Biotech, med tech, and smaller pharma companies have complex issues to consider when making decisions about capital investment, but they often lack the portfolio management capability to most effectively chart their path. In today’s market, it is vital to understand where to invest limited capital for the best return, and how the availability of capital will impact that return on a technology or service offering.
While smaller and newer technology-based companies’ pipelines may include as few as two or three products in development, they often operate with comparatively limited resources and narrow windows for delivery. The portfolio strategy options for the smaller companies are different from those available to a large pharmaceutical pipeline; a tech portfolio requires more granular thinking and decision making, with more emphasis on which asset to fund and in which way, rather than a broad development view. These foundational differences mean that burn rate relative to funding is a key metric of business progress.
Investment decisions are made more challenging by the way they impact the multiple routes through which these companies can return shareholder value: direct sales of products and services, licensing technology and products, sale of the company to a larger suitor. This complexity is compounded by the fact that the value returned via any of these routes changes over time depending on the development stage of products, the amount of funding available to continue R&D, and companies’ ability to communicate to investors and suitors why they should be interested in these companies as investment targets.
Investors and large pharma are also currently concerned with the lack of commercial thinking going on at their smaller counterparts. Addressing these concerns early and along the way can thus be a source of competitive advantage, and can help reduce the risk of complex investment decisions. Smaller companies and start-ups should use a clear and comprehensive tech portfolio strategy and story to clearly understand and communicate what they have and how best to invest capital to maximize the return on their assets.
This begins when companies:
- Understand what they have and where it will capture the greatest return. Over- or underestimating your target market and the achievable share over a given time-horizon damages your credibility with investors. It is less important to understand the current market and more important to understand what the market will look like when your product becomes available. Part of this understanding involves acknowledging that there will always be uncertainty in predicting the future. The key is in how you will plan to manage your investments given any unexpected scenarios that play out. Explore and evaluate the different options available for developing your product(s), as well as the options for where you expect to finally receive a return on your investments. Based on this evaluation, build and articulate the rationale behind the perceived value of your assets.
- Understand the road to getting there. Where companies often stumble is in truly understanding that there are many points during both their product and company life-cycle at which they can realize an ROI for their assets. One must evaluate all options in terms of both present and potential future capital. This is not as simple as knowing which path offers the greatest ROI, or holds the least risk. A great strategy goes several steps further to understand how the value of a given path will change over time, and at which point along any path the value of the company as a commodity changes. Further, it accounts for the uncertainty of future capital availability. You must know where the flex in your schedule/capital is, and know and balance the associated risk in the direction you will take.
- Make the right decisions to align to this strategy. Balance short-term and long-term decisions to maintain current value while building value for the future. It is important to understand how each development milestone changes the value of a company and its product(s). It is also necessary to have clarity on both the technical and economic aspects affecting one’s ability to corner the market. Failure to monitor and adapt to the external environment will keep management from recognizing and adapting to events that may have great impact on the company’s value. This can quickly lead to higher costs, longer timelines, and obsolete or non-compliant products.
- Articulate and communicate a clear and compelling story. Once understanding and strategy are aligned, there is still great risk in not being able to secure sufficient additional capital for further product development. It is imperative to articulate a clear story that communicates the value of the company and the rationale behind this value. This story is key, not only to solidify one’s footing with investors, but also to inform potential suitors depending on the road the company has chosen.
Thad Wolfram is Life Sciences Specialist at PA Consulting Group. He can be reached via www.paconsulting.com/us.