Bioscience Platform Companies as Technology/Service Providers and Hybrid Businesses

In this second instalment of our 3-part series, we look at the adolescent and early adulthood stages of bioscience platform companies. What drives the transition to these stages? What are the key success factors during these stages? This article discusses in more detail Stages 2 and 3 of the lifecycle of bioscience platform companies depicted below:

The complete 3-part series can be downloaded here as a single pdf document

Stage 2 – Service/Technology Provider

Unless there is a hugely compelling investment case, a new bioscience platform company cannot usually afford to fund its own projects at the outset. And the platform often needs additional investment for further development. The company thus needs to generate reliable cash flow by providing its platform to other companies (its customers) via business-to-business (“B2B”) collaboration arrangements. Transition from Stage 1 to 2 is therefore a matter of survival.

Each successive collaboration deal increases its credibility and reputation, enabling it to secure increasingly more high profile collaborators and increase its effective pricing level. Multiple projects with the same collaborator create economies of scale and scope. While a broad portfolio of collaborators is essential to manage risk and to ensure a solid bargaining position in the marketplace. If for example, 12 running projects represents what is required to sustain and grow the company, then 4 collaborators with 3 projects each is much better than either 1 project each with 12 collaborators, or 12 projects with 1 collaborator.

“A broad portfolio of partnered projects spreads corporate risk, ensures business stability and strengthens our bargaining position.”

A strong business development capability is a critical enabler to assembling this portfolio and becoming an established technology/service provider. In particular, the “B2B marketing” aspect of business development is crucial i.e. positioning and differentiating the platform as one which provides unique value in the eyes of the customer. A classic error is to focus on the technical uniqueness of the platform rather than on the unique benefits to the customer that enable the latter to differentiate the resulting end-user products in the customer’s own marketplace. This is an important principle in any B2B marketing situation i.e. unique and sustainable benefits in the customer’s end-user marketplace are what the customer wants, not the unique science or know-how of the technology/service provider. Hence the platform company’s competitors are not just suppliers with a similar platform but also those who can provide the same benefits to the customers in some other way.

“Our scientists sometimes forget that we essentially sell our projects to pharma companies – our projects need to enhance our prospective collaborator’s business.”

Each successive project broadens the range of situations where the platform can be applied, enhances the efficiency of the platform’s delivery owing to the experience curve effect and triggers further platform-enhancing innovations. A critical enabler is a strong capability in collaboration structuring and execution, with respect to every individual project as well as the overall alliance with a collaborator over multiple projects. Working with another company to deliver a project together is much harder than doing it all in-house, the inherently unpredictable nature of bioscience R&D projects further exacerbating this challenge – for a further explanation, see: “Hidden Reasons for Collaboration Failures”.

“Collaborations are the lifeblood of our business.”

“You have to fit in with your collaborator in some way, especially since many of them are large multi-nationals with their own established processes. And if you’re working with several different collaborators, it can get somewhat schizophrenic! Nevertheless, you also have to somehow maintain your own identity and culture, otherwise you lose your own strengths.”

Over time with technology platforms, it is not uncommon to introduce “version 2.0” of the platform – to overcome the shortcomings of the original version and to counteract improvements that competitors have made. Alternatively, or in parallel, it could also make strategic sense to stretch the existing platform to a somewhat different application. Furthermore, as the company establishes strong relationships with its collaborators, it will also make strategic sense to widen the portfolio of platforms aimed at the same target customer segments, either through organic development or acquisition.

Stage 3 – Hybrid Business Model

At some point after the platform company has become an established technology/service provider able to sustain its own existence, pressure starts to build to initiate proprietary projects of its own. In some cases, this pressure comes from within, when the management team seeks to control their company’s own destiny and maximize the return from their platform. In many cases though, the pressure comes from its owners. Many professional investors fund platform start-ups or spin-outs with expectations of very high returns if they succeed, commensurate with the high failure rates of similar new companies. The usual way to capture such huge returns is via proprietary projects which eventually lead to large revenue flows from commercial products.

“Investors want the possibility of the ‘big pop’ when a proprietary drug succeeds”

“There are not many industries where valuations can explode to the extent that they can in ours. Investors can hedge their risk by placing investments across a portfolio of investments. But what they want is the possibility of a company whose valuation explodes. And all the successful biotech case studies out there are of companies who eventually developed their own product.”

“At the end of the day as CEOs, we’re measured on valuation. And the reality is a service/technology provision business is valued much less than a ‘Dreams’ business. If you start to talk about own projects and products, the shareholders take a completely different view of your company.”

