate and financing issues for life sciences companies. They can be reached at [email protected]and [email protected], respectively. The views expressed here are the authors’ and do not necessarily reflect the views of their firm, its clients, or their partners.

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