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Columbia University GSAS BIOT 4180

Entrepreneurship in Biotechnology

Columbia University

Graduate School of Arts and Sciences

BIOT 4180


Week 1

housekeeping

•  10:30 GSAS orientation

•  Classroom: 309 Havemeyer for 3 weeks, the 417

IAB

•  Office: 613 Fairchild

•  Office hours: Friday 12-‐2 or by appt.

•  Barnard students


•  Communicate with me through email:

[email protected]

•  Speakers

Why Study Entrepreneurship?

•  What is entrepreneurship?

–  Starting a business?

–  Creativity in a business setting?

•  Forum for broader range of talent and

expression

•  Freedom within work / career context


Healthcare Spending

  World GDP 87,000 B •  CIA 2013

  World healthcare economy 8,700 B •  extrapolated

  World biotechnology revenue 98.8 B •  Ernst & Young 2014

  US GDP 16,700B •  CIA 2011

  US healthcare economy 3,000 B •  CMS projection

  US biotechnology revenue 71.9 B •  Ernst & Young 2014

World Economy

Databank.worldbank.org


Comparative revenues

•  Walmart revenue* 477 B •  New York State government spending 127 B

•  New York State Division of the Budget

•  Pfizer revenue* 51 B •  Apple computer revenue* 175 B •  Biotech R&D 29 B

•  Ernst & Young 2014 •  US biotech industry 72 B •  Coca Cola revenue* 47 B •  NIH grants 30 B •  Starbucks revenue* 16 B •  Columbia University budget 3.7 B

•  Columbia office of Management and Budget •  *Capital IQ


Segments

•  TherapeuZcs ß

•  Devices

•  DiagnosZcs

•  Agricultural

•  Manufacturing

•  Industrial


Why study the biotech industry?

•  All entrepreneurship is hard

•  Biotech is harder –  High regulatory hurdle –  Technical difficulty

–  Long need for funding –  Major shi^s in needed competence

•  Discovery, Development (stages)

•  Development, Regulatory

•  Funding, CommercializaZon, Strategic development


…and not gedng easier


Assignment

•  Be prepared to present a 60 second elevator

pitch at the start of the next class


Concurrent Processes

•  Development cycle –  Define proof of concept –  Pipeline and lead progress

•  Funding cycle –  IdenZfying value inflecZons –  Seed through secondary public or partnerships

•  Funding environment may or may not reward value inflecZons


ScienZfic Development


Funding Cycle

•  Seed

•  Angel

•  Venture

•  Public

•  Secondary

•  Partnership or sale


Matching Funding to Value InflecZon


Biotech Companies and Cash


EvoluZon of a business

•  Idea

•  OrganizaZon and idenZty and pitch

•  Seed capital

•  Define what is proprietary and iniZate a strategy

to protect it

•  Establish proof of concept


Three Statements

•  3-‐5 word descripZon

•  Elevator pitch

•  Business Plan

•  AccounZng



Columbia University


BIOT 4180


Week 2

Elevator Pitches

More on Starting a Company

Basic science

•  Language / communication

•  Physiology / operations

•  Metabolism / funding and financing

•  Immunity / IP protection

housekeeping

•  Room update

•  First guest speaker

•  Review

•  Volunteer


EvoluZon of a business

•  Idea

•  OrganizaZon and idenZty and pitch

•  Seed capital

•  Define what is proprietary and iniZate a strategy

to protect it

•  Establish proof of concept


Three Statements

•  3-‐5 word descripZon

•  Elevator pitch

•  Business Plan

•  AccounZng


Elevator Pitches


One minute pitch

•  Hook: relevant question in need of a solution

•  3-‐5 word description

•  Target customer

•  Target customer’s specific problem

•  Your solution

•  Why you are different

•  Economic teaser

Adapted from MARSDD.com


The Early Business

•  Idea

•  Identity

•  Entity: the need to choose a business platform

–  Single proprietor

–  Partnership

–  Corporation


•  The basis for determining your business form

is to limit your personal liability, establish a

platform to bring in partners (ie raise money)

and to avoid double taxation


Sole Proprietorship

•  No division between the founder and the

business

•  Tax pass through

•  No limits to liability

•  Upfront legal costs


Partnership

•  No division between the partners on one side and the

business on the other


•  No limits to liability

•  Upfront legal costs


Professional Corporation (PC)

