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Virtual Biotech, Like It or Not

We’ve all been hearing for a while about “virtual biotechs”. The term usually refers to a company with only a handful of employees and no real laboratory space of its own. All the work is contracted out. That means that what’s left back at the tiny headquarters (which in a couple of cases is as small as one person’s spare bedroom) is the IP. What else could it be? There’s hardly any physical property at all. It’s as pure a split as you can get between intellectual property (ideas, skills, actual patents) and everything else. Here’s a 2010 look at the field in San Diego, and here’s a more recent look from Xconomy. (I last wrote about the topic here).
Obviously, this gets easier to do earlier in the whole drug development process, where less money is involved. That said, there are difficulties at both ends. A large number of these stories seem to involve people who were at a larger company when it ran out of money, but still had some projects worth looking at. The rest of the cases seem to come out of academia. In other words, the ideas themselves (the key part of the whole business) were generated somewhere with more infrastructure and funding. Trying to get one of these off the ground otherwise would be a real bootstrapping problem.
And at the other end of the process, getting something all the way through the clinic like this also seems unlikely. The usual end point is licensing out to someone with more resources, as this piece from Xconomy makes clear:

In the meantime, one biotech model gaining traction is the single asset, infrastructure-lite, development model, which deploys modest amounts of capital to develop a single compound to an early clinical data package which can be partnered with pharma. The asset resides within an LLC, and following the license transaction, the LLC is wound down and distributes the upfront, milestone and royalty payments to the LLC members on a pro rata basis. The key to success in this model is choosing the appropriate asset/indication – one where it is possible to get to a clinical data package on limited capital. This approach excludes many molecules and indications often favored by biotech, and tends to drive towards clinical studies using biomarkers – directly in line with one of pharma’s favored strategies.

This is a much different model, of course, than the “We’re going to have an IPO and become our own drug company!” one. But the chances of that happening have been dwindling over the years, and the current funding environment makes it harder than ever, Verastem aside. It’s even a rough environment to get acquired in. So licensing is the more common path, and (as this FierceBiotech story says), that’s bound to have an effect on the composition of the industry. People aren’t holding on to assets for as long as they used to, and they’re trying to get by with as little of their own money as they can. Will we end up with a “field of fireflies” model, with dozens, hundreds of tiny companies flickering on and off? What will the business look like after another ten years of this – better, or worse?

26 comments on “Virtual Biotech, Like It or Not”

  1. M says:

    The UT-San Diego article states that the shift to virtual companies has not hurt job prospects for scientists in the area, that local CROs are picking up the slack. A bit hard to believe…

  2. Rick Wobbe says:

    There’s undoubtedly low-hanging fruit out there where this approach can and will work and it will be a welcome addition.
    Industry-wide, will it prove more productive than the big company approach to drug discovery and development? I doubt it.
    Does it have the potential to recreate modern day versions of yesteryear’s patent medicine shows? Perhaps not on its own, but alongside efforts to curtail FDA oversight of efficacy and “let the market decide”, it seems practically inevitable.

  3. HelicalZz says:

    I work in this kind of model .. or nearabouts. It has its useful aspects, but also flaws. Only as good as the people it has and leans on for advisement.

  4. johnnyboy says:

    It’s an interesting concept, but it seems much less resilient and more prone to problems than the standard drug development model. I think the success of pretty much any human endeavour depends on two big factors: the quality of the people involved, and the quality of the communication between them. In this ‘firefly’ model, there may be quality people involved at the conceptual level, but when you outsource everything, it multiplies the vulnerability of your project by the number of possible weak links in the chain. Proper communication between all the actors, who have divergent priorities and interests, also becomes much more difficult. The people you outsource to don’t have skin in the game, so they’ll be much less concerned about your final success.
    Also, if all you’re looking to do is kick the project a little further down the road so you can sell it off relatively quick, your first priority won’t necessarily be the final success of the drug. Of course you might get bigger royalties if the drug does get commercialized, but in the real world you’ll probably focus more on the revenue from the initial deal that takes the NCE off your hands.

  5. Derek,
    I think you hit the nail on the head with the last paragraph.
    The IPO market is terrible right now so the most viable exit is through an acquisition. What is driving a lot of the virtual biotech push are the VCs who are putting up the money for these start-ups. They are trying to craft the most attractive product for their main customers which are the big pharma companies. The big pharma guys don’t want to buy a building, or people or any infrastructure whatsoever, they just want a viable drug candidate in a neat and tidy package and that’s what a virtual biotech company gets them.

