More Fun and Profit

In my post last week (“For Fun and Profit”), I chided the author and editors of a report recently published by the Results for Development Institute (R4D) on “global health social enterprises” in part because they made what I thought was an arbitrary distinction between social and non-social (for-profit?) enterprises.  The report defined the former as a company with an explicit statement of a mission of providing a social benefit (i.e., making a product to improve global health) and implied that a for-profit without such a statement but one that invents, develops, and/or a distributes an affordable global health product was not providing a social benefit.  I think a better approach for R4D and similar contract global health consultants, or really the entire “not-for-profit” global health community, is to analyze, publicize, and support all companies developing therapeutic products for global health (GHTP), regardless of their mission statement.  I think it makes more sense to categorize biotech companies by their business models (essentially their plans for making enough money to meet their payrolls for the foreseeable future) and include one category for companies developing products that have high technical risk (as do all biotech products) and potential huge but low margin markets.  The labels I have seen for this category are “dual market,” which isn’t accurate because it excludes companies developing products specifically for diseases and environments outside the major markets, and “double bottom line,” which implies to me use of suspect accounting methods.  My preferred label is simply “global market” since a company intends its GHTP will used by and benefit people globally without regard to a person’s ability to pay individually for it.

So how many biotech companies fit this global market model?  The main organization for this industry segment is BIO Ventures for Global Health (BVGH).  Last spring, BVGH issued a relevant report, “Developing New Drugs and Vaccine for Neglected Diseases of the Poor:  The Product Developer Landscape” (BVGH report ).  In my review (“BD Needy”), I noted several of the report’s findings:

  • only a few percent of all biotech companies are involved in global health product development (3% or 104 out of 3853);
  • the GH products are still candidate products with most projects in the preclinical stage;
  • about 40% of the projects are without partners, that is, are self-funded rather that through a co-development with another company, non-profit research organization, university, or government; and
  • the level of funding of global health projects is modest, only about $600K per company per year.

The BVGH number is small, it is larger than the number of companies identified as social enterprises in the R4D report (11 are listed in the appendix), and it does not include companies that are developing GHTP for the non-neglected diseases (like cancer and diabetes) of the poor (or all those uninsured) in markets outside the major market countries of the US and the EU.  The small number of companies and their level of spending on GHTP clearly indicates that this route is not a popular business model.  Unfortunately, BVGH did not look at these companies’ longevity, fund-raising, or overall deal-making as measures the model’s viability, and, as far as I know, none have got a GHTP to market.

So where does the my global market model fit within the biotech industry?  As many know, like the pharmaceutical industry, the biotech industry has been struggling to fine-tune its business models for at least 10 years.  Bruce Booth, a principal at Atlas Ventures who writes a readable biotech column for Forbes.com, recently summarized two emerging variants on the basic models which are either drug discovery via a novel platform or the development of one or more products with similar chemical or biochemical characteristics (Booth alternative structures):

  • the “LLC Holding Company” model in which the candidate products of a common drug discovery platforms are developed in separate C-corporations which, if successful, are more attractive for acquisition; and
  • the “Single Asset Project Financings with Structured Buyouts” model in which a product candidate is out-licensed by a big pharma to new entity with the pharma having a buy-back option.

Neither of these models preclude application to GH products, but, while they reduce risk, they do not help with the problem of the relatively low ROI and untested exit/acquisition posed GH products.  Interestingly in another column, Mr. Booth advocated investors start or support biotechs that pursue “contrarian” products, those largely abandoned by big pharma and VCs but potentially profitable (Booth contrarian products).  He cited anti-bacterial, neuroscience, heart failure, obesity, and RNA-based therapeutics, but didn’t mention the potential profitability of GHTP, likely because he assumes it insignificant.

As was described in the R4D report, there are two new legal corporate structures under which my global market biotech company may fit:  the benefit corporation and the flexible purpose corporation.  Both allow the founders, managers, investors, and employees to agree and understand that the company’s goal is to stay in business and provide a social benefit.  Will these new structures help biotechs?  Trista Morrison, an editor of the newsletter, BioWorld, wrote “maybe” in a recent article (BioWorld article).  Possible benefits are the flexibility to price products based on affordability rather than maximum profit, increased attractiveness to investors like foundations and philanthropic individuals, and maintenance of the social benefit purpose as the company matures (if it survives).  I’d like to see the global market biotech model gain credibility and adherents but also recognize in the business world nothing succeeds like success.

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