•  Attorneys, architects, engineers,

accountants, doctors

•  Members still have liability for their actions

but not for those of their partners

(somewhat simplified)

•  The corporation pays taxes


Limited Liability Company (LLC)

•  Hybrid between partnership and corporation

•  Not incorporated

•  Limited liability

•  Tax pass-‐through


Corporation (C Corp)


•  Double taxation

•  Oversight and administrative requirements


S Corporation



•  Maximum number of investors

•  Corporations cannot invest in S Corps



Columbia University


BIOT 4180


Week 3

Business Plan 1

40

housekeeping

•  classroom saga

•  guest schedule

•  attendance

•  homework and “pre homework"

41

review

•  overview: comfort w large numbers

•  biotech industry overview

•  4 entrepreneurial tracks

•  business types (single prop to corporation)

•  brief description, elevator pitch, business plan

•  strategy

42


Purpose of Business Plan

•  Convince yourself

•  Standard form of communication and

documentation about your business

•  Credibility

•  Initial roadmap and jump off point for revisions

•  Basis for investor presentations


A Business Plan is Not

•  A mission statement

•  A contract


SWOT analysis

•  Strengths

•  Weaknesses

•  Opportunities

•  Threats


Business plan concept

1.  Title

2.  Problem

3.  Solution

4.  Business model

5.  Underlying magic

6.  Marketing and sales

7.  Competition

8.  Management team

9.  Financial projections and key metrics

10.  Current status, accomplishments to date, timeline, use of funds

Kawasaki


Business plan method

•  Cover page

•  Table of contents

•  Executive summary

•  Industry analysis

•  Customer

•  Competition

•  Company

•  Product

•  Development or Marketing plan

•  Operations

•  Team

•  Risks

•  Offering

•  Financial plan

Timmons, Zacharakis, Spinelli

Business plan vs business model

•  Relate your business plan to known models

within the industry or sector


Biotech Models


Biotech Business Models

•  Discovery based

•  In-‐licensing

•  Virtual

•  Platform

•  Science project (“science project to viable company continuum”)

•  Fully integrated bio-‐pharma (“FIPCO”)

Strategy

51


Pricing


Demand curve

•  Downward sloping

•  Curve shifts in response to

changes in taste, availability

of competitive products

•  Marketing attempts to shift

the demand curve

Business Types Economic rent

•  Market demand curve

•  Differentiated product

•  Barriers to entry

•  High gross margins

•  Monopoly: limit supply

Commodity

•  Market price

•  Indistinguishable product

•  Ease of entry

•  Low gross margins

•  Consolidation



Columbia University


BIOT 4180


Week 4

Accounting

housekeeping

•  room saga ends

•  homework and reading

•  office hours Fairchild 613 12-‐2 Fridays

57

review

•  week 1: intro entrepreneurship and biotech

•  week 2: 4 tracks of company formation,

communication, business types

•  week 3: business plans, business models,

intro to strategy and pricing

58

week 4

•  more on pricing

•  introduction to accounting

59


Pricing


Demand curve

•  Downward sloping

•  Curve shifts in response to

changes in taste, availability

of competitive products

•  Marketing attempts to shift

the demand curve

Business Types Economic rent

•  Market demand curve

•  Differentiated product

•  Barriers to entry

•  High gross margins

•  Monopoly: limit supply

Commodity

•  Market price

•  Indistinguishable product

•  Ease of entry

•  Low gross margins

•  Consolidation

Gross margin Revenue – cost of goods sold

(Can be reported as %)

Direct costs only (aka variable costs)

Does not include overhead (aka fixed costs)

Ability to control pricing implies higher gross margins

Differentiated, innovative products

Growth through reinvestment into the business

Market pricing implies lower gross margins

Growth through cost cutting or consolidation

Oligopolistic competition Differentiated products competing with each other

Higher gross margins than market pricing

Companies compete on everything but price

Auto

Consumer products

US healthcare pricing Primary purchaser of healthcare in the US is Medicare

Medicare cannot negotiate prices

Instead, it uses an arcane formula based on the lowest price negotiated

with outside of Medicare

accounting

•  4th tool of business communication

•  name and brief description

•  elevator pitch

•  business plan

•  financial statements

66

science and art of accounting

•  science: basic and applied

•  basic science: matching revenues with the

expenses used to generate them;