  6. reader says:

    Stromedix, which was recently acquired by Biogen, is a good example of a success story for virtual drug discovery model that the relied heavily on a good science, experienced team, and CROs to do the actual experiments.

  7. Hap says:

    If the physical and intellectual infrastructure for generating drug candidates isn’t needed (as seen in Pfizer’s acquisition of….nearly everybody) and all a purchaser wants is a validated drug candidate, then why invest in it? Infrastructure should make it easier to find good candidates and to find more of them – but if no one wants to pay for it, well, then out it goes.
    The question is whether investment in these things is good in the long term…and whether anyone will be left who is interested in a long term, or even if there will be a long term. It’s like the drug industry’s version of “Left Behind” – except no one’s going anywhere good.

  8. Cellbio says:

    I’ve been a “firefly: for the last 4 years, and have seen several versions, but all have had some lab space, founders lab at the U, a bench at an incubator or small lab that consumes little, but too much cash. Regardless of the set-up, the cost of drug development remains largely the same. And talented people like to be paid real salaries, so funding is still required at nearly the same level to advance to the same place (manufacture a drug, formulate a drug, run tox etc).
    I do think it makes sense to not burden each new technology with the costs of a building, a receptionist, signage etc, so there are savings. This also reflects the current market, as it feeds pharma pipelines and is capital efficient. On the positive side, when the firefly juices burn bright, this model will enable investors and employees to participate in upside (if we can survive the periods when the fire fly light is dim). But I worry. Will there be folks 5-10 years from now that have enough integrated experience to effectively manage these outfits? I suppose so, as the new model will probably create new models for learning, but the way I learned, a long run with talented people to observe, is going away.
    My current shop is moving from virtual to more real. new CEO hiring experience, as the first investment and outsourcing burned a series A level of money with little real advancement. IMO, you need a seasoned internal team to balance the enthusiasm of founders and investors who see an easy, often “novel” path to success. What is novel to some, is experience to others.

  9. DLIB says:

    Ferrokin is another example of success…just bought by Shire . A biomarker that is nice and trustworthy. Blood Iron levels. Very doable for a virtual pharma. They worked their tails off though.

  10. Assay Guy says:

    @ #2 “Industry-wide, will it prove more productive than the big company approach to drug discovery and development? I doubt it.”
    Seriously? The big company approach isn’t productive (or efficient) at ALL. It’s virtually (pun intended) impossible for the firefly model to be worse.

  11. entropyGain says:

    Like most of the other MBA driven trends in this industry, the “firefly” model is stupid. How were fireflies treated when you were a kid? Why would any drug hunter worth their pipetteman or rotovap aspire to flicker around until caught and put in a jar to glow for a bit before dying?
    BTW – Biocom will say whatever they think will bring in more money from their high profile partners (Pharma, VCs, Lawyers…)

  12. patentgeek says:

    There are different variations of the virtual model. Some are not so small, though still with minimal infrastructure and all “wet work” outsourced. MGI Pharma for much of its life was a cubicle farm whose denizens oversaw the clinical development, by CROs, of in-licensed projects. Tesaro Bio, started by ex-MGI folks, is based on the outsourced model. They have certainly been successful in raising cash, and have a couple of in-licensing deals under their belts in a short time.
    The virtual model is not new, and was not terribly new ten years ago when I was involved in starting such a company. (A dozen folks in a rented basement in Gaithersburg.) The execution of it has certainly evolved as Big Pharma has imploded.

  13. Rick Wobbe says:

    10, Assay Guy,
    Yes I am serious AND I don’t disagree with your comment either. The reason I don’t think it will be more cost-efficient is that you are taking the activities that were done within a large organization and distributing them among a larger number of unrelated organizations each with its own profit mandates and goals. Each individual component may (or may not!) cost less in the latter case, but that will be offset by new transactional costs at the new nexuses. Although there will be cases where it could work out better in the virtual model especially when the number of new nexuses is very small,, applying it industry-wide to all drugs will, at best, make it a wash.
    But don’t take my word for it. This phenomenon, known as “dis-integration cost” is real and has been well studied by a number of economists. My favorite is Iain Cockburn at BU.

