Biotech Business Model Framework

The Biotech industry is constantly evolving and as new technologies are being developed to supply the market demand, new markets are being created. The Life Science ecosystem typically develops within an international network involving universities, research institutions, incubators, new biotechnology firms, and global pharmaceutical companies.

This pace of development and the modality of compete-cooperate that many companies are facing due to the downside of the market leads us to this question: Which companies can create value for the stakeholders and which business model will make them achieve their milestones? There´s no simple answer to that question since most companies can follow many business models depending on their needs. I´ll share with you some current business model approaches and examples of how companies used them to position in the industry.

How can we define “Business Model”: It describes the rationale of how an organization creates, delivers, and captures value” (Osterwalder and Pigneur, 2009). Capturing value is a key element of business model design to achieve commercial viability (Gay, 2014). According to Teece (2010), a business model is organized around the hypothesis of what customers want, so the unit of analysis of a business model is its value proposal. Business models can be balanced to ensure short or medium times-to-market. This is important for small companies, as it is difficult for them to survive a long period without turnover and profit involved in longer-term models.

Business model canvas illustration of key components of the business model

Navigating the world of bio may be difficult to understand mainly because it changes literally every day, new technologies arise, regulations that need to stay up to date, many different stakeholders and customers (B2C; B2B2C; B2C2B; others), and many instances of end-users who aren’t actually customers. Nevertheless, we can simplify the business models into 3 big categories: Product-Based and Services-based or Portfolio approach.

Product-Based:

Product-based As a general value creation and capture scheme, the dominant logic of the drug industry is product-based (Sabatier et al., 2012). The product business model originates from the pharmaceutical model where value is added along the activities of the value chain to deliver a final product to market. The fully integrated pharmaceutical company (FIPCO) is a form of a vertical business model focused on developing a pharmaceutical product. The FIPCO might fall under the category of a "producer business model" (Phillips, 2016).

The ultimate goal for many biotech companies is to pursue a traditional FIPCO structure controlling the value chain for their product offering. The traditional model of fully integrated companies covers the whole value-creation cycle from discovery through development and commercialization. In addition to revenue generation, the R&D pipeline profile is also crucial to being able to scale. Biotech companies that have scaled successfully have managed to diversify their R&D pipeline and de-risk their business while sustaining innovation.

However, for dedicated new biotechnology firms, the high risk and high cost of developing and commercializing a new product on their own make the platform-based and hybrid business models attractive, through multiple alliances (interfirm partnerships) with large pharmaceutical companies.

💡 We can find several subcategories in this section but, the one we are seeing most is The Research Model: “Spin-off company from academia” Its main value proposition is being able to discover and develop drugs faster, most often in a niche of expertise and then Licence their IP or be bought by a big pharma usually after a phase II of a clinical trial - Usually a single compound one or many indications.

Here are some examples:

Service-Based:

Drug companies have long relied on conventional tools to try to predict whether a drug candidate will inhibit CYP450 in patients, such as by conducting chemical analyses in test tubes, looking at CYP450 interactions with better-understood drugs that have chemical similarities, and running tests on mice. But their predictions are wrong about a third of the time.

Inefficiencies such as this one contribute to a larger problem: the $1-trillion global pharmaceutical industry has been in drug development and productivity slide for at least two decades. Pharmaceutical companies are spending more and more—the 10 largest ones now pay nearly $80 billion a year—to come up with fewer and fewer successful drugs, Ten years ago every dollar invested in research and development saw a return of 10 cents; today it yields less than two cents. This is what we call the “Erooms Law”.

Up to date, the drug discovery or repurposing process has been made by companies that offer software or service to pharma players, what we can call, drug-discovery-as-a-service, what we can call platform model 1st generation. These firms use data and analytics to improve one or more specific use cases at various points in the value chain. Their business model includes target discovery and validation using knowledge graphs and small-molecule design using generative neural networks. Large pharma companies have been able to gain access to these capabilities through partnerships or software licensing deals and then apply them in their own pipelines.

Here are some examples:

On the other hand, many companies like Insilico Medicine and Exscientia made the extra mile, expanding their business model by building their own end-to-end drug discovery capabilities and internal pipelines, launching a new breed of biotech firm, what we can call platform model 2nd generation. In addition, many of these players are also exploring innovative business models like joint ventures to work as a portfolio to de-risk their investment in new compounds like Atomwise and Schrödinger who formed a joint venture. 

Here are some examples:

Portfolio approach:

This 3erd business model is a mix of the other 2 models which is built to de-risk investment. In the traditional biotech-investment model, investors bet on a company’s technology or understanding of a disease. That can be a risky bet, with roughly one in 20 preclinical-stage biotech assets making it to launch. In the portfolio model, investors put capital behind a central management team that offers a distinctive edge and harnesses its expertise to pursue many different bets, developing its own portfolio. Investors can leave their capital invested in a management team over the long term. Individual entities within a portfolio may reach an IPO or be sold off, but the portfolio-management team continues.

The portfolio model is also highly attractive to employees. Portfolio companies have successfully recruited top biomedical personnel who sometimes have little previous experience into their executive roles because the resources and expertise of the portfolio managers’ central teams can complement the new executives’ deep biomedical expertise. Portfolio managers have also attracted a growing number of skilled professionals from Wall Street, consulting firms, and even the biopharma industry. The roles available to people with those backgrounds are attractive in responsibility, learning opportunities, and compensation.

💡 For biotech companies, the portfolio model represents an alternative to an acquisition or IPO. Companies have traditionally funded maturing pipelines through a combination of public investment and industry partnerships.

Which model should your company pursue?

Companies need to design their value proposition and business model depending on the solution they develop and not push one model or another to fit their solution. We need to take into consideration that technology is just an enabler that helps us to solve the demand that comes from the market and sometimes creating new markets.

Companies need to be flexible to pivot their business model to fit the strategy and create value for the clients and stakeholders. Most companies have one or more models depending on their structure and products/services and they can work in synergy to increase the revenue.

💡 We are in The 5th revolution, The Bio Revolution, last year alone, more than USD 20 billion was invested in the Bioindustry. Today we are suffering a transitory bear market and we need to go into war strategy (decrease investment, reduce costs, etc), this could be a big opportunity for companies to change gear and find new partnerships and cooperation.

The future looks brighter for this industry and I´m eager to see the new solutions to come.