(Finance: matching assets with the

financing used to acquire them)

•  applied science: GAAP

67


•  discretion over revenue and expense

recognition

•  discretion over depreciation, amortization

•  ability to control reported earnings

68


Early Accounting

•  Concept of double entry –  Cash in or out or receivable or payable –  Asset gained or sold

•  Match the income or revenue for a period of time with the use of materials to create that revenue

–  Depreciation –  Amortization

•  Three financial statements


Financial Statements

•  Balance sheet: point in time summary of what is owned, what is owed and what is left over for the owners

•  Income statement: revenue generated over a period of time matched against the expenses needed to generate the revenue

•  Cash flow statement: reconciliation between revenue / expenses and change in cash balances



Columbia University


BIOT 4180


Week 5

More on Accounting and Finance

review

•  Overview

•  Forming a company

•  Business types, communication, strategy

•  Pricing

•  Introduction to accounting

accounting

•  4th tool of business communication

•  name and brief description

•  elevator pitch

•  business plan

•  financial statements

74


•  science: basic and applied

•  basic science: matching revenues with the

expenses used to generate them;

(Finance: matching assets with the

financing used to acquire them)

•  applied science: GAAP

75


•  discretion over revenue and expense

recognition

•  discretion over depreciation, amortization

•  ability to control reported earnings

76


Early Accounting

•  Concept of double entry –  Cash in or out or receivable or payable –  Asset gained or sold

•  Match the income or revenue for a period of time with the use of materials to create that revenue

–  Depreciation –  Amortization

•  Three financial statements



•  Balance sheet: point in time summary of what is owned, what is owed and what is left over for the owners

•  Income statement: revenue generated over a period of time matched against the expenses needed to generate the revenue

•  Cash flow statement: reconciliation between revenue / expenses and change in cash balances


Day 1 accounting

•  Basic equation: Assets = Liabilities + Owner’s Equity

•  The ledger: a written record of every transaction

–  Debit: asset increase or liability/equity decrease –  Credit: asset decrease or liability/equity increase

•  Double entry: an enforced balance between inflows and outflows for the company

•  First entry: owner(s) writes a check and the company issues equity


Principles

•  Accounting –  Double entry bookkeeping: every debit increase must be matched by an

offsetting debit decrease or credit increase and visa versa •  Debit: increase in asset or decrease in liability •  Credit: decrease asset or increase liability or equity

–  Financial statements constructed from ledger

–  Asset values can change over time: Depreciation and amortization

–  Expenses and expensing: match revenue generation to expenses used to generate the revenue

–  Tax considerations



•  From the ledger, 3 statements follow

–  Balance sheet

–  Income statement

–  Statement of cash flows

•  Balance sheet exists from inception

•  Income and cash flow are different


Balance sheet

•  “Snapshot in time” of the financial condition of the company

•  What the company owns, what it owes and who lays claim to what’s left

•  Assets on one side, liabilities and owners’ equity on the other

•  Income statement is between two balance sheets

•  Acquiring and disposing of assets, plus depreciation of assets, amortization of goodwill


Balance Sheet

•  General form –  More liquid assets at the top

–  Current assets and current liabilities (used within 1 yr)

•  What does a company own? –  Cash –  Receivables –  Inventories: raw materials and finished goods

–  PP&E: property, plant and equipment

–  Intangibles: patents, trademarks, brand names (not on balance sheet except as good will)


Balance sheet


Assets

•  Buildings and equipment are depreciable

•  Land is not

•  Depreciation can be accelerated

•  Inventories: can be counted in different ways –  FIFO

–  LIFO

•  General principal is that companies with profits want to maximize recognition of expenses early to decrease taxes

•  Opposite can be true (max profits to make stock go up)

•  Need for consistency



Columbia University


BIOT 4180


Week 6


rev: Balance Sheet

•  General form –  More liquid assets at the top

–  Current assets and current liabilities (used within 1 yr)

