The Era of the One Man Pharma Band (With Updates)

There is a fascinating discussion taking place over at Derek Lowe’s blog today on one-man drug companies:

…some of them are not quite down to one person, but you can count the employees on your fingers. In all of these cases, everything is being contracted out.

Aside from the samples given in the post, and another here, we are seeing similar models being executed. While a one-man shop is rare, we definitely see a new breed of asset-centric/employee-light companies emerging. What do these companies look like?

To make a few sweeping generalizations,  we’re seeing companies that:

• Have 2-3 executives/employees, with everything else out-sourced (including legal & accounting).
  • One will be the CEO, and typically a former SVP from a pharma/biotech company who is now redundant
  • One will be the “science” person, usually one intimately familiar with the asset (more later)
  • One will be the clinical and/or regulatory person
  • At least 2 out of the three will have worked together before
• The assets will consist of 1-2 candidates, usually with one as the lead, while the other (invariably the higher value one) will be behind development-wise
• The assets are sourced from their former employer, and will target under served niches (no blockbusters here)
• The LLC is becoming a more common legal entity with these business models, for a number of tax and other reasons
• The initial set of investors will splice and dice the tranches based on very specific milestones and inflection points.
• The commitments are larger than seed investments, but smaller than Series A.

These are not “blank check” business models which were popular a few years ago. Back then, a solid management team would be given a pool of capital to shop for and in-license assets to then build the company around. These asset-lite models are, in a sense, the reverse. The focus of these new companies is the asset(s), not the management team.

In addition, neither the investors nor the management team have any intention of building a FIPCo. Rather, the objective is (typically) to develop the asset to a specific inflection point, then divest the asset and distribute the proceeds.

VCs seem to have mixed feelings about these models. Supporters like these models because it allows them to more finely tune their cash outlays and their diversification. Plus, more cash goes directly to product development instead of fancy offices and furniture. This requires a team of investors that can really provide strategic and operational support to the management team, preferably from personal experience.

The counterargument is that these models are too risky, in the sense that a product setback essentially means the end of the company unless there is a backup asset. Plus, a heavily-outsourced operation could lead to operational inefficiencies that are beyond the control of the management team.

We think it’s a fascinating model, especially if it leads to more underdeveloped assets being “freed” from big pharma due to a lack of big pharma commercial attractiveness.

UPDATE: David Leahy raises an excellent point regarding a major benefit/advantage of a management-lite business model:

It also eliminates much of the enormous cost and time overheads of running a project that accrue when you work in a big and complex organisation. For experienced drug discovery scientists, there is only the project and the scientific/commercial decision making needed to drive it to a conclusion. No lean sigma meetings, no organisational change, no performance reviews. Just the drug discovery project. A management-free zone. I would bet that eliminating management overhead is mostly why these projects should cost less — not the off-shoring. I would also bet that creating projects where the scientists can focus exclusively on discovery is why they are more likely to succeed.

Eliminating layers of management overhead should save time, and in turn, save money.

UPDATE #2: Bruce Booth has a post on his blog on the valuation history of AVEO. Note the last paragraph:

But the reality is that raising $150M+ privately makes it very hard to get to high multiple exits when the public capital markets aren’t there with some irrational exuberance.  This model of “raise as much as you can, when you can” worked well in the 1980s and 1990s because the public markets were accommodating.   But no longer, even for great companies like AVEO.

The key challenge is the equity capital intensity.  The answer is simple: capital efficiency.  We need to create winners with a lot less equity capital.

Trying to figure out the new models that address this issue is both the opportunity and challenge of early stage venture investing today.  We’re experimenting with lots of approaches (asset-centric models, virtual companies, project-financings, leaner platforms), but only time will tell.