Everything You Need to Know About Biotech Business Models

What’s my business model? Who do I partner with? How do I scale up? These are typical strategic questions a young biotech will regularly face.

The business model of a biotech company can determine its long-term trajectory to success. In this article, we’ll focus on a typical ‘platform’ biotech company in the biopharma sector whose intellectual property can be applied to a wide range of R&D programs.

These principles apply to a range of technologies including protein therapeutics, targeted drug delivery, computational drug discovery, gene therapy, RNA therapeutics, and stem cells, as well as platforms that unlock new insights into disease pathophysiology or novel drug targets.

Pure Play Models

Broadly speaking, a founder could adopt any one of these three pure play business models:

1. Technology partnering: licensing your platform and providing related services to a biopharma company, which in turn uses your help to create, develop, and commercialize pharmaceutical products.
2. Asset creation and out-licensing: using your platform to create a pipeline of proprietary assets, be it candidate drugs in the case of therapeutics or prototype formulations in the case of drug delivery. Once there is scientific proof-of-concept for an asset, it can be licensed to a biopharma company, which in turn develops it into a product for regulatory approval and subsequent marketing.
3. Product development and commercialization: creating your own pharmaceutical assets and taking care of the whole development process until commercialization.

When adopting either the second or third approach, there is always the option to conduct a joint effort with a large biopharma, small biotech, or academic partner on a project-by-project basis. While these are the three key business models in biotech, in practice many established companies end up operating with a hybrid of all the above approaches.

Technology partnering

Once your technology has evolved sufficiently to reliably contribute to pharmaceutical R&D projects, you can generate immediate and significant income by licensing your platform and providing related services to the projects of better-funded biopharma companies. If you have limited financial resources or a low-risk appetite, this is your best option for getting started.

This is also the fastest route to validating your platform with both the investor and biopharma communities; an initial technology partnering deal with a well-known biopharma early in your company’s life will immeasurably enhance your credibility and bargaining power. An example is Mogrify, a UK-based startup developing stem cell technology. Just about a year after its seed round in 2019, the company signed a collaboration and exclusive licensing deal with Sangamo Therapeutics.

If you follow the model of technology partnering, your partner absorbs all the financial risk — the upfront licensing fee, fee-for-service revenue, and near-term preclinical milestone payments are earned irrespective of whether the project eventually results in an approved pharmaceutical product. While your partner will own any pharmaceutical assets and marketing authorizations that emerge from the project, you can typically earn small single-digit royalties on future sales of these products.

Asset creation and out-licensing

If you invest your own funds upfront to create proprietary pharmaceutical assets, you can then issue exclusive licenses to larger biopharma companies. The latter then becomes fully responsible for completing late-stage clinical trials, manufacturing scaleup, obtaining regulatory approval, and commercialization. A good example is Numab, a Swiss company that earlier this year, signed its second licensing deal with Japanese firm Ono Pharmaceutical, giving the company exclusive access to a cancer antibody treatment currently in development.

A key advantage of out-licensing, compared to technology partnering, is that the return on investment is higher if successful. The upfront fee and milestone payments are higher, and these deals often involve significant double-digit royalties on future product sales.

With appropriately negotiated deal terms, the upfront fee alone can recover most of your initial cash outlay for the asset, and the milestone payments can ensure a small positive return even if the subsequent commercial performance is not to expectations. Furthermore, this business model lets you leverage your partner’s late-stage development and commercial expertise, while transferring the cost and risk for these much more expensive stages to the partner.

In situations where your company is facing other competing technologies, creating your own pharmaceutical assets may be essential to differentiate yourself in a crowded arena. For example, in the area of targeted drug delivery, you might apply your technology to an off-patent active pharmaceutical ingredient, such as ibuprofen, to demonstrate superior performance compared to existing medicines. While this scenario generates a lower standalone financial return compared to novel applications, you may need successful projects of this type to support fundraising and attract more lucrative partnering opportunities on novel applications.

On the downside, this path takes more time, costs more money, and exposes you to a greater risk of financial loss compared to technology partnering. This model also requires significant expertise in disease biology and pharmacological screening. These can be obtained through in-house investment, external contract research organizations, or company acquistions.

An alternative option is to collaborate with another biotech or pharma company that has complementary capabilities and shares the cost and risk. For example, the UK-based biotechs Kymab and Heptares are collaborating to co-discover new cancer therapeutics using their complementary technologies.

Product development and commercialization

If you choose to develop a pharmaceutical asset on your own, you retain full ownership and prevent handing it over to another party. This business model requires either substantial investor backing or a well-established revenue stream, often coming from a sizeable portfolio of historical technology partnering and asset out-licensing deals.

The total financial return of this route is hugely greater if successful. Of course, the financial burden and risk exposure is also bigger. And even some well-established companies may lack the necessary expertise for late-stage clinical development, manufacturing scale-up, regulatory approval, payer reimbursement negotiations, commercial brand management and sales promotion. Most biotechs taking this approach mitigate these gaps with strategic alliances — for example, the one between the Belgian biotech Galapagos and big pharma Gilead to co-develop and co-promote the antiinflammatory drug filgotinib.

Hybrid approaches

Most young biotechs start with either the technology partnering or the asset creation and out-licensing approach. The former generates revenue faster with lower financial risk. With higher investor funding and a greater risk appetite, the latter generates a much better return if successful. In addition, this second option might be essential in a very competitive situation where you initially have to demonstrate technological superiority with your own pharmaceutical assets.

An increasing number of research-stage companies operate a hybrid business model that combines both these two approaches. For example, the US-Israeli company Intec Pharma offers technological partnerships around its drug delivery platform while in parallel developing its own pharmaceutical assets by applying the technological platform to established medicines.

Once you become more established, successful, and well-funded, you might want to gradually transition over time to the product development and commercialization model, as giants such as Genmab in Denmark and MorphoSys in Germany have done.

Robert Thong consults and writes on bioscience business strategy and collaborations, specialising in small-to-mid-sized biotechs, technology platform companies, and R&D service providers. He is the author of the book Biopharma R&D Partnerships.