•  What does a company own? –  Cash –  Receivables –  Inventories: raw materials and finished goods

–  PP&E: property, plant and equipment

–  Intangibles: patents, trademarks, brand names (not on balance sheet except as good will)


rev Balance sheet


Capital Structure

•  The combination of debt and equity on which the company is built –  Debt: borrowed funds with a fixed interest rate and date of

repayment. Debt holders have first liquidation preference

–  Equity: ownership of assets after debt holders have been repaid

–  Hybrids: preferred stock, convertible debt


Simple Cap Structure


Complex cap structure


Other statements bridge two balance sheets

•  Bridges two balance sheets

•  Balance sheet assumptions affect the

income statement

–  Eg inventory valuation -‐> cost of goods sold


Income statement

Gross margin

•  =Revenue – cost of goods sold (cost of revenue)

•  =Revenue – variable costs

•  As absolute or as a %


Income Statement with product sales


Cash Flow Statement reconciles changes in cash bet balance sheets

•  Operating income for income statement

–  Add back non cash items (dep, amort, prepays,

deferrals)

–  Add / subtract financing and investing in/outflow


Cash Flow Statement



Columbia University


BIOT 4180


Week 7


Capital Structure of a Company

•  Debt –  Borrowed funds

–  Fixed repayment

–  No share in upside or success of company

–  Preference in liquidation of assets

•  Equity –  Ownership stake

–  Different levels: preferred versus common

–  Variably liquid

•  Hybrids: Convertible debt, convertible preferred

•  The ability to borrow money depends in

large part on the accuracy with which you

can predict future cash flows

•  (Or the existence of assets that can be used

as collateral)


Principle of Finance

•  Time value of money: a given sum in the future is worth

less than the same sum today

•  Risk and uncertainty decrease the value of a sum in the

future

•  There is a methodology for calculating the present value of

a future sum

•  Concept of discounted cash flow


Discounted Cash Flow


The Funding Cycle


Financial Projections (from business plan)

•  Addressable market

–  Market size

–  Revenue projections

•  Product life cycle

•  Market exclusivity

•  Terminal value

•  Discounted cash flow calculations


Time horizons for positive cash flow generation

•  Service business

•  Franchises

•  Software

•  Light manufacturing

•  Heavy manufacturing

•  Exploration

•  R&D, regulation


Funding cycle

•  Seed capital

•  Crowdfunding?

•  Angel investors

•  Venture capital –  Early stage –  Late stage

•  Public offerings

•  Non dilutive funds

–  Grants –  Business development: cash from partnerships

•  Product revenues and profit


Funding Uncertainty

agenda

•  Homework

•  Review discounted cash flow

•  Financial statement diagnostics

•  Basic equity sales


Discounted Cash Flow

agenda

•  Homework



•  Basic equity sales

questions

•  Can the company pay its bills?

•  How profitable is the product(s)?

•  How much of the company would I own if I buy

stock?

•  What is the cash burn?

•  Can the company raise money?

questions



•  How much of the company would I own if I buy stock?



•  Balance sheet: working capital

•  Income statement: gross margin

•  Balance sheet: capital structure

•  Cash burn: cash flow statement

•  Assets or Cash flows (debt), cap structure (equity)


Balance sheet

questions












Pricing


Income Statement with product sales

questions












Simple Cap Structure


Complex cap structure

questions












Cash Flow Statement

questions











agenda

•  Homework



•  Debt, equity and convertible debt

•  Basics of equity sales

agenda

•  Homework



•  Basics of equity sales

•  Accounting for and use of profits



Columbia University


BIOT 4180


Week 8

cancelled


Demand curve

•  Downward sloping, elasticity

•  Curve shifts in response to changes in taste, availability of competitive products

•  Be careful about narrow definition of competition!

•  Marketing attempts to shift the demand curve; news can shift demand curve


Supply curve

•  Upward sloping

•  Decrease in cost of inputs

can shift supply curve

•  Business strategy: increase

efficieny/ decrease cost


Pricing: commodity (generics)


Market Models

•  In perfect competition, neither suppliers nor consumers see the market curves

•  Monopolists see the market demand and have an incentive to decrease supply to maximize total revenue

•  Arbitrage and Canadian drug reimportation

•  Oligopolists try to create mini-‐industry demand curves by nonprice differentiation (cardiac stents)


Subsidy (s1 to s2) and Licensure (s2 to s1)

•  Changes the supply at all wage points

•  Results in lower (licensure) or higher (subsidy) availability at higher price

•  Question of consumer protection or guild protection?

