Back to School 2004: Asset accumulation
Back to school
A few months ago, BioCentury spilled a lot of ink to deconstruct the NRDO model of no-research, development only companies being formed to scavenge for products or technologies that can be commercialized quickly and offer private equity investors a quick IPO or trade sale exit.
In addition to pointing out a variety of reasons why the “de-risked” approach was limited in terms of valuation leverage, we noted that any number of “starter models” could work equally well to get companies going but that, to sustain themselves, even the NRDO players ultimately would find it necessary to integrate backwards on the value chain (see “Deconstructing De-Risking,” BioCentury, June 7).
Now, in this 12th Back-to-School Commentary, we propose to continue that conversation, arguing that the bigger question is not how to start a company and get to an IPO, but how to go forward from its initial base.
Indeed, it’s in many ways easier to start a company than to grow one, and the history of the industry is littered with companies that managed to get a first product to market and then were unable to get to the next stage.
This also is illustrated by the lack of upward movement by companies since the end of the bubble year in 2000.
Indeed, earlier that year, BioCentury pointed to a “red shift” in biotech, as accelerating market caps drove whole constellations of companies into outer reaches of the valuation universe (see BioCentury, Feb.. 14, 2000). The picture is different now.
Indeed, since the end of 2000, some “blue shift” has occurred, with more companies falling back than accelerating in valuation. In that time, 21 “Tier Jumpers” have moved up into the mid- and top tiers of the industry, while 38 companies have fallen into a lower valuation group.
M&A, bankruptcies and other events took out 114 public names in this time (see “Contraction,”A2, “Tier Jumpers,” A3, & “Tier Droppers,” A3).
This group includes the bulk of companies that have provided VCs with an IPO exit since the end of 2000, as all but two have not yet reached tier jumper status (see “IPOs Not Enough,” A4).
To reiterate, the problem is not how to start companies, but how to build them to last.
As a framework for thinking about this challenge, this year’s Back-to-School discussion argues that regardless of the starting point - whether as a NRDO or a research-based model - all companies must become “asset accumulators.”
The goal of the asset accumulator is to create or acquire the following:
- assets that can be traded or monetized for other assets the company needs (e.g., technology, pipeline, sales force);
- assets that can be financed by the markets or through partnerships;
- assets that can take the place of assets that fail; and
- assets that can create more assets, such as technology.
These assets can - and most likely will - include people, technology, know-how, other IP, profitable products and liquid stock.
The successful asset accumulator will have a pipeline spanning multiple stages of development, cash that is not working capital, and stock that can be used for acquisitions.
One of the beauties of the concept of asset accumulation is that it can accommodate both R&D companies that need to graft on a commercial aspect, and successful de-riskers that need to add to pipeline or integrate backwards into R&D.
Indeed, whatever the starting point, every company that has reached the top tier is fully integrated. Thus, whether companies are integrating backwards or forwards, the key is that they are integrating - and they will need to accumulate assets to do that.
Most companies in the sector are struggling to get to product No. 1 and don’t want to be asked to think much beyond this first daunting hurdle. Unfortunately, this is not a question that can be delayed until after a company has its first product on the market. In fact, companies that do this will almost invariably find themselves in deep trouble once product No. 1 is on the market.
As noted by Jean-Paul Clozel, CEO of Actelion Ltd., there is a constant tension between the market - in this case meaning investors, whether VCs or public equity investors - and the long-term needs of companies. The former have a short-term interest in maximizing the profits from a single product, while the latter have a long-term interest in reinvesting some of those profits at the expense of short-term gains.
“The market doesn’t understand it, but it’s the most important thing for any company,” he said. “You get your first product, but the concept of the company can’t be based on this product.”
Richard Pops, CEO of Alkermes Inc. (ALKS, Cambridge, Mass.), noted that there is sometimes a disconnect between the CEO’s understanding of the need to have enough cash to fund multiple products versus the fact that the venture investors often can get an adequate return by providing only enough money to fund one product.
“For VCs and people who start these companies, it’s not immediately self-evident that you need to provide for the second and third assets because they’re well remunerated for getting that first asset,” he said.
This problem remains ubiquitous in Europe, where most companies are still chronically under-funded.
To explore asset building, BioCentury talked to eight companies. As presented here, we begin with companies that started their trek with almost literally nothing, and finish with a company widely considered to be the paragon of the asset accumulator.
In between are stories about companies that are trying to build on bases of know-how and technology, a company that looks to have everything at inception, a couple of companies that were forced to change course, and one player that has taken about a quarter of a century before leaving the launching pad.
The methods these companies and their senior managements use aren’t mysterious, and essentially boil down to using whatever assets are initially at hand to accumulate more assets, partially digest them - i.e., get them started on the road to increased value - and then accumulate more assets based on that increased value.
The lessons of these cases also are straightforward.
These histories make it obvious that the only asset that really matters at inception is people. The “concrete” assets these companies started with range from close to zero - no cash, no compounds, or no IP - to those that were blessed with a bit of everything. The only constant is people - not just the right top managers, but critical masses of people in chosen areas - in medicinal chemistry, clinical development or sales, for example - that can attract new assets.
Assets are like black holes: they inexorably attract other assets. That being the case, the lesson is that there’s no point in delaying the investment required to reach critical mass in defined core areas. The sooner that is accomplished, the sooner the company can attract additional assets.
Regardless of their assets at inception, the CEOs of companies that plan to go far can best be described as purposeful. Building companies is not just a random walk, although serendipity certainly plays a role.
More important is that these companies, either at inception or as part of a course correction, become big thinkers. Their CEOs share two related visions: they plan with an eye to reaching big valuations - not just $1 billion - and they think from the beginning about products Nos. 2, 3, 4 and beyond. Both goals require spending and infrastructure far different than a company that plans to create one product and sell itself - or a company that neglects to plan beyond its first drug (see “The Sweet Spot,” BioCentury, Sept. 3, 2002).
By extension, a company on the $1 billion track doesn’t need to accumulate large and varied pools of assets, and probably will go directly from the Starter Model to a trade sale.
Be commercially minded
The benefits of market access are not limited to big pharma and big biotech. Sooner or later, companies must address the role of sales in their asset structures. Indeed, in several of these cases, the decision to build a sales force proved to be the transformational decision in the ability of the company to accumulate new products and enabling technologies.
Embrace the “Invented Anywhere” syndrome
Companies should assume that they will