Whatever the reasons, the company now starts looking for new projects where it has at least 50% control and ownership. A critical prerequisite for success is a deeper business and corporate development capability, not just in the business development function but embedded into the other parts of the organization that need to be involved to find, evaluate and select the right proprietary project opportunities. Typically, new proprietary projects come from some combination of:

  1. Identifying internally new potential applications of the platform that it can initiate on its own.
  2. Initiating 50/50 co-funded collaborations with existing technology/service provision customers, with the option to continue as a 50/50 owner in the later stages.
  3. Acquiring or in-licensing assets to which the platform can be applied to generate new product candidates.
  4. Acquiring or merging with a company that has a complementary capability that, when combined with the original platform, enable internal creation of new product candidates.

As the foray into proprietary projects begins, the company will typically maintain (or even expand) its traditional portfolio of technology/service provision collaborations, to spread risk and provide the additional cash flow needed to fund its own projects. Hence the company now operates a hybrid business model.

“We’ll have to carry on with technology/service provision collaborations for quite some time, at least until we can build up a broader portfolio of proprietary programs and the funding for them.”

“Need to build up funds to take our proprietary programs to Clinical Phase 2 PoC, as we’ll never raise the hundreds of millions we’ll need for this purely from investors.”

An important prerequisite for the hybrid model to work well is sufficient synergy between the proprietary projects and the core platform. This ensures scale economies and a focused internal operating mindset. Adding proprietary projects that have no synergy with the core platform usually leads to a poor return on investment as there is no mechanism to mitigate the high cost of creating or bringing in these projects. A comparison can be made here with another kind of hybrid business model created in the reverse fashion i.e. starting with a classic cash-burning proprietary product development biotech and adding a cash-generating contract R&D, manufacturing or sales business. Such companies do exist but those that prosper are the ones that create a high degree of synergy across the two parts of the business by deploying the service capabilities to competitively enhance the proprietary projects.

Another important prerequisite for success in the hybrid model is adding the new capabilities required to deliver the proprietary projects. The typical capabilities that need to be added for a drug discovery platform company include clinical development, formulation development, clinical trial supply and regulatory/commercial strategy (“strategic marketing”) in the first wave, and at later stages also, manufacturing and sales. Adding a full suite of in-house capabilities across the value chain is too expensive and time consuming for most companies, notwithstanding the risk of adding fixed costs if the projects are delayed or fail. So the usual approach is to add capabilities in a focused and semi-virtual way i.e. a small core group of in-house leadership and technical expertise to manage outsourced service providers. What the company had learnt in collaboration structuring and execution with its platform partners can now be extended and applied in reverse to get the most out of its outsourced collaborators for the new capabilities being added.

“We need CROs so that we can focus on our core and remain lean”

“It’s not simply ‘outsourcing’ – people always underestimate the management time”

The new capabilities also need to be added in a culturally-sensitive way as the mindset, priorities and working language of the new people added are usually very different to those of the original team. Such differences need to be recognized and managed to avoid two or even three separate “camps” emerging in the company. Another cultural aspect that needs careful management is ensuring continued internal ownership and commitment to the partnered projects. There can be a tendency when the company starts to grow its proprietary projects for internal attention and energy to shift to them at the expense of the partnered projects. At this stage in its evolutionary lifecycle, it still needs the cash flow and the market credibility from its technology/service provision projects – a level internal playing field needs to be maintained.

Overall, it can be quite challenging to run a hybrid business, but it is important to realize that this stage in the evolutionary lifecycle is absolutely necessary – there are too many financial and management risks when trying to leap directly from being a technology/service provider to being a focused product company.

“Our hybrid model works, at least for a certain time. It’s just a tough and strange one to manage.”

“We’re a little bit schizophrenic. We’re not pure service companies. We have our aspirations for our own programs. Technology collaborations and other services are a means to an end, some of them can be quite large and quite complicated relationships, very financially beneficial. Whereas our investors think ‘this is just paying the bills’ and the real business is creating our own products. Requires constant management of the expectations of both our investors and our own people.”

Coming Up Next

In the next and final instalment of this series, we will look in more detail at the company as it matures into a focused product business. We will also consider whether it is necessary to transition to this stage at all or whether it can continue indefinitely as a hybrid model platform company.

The complete 3-part series can be downloaded here as a single pdf document

Author’s Note: The content in this series of articles synthesizes (i) my own experiences working with bioscience platform companies, and (ii) perspectives volunteered by the leaders of such companies. For example, the quotations which appear in this series of articles emerged from an informal workshop I chaired in the summer of 2014 with the leaders of four drug discovery platform companies. Since the meeting took place in a pre-competitive setting under the Chatham House Rule, neither the individuals, their companies nor the quotation attributions can be identified. Nevertheless, all assertions and opinions in this series of articles are mine alone and do not necessarily reflect the views of the four individuals nor their companies.