•  Trade barriers, tariffs, taxi medallions, interior decorators


Minimum Wage

•  Greater supply of workers willing to work but

•  Less demand for labor at that price

•  Helps those who have jobs at that wage but

•  ?Harms those who would have worked for less

•  Efficiency trade-‐offs with policy


Pricing

•  In a competitive market, suppliers enter freely and bid down the price ~equal to the aggregate prices of inputs

•  In competitive market, each firm sees only the market price

•  In noncompetitive markets, firm sees the market demand curve

•  Limiting supply gives the supplier ability to set the price and maximize gross margin

•  Mandated inefficiencies, independent of political / equity issues, result in redirected allocation of resources



Columbia University


BIOT 4180


Week 10

Clinical Development

Regulatory

Biopharmaceutical Companies’ Investment in R&D Increasing Steadily

$47.60 $51.80

$56.10

$63.20 $63.70 $65.90 $67.40

$15.2 $16.9 $19.0 $21.0 $22.7 $26.0

$29.8 $31.0 $34.5

$37.0 $39.9

$43.4 $47.9 $47.4 $46.4

$49.4

$0

$18

$35

$53

$70

$88

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Expe

nditu

res

(Bill

ions

of D

olla

rs)

Entire Pharma Sector PhRMA Member Companies' R&D Expenditures

Total Biopharmaceutical Company R&D and PhRMA Member R&D: 1995–20101

Sources: 1Burrill & Company, analysis for PhRMA, 2005–2011 (Includes PhRMA research associates and nonmembers); PhRMA, PhRMA Annual Member Survey, 1996-2011; 2CBO, Research and Development in the Pharmaceutical Industry, 2006.

The pharmaceutical industry is one of the most research-intensive industries in the United States. Pharmaceutical firms invest as much as five times more in research and development, relative to their sales, than the average U.S. manufacturing firm.2

— Congressional Budget Office

“ “

Preclinical Discovery


Development Process


Process

•  Phase 1: safety –  IND: Investigational New Drug

–  Apply to FDA for human dosing

–  FDA has 30 days to object

•  IRB approval

•  Small number of subjects, one dose

–  Records adverse events, monitor physiologic process

–  Efficacy signals in oncology, infectious disease


Phase 2 trial

•  IIA: dosing

•  IIB: efficacy

–  Target dose for pivotal –  Target indication, study design

•  Can do one at a time or many phase 2 trials

–  Small biotech companies do a minimum

–  Large pharma do wide range of studies

•  Rarely file NDA/BLA based on phase 2 data


Phase 3

•  Typically 2 trials per indication, multicenter

•  N=hundreds to thousands

•  Why do trials fail? –  Poor design

•  Difficult identification of treatment group or endpoint

•  Poor statistics: gaussian distribution, power

•  Placebo groups perform better than historical

•  Poor oversight

–  The drug does not work



Columbia University


BIOT 4180


Week 11

Partnering, Mergers and Acquisitions and

Exits


Phase 3 considerations

•  Physiologic or made-‐up endpoint –  ADAS-‐COG and other cognition tests

–  Pain scores –  How reproducible is the entity being measured?

•  Surrogate endpoints: accelerated approval process

•  Dealing with drop-‐outs

–  Intent to treat vs per protocol

•  Ease of enrollment


Post phase 3

•  Successful trial –  Second trial (unless oncology, unmet need)

–  If works: NDA, then PDUFA date (6-‐9 months)

–  If approved, marketing and phase 4 studies

•  Unsuccessful trial –  Data review/ data mining

–  Await concurrent study completion

–  Tough to kill a molecule

Outcomes by phase

The FDA

•  F. 1906

•  9,300 FTE’s

•  2012 budget 4.36B; regulates 1 trillion dollars of

consumer goods

•  Facilitator of innovation vs protector of the

public


Increase in orphan designations


Orphan Designation


Definitions

•  Accelerated approval: surrogate endpoint

•  Fast track designation: FDA facilitated communication

•  Priority review: 6 vs 10 months

•  SPA Special Protocol Assessment

•  PDUFA

•  Breakthrough designation: early guidance and senior FDA reviewers

•  “Special limited use”: under exploration by FDA. Serious drug resistant infection outbreak vis a vis unapproved antibiotic