  14. Cellbio says:

    I agree with Rick. We will likely hear of the great successes, while those that lie on the other side of the distribution of cost will be buried. I saw one where outsourced manufacturing failed, that is failed to deliver product suitable for IND enabling studies, but did not fail to consume cash or time which killed the company. Have seen less terminal examples too, but even with a thin overhead, a delay to repeat failed studies like a pivotal PK or tox studies impacts the bottom line, and the length of delay is out of your control when outsourcing. An eager vendor once expressed their desire to get started asap, meaning in 6 mos when the next available slot was open. They make their money by keeping the staff fully burdened. More outsourcing will lead to more CRO business, and likely less schedule flexibility and fewer advantages.

  15. ClinicalPharmacologist says:

    I worked at a company called Sosei R&D which employed exactly this model and it was the single most enjoyable job I have ever had. Sadly it ended when we went to refinance and hit the credit crunch square on. I can’t begin to say how sad we all were when it folded.

  16. processchemist says:

    Knowing something about contract manufacturing, I can’t blame the 6 months from the next available slot, but I bet that in these times there’s plenty of empty slots in the western CMO landscape, and that they’re cheaper than 10 years ago.

  17. johnnyboy says:

    Interesting how some of the commenters who are positive on this define ‘success story’ as a virtual firm signing a deal or getting bought out, not as getting an actual drug or biomarker out into the market…

  18. Chrispy says:

    Those of you within Pharmas are already hearing the drumbeat to outsource everything you can. And almost always what you find is a lack of experience in the CROs which drags down projects and leads to expensive delays.

  19. MTK says:

    Well, yeah.
    As was noted in Derek’s post, the end game is usually not getting a drug to market it’s getting it licensed. Remember the title is “virtual biotech”, not “virtual pharma” (although those exist too.)
    Biotech’s generally don’t have any visions of getting a drug to market all by themselves. That takes a whole other level of expertise and capital that most do not have or even want. The Amgens, Genentechs, and even Vertex’s are a thing of the past. Now some do become full fledged pharma companies if they get enough licensing deals done to capitalize that, but the reality is most do not even aspire to that.
    In that case success should be measured by their ability to license things

  20. ronathan richardson says:

    The one advantage of virtual development is that the experimenters are more blinded to the results, and thus less likely to (consciously or subconsciously) inflate results.

  21. drug_hunter says:

    I’m wondering how folks on this board can make such definitive statements about how the virtual model can’t possibly work. From where I sit — actually interacting with several such companies — data is emerging to suggest what works and what doesn’t. My observation is that the “virtual” model works extraordinarily well when the internal team is highly motivated & smart, make fast decisions, are willing to take chances, don’t worry too much about penny-pinching (i.e. they do the right experiments at the right time), and projects are selected where it is possible to get high-quality outsourced science done at a reasonable price and turn-around. So trying to run a project with a horribly complex animal model, or a ridiculously complex scale-up procedure, would be a very bad choice for a virtual pharma. But big pharma hasn’t done so well on such projects either.

  22. HWolfe says:

    I was a member of a firefly for about a year, 4 of us with no lab space each working out of his home, separated by 100 miles from each other. Heavy Skype, email and phone calls for coordination. Everything outsourced with the only asset being a frost-free freezer in my garage for compound storage. It’s not for everyone and we died on the vine for lack of funding.
    Now I am running pharmtox in a specialty pharma and am a “firefly in a jar” – the company has products with revenue, but R&D is 100% virtual, no labs at all with the exception of CMC (an old generic firm). Not for everyone, but these days any job is a good job.

  23. CMCguy says:

    Good comments and believe in some specific cases is workable to advance certain programs but as #21 drug_hunter discusses it takes the right combination of people and requirements. Like with small companies impact of each individual is magnified both positively and negatively. Outsourcing to right CMOs and CROs is vital but likely not to succeed if done on the cheap and takes people with expertise to supervise and control directions. Many CMOs and CROs are not as naive these days since may now have a few experienced people with pharma backgrounds but there are limits to what they can provide in a complete sense. I do wonder if adopt the firefly model there will be no remaining training grounds to raise up future generations with appropriate skill sets to carry on.

  24. Morten G says:

    So the money is to be made from having a CRO with very good, verified, animal models for a number of popular diseases/indications?
    (And I mean verified – the current TB drugs don’t actually work in the animal models of TB for instance)

  25. Mr. Fixit says:

    I work at a relativity small start up. Isn’t there value is having everybody working on a project engaged and excited about the science. I would imagine if you outsource everything to a CRO the people doing the work would not care as much. I think that passion can make or break a company.

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