The rise of virtual business models in biopharma reflects the changing face of the pharmaceutical industry. Big pharma discovering and developing its own pipeline exclusively in-house no longer exists. Virtual pharma companies, which employ few employees directly and have few facilities, actively pursue their novel IP with the financial assistance of a range of funders.
Their investors appreciate the virtual model as risk and potential reward is clearly defined in the unique proposition of any business based on pure R&D. In this environment, there’s a strong rationale for keeping fixed costs to an absolute minimum. The approach also opens the way for virtual business to be highly agile and responsive to fast-moving science.
Virtual businesses typically start with venture capital funding before raising larger sums through public share offerings on non-main share markets. Businesses that successfully progress from virtual through the start-up and scaling phase tend to be acquired by large, multinational firms. That’s of course the dream that keeps the fire burning for many a biotech entrepreneur.
A concern is that the entrepreneurial talent you find in virtual and smaller businesses tends to get lost once these firms are acquired by bigger fish, meaning that the sector doesn’t nurture what may have been its dynamic leaders of the future. To use an example from another sector, would Amazon or Facebook have progressed in the way they have if founders Jeff Bezos and Mark Zuckerberg had sold out on the way up? Generally speaking, however, once an entrepreneur, always an entrepreneur, and those good at identifying great start-up opportunities often move on to others after selling the original.
There’s also a fear that innovation tends to be stifled in a corporate environment where the ‘start-up’ mentality in which left-field ideas are considered is squeezed out. There’s a pressure on intellectual diversity at all levels within research, but it’s an attractive idea that the continuing restructuring in biopharma, with more collaboration across the myriad drug discovery projects, is good for healthcare in the grand scheme of things.
The decade-long structural changes in pharma have meant the biggest companies are now much more nuanced and practised at working with partners and contracting out specialist activities as opposed to doing everything in-house. These changes are good for innovation, and there’s a growing appreciation of what virtual businesses can bring to the party.
These changes have of course driven significant growth in the numbers of contract research organisations (CROs), the best of which have the same willingness to perform as an in-house team, and generally have a harmonious co-existence in the same eco-system as the virtual firms.
Across the spectrum from purely virtual, semi-virtual to fully-formed biotechs what these businesses want is actually broadly the same. What they want from a CRO is good science, a keen awareness of their priorities and the ability to communicate and deliver as directly and straightforwardly as possible, working well as an extension of their team.
The characteristics of the most successful virtual businesses are the foundations of exciting IP, a strong science background, and also making good choices about investment partners. In the best-case scenario, the right investment partner will provide a good network to facilitate an acquisition as well as bringing cash.
Virtual and start-up businesses are serving a critical R&D function, and whilst there’s an understandable focus on speed and size across the industry – who is going to create the next Genentech? – policymakers and the investment community need to remember that small can be beautiful, and that real progress isn’t always measured in giant leaps.
Dr Tony Flinn is executive chairman at Apex Molecular