Columbia University


BIOT 4180


Week 12

Business Development and Exits, Job

Offers, Stock Options, Patents, Marketing


Good and Bad Deals

•  Roche acquiring

Genentech

–  Herceptin, Avastin, Lucentis

•  Pfizer acquires Warner

Lambert

–  Lipitor

•  Pfizer acquires Esperion

–  Nothing for 1.3B


•  2003: Medivation

inlicenses Dimebon

•  Sep 2006: Dimebon meets

5/5 endpoints at 6 months


•  June 2007: Dimebon

benefits last 12 months


Small Company Perspective

•  Late clinical and regulatory experience

•  Risk mitigation

•  Orphan drug sales force: 15+

•  Blockbuster drug sales force: 3000+

•  Cost of sales person: $300,000-‐ 400,000

•  Minimal overlap in skill sets between development, regulatory and sales


Large Company Perspective

•  Cash flow

•  Product(s)

•  Pipeline

•  Platform

•  Leverage existing assets (sales force eg)


Deal variables

•  Upfront payment

•  Milestone payments

•  Royalties

•  Costs and profits

•  Manufacturing

•  Geography

•  Co-‐promotion

•  Options

•  Contingent variable rights / other indications


•  July 2008: Dimebon data

published in Lancet

•  Sep 2008: Pfizer deal

announced


Dimebon licensing deal

•  225M upfront payment

•  500M on approval

•  60:40 costs and profit split

Stock vs Cash

•  Stock as currency: implicit admission that

the stock is over-‐valued

•  Cash: straight-‐forward DCF calculation w/o

need to include a “stock price currency

exchange”


•  Mar 2010 Dimebon

fails pivotal trial

Negotiation

•  Dealing from strength

•  Multiple buyer dynamic

•  Never have no options

•  Walking away

•  Most programs / companies are bought, not sold


Job Offers

•  Assess the economic rent factor

•  Job description

•  Chain of command

•  Compensation package as a financing vehicle

–  Duration of financing matching the duration of the asset

–  You are the asset

–  Cash only vs options


Compensation

•  Finance principle: match asset life to financing term

•  Salary principles –  Per unit, per hour / day, per year –  Economic rent

•  Cash versus equity

•  Options

•  Bonuses –  ?company goals

–  ?individual goals


Assessing Options

•  Right but not the obligation to purchase a share of stock at a give price for a duration of time after a vesting period

•  Exercise or expire

•  Value

–  In the money or out of the money

–  Likely dilution if they raise cash serially –  Not a Black Scholes calculation


Boards of Directors

•  Organizational oversight as defined by bylaws

•  Elected by shareholders in public companies

–  Policies and objectives –  Executive oversight –  Resource oversight (adequate cash) –  Approval of budgets –  Reporting performance

–  Compensation


Patents


Patent Timeline


How Not to Screw It Up


Costs

Patent Types: Biotech

•  Composition of matter

•  Use patents

•  Patent extensions

185


Marketing

•  5 p’s of marketing

–  Product

–  Price

–  Placement

–  Promotion

–  People

Product

•  Defined in elevator pitch

•  Commodity ß-‐-‐à Economic rent

•  Market

–  Competitive

–  Oligopoly with nonprice competition

–  Monopoly

Price

•  As discussed, a function of the firm demand

curve, which in turn is derived either by the

market demand curve or by the intersection

of market demand and market supply

Placement

•  Constantly evolving

•  Reflects the consumer: where he/she has access

•  Physical: general store to Sears catalog to mall to

Amazon

•  Dynamics: move from Nieman Marcus to Target

Promotion

•  Awareness

•  Advertising

•  Media choices

•  Research

•  Targeting

People

•  Intensity of marketing effort

•  Expertise

•  Fragmented market

•  Language, knowledge, specialization

Take a bow!

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