Investors need to ask tough questions when deciding whether to invest in pharma startups

According to a recent report, startups developed 65% of the total drug development pipeline. And 42% of products filed with the FDA. This creates huge opportunities for investors, but also presents huge risk potential. The research and development of a new drug can take years and, in some cases, decades. Ultimately, there is no guarantee that the product will get FDA approval and hit the market.

When considering investing in a start-up pharmaceutical company, investors have a lot to consider. Pharmaceutical science and the FDA approval process are complicated. Investors need to ask tough questions and assess the value proposition of the proposed drug. Does the medicine fill an unmet need in the market? What really differentiates the proposed pharmaceutical product from others on the market? What are the expected patient populations and payment methods? Will insurance companies cover and reimburse the costs?

Here are a few areas where investors need answers before putting money on the table. With this information, investors can triangulate the opportunity.

Who is the team and what are their experiences?

The development of a drug, from research to approval, is a complicated process, and a startup must have a team with varied profiles. Although the research team is large, the startup must have experts in finance and fundraising, FDA regulation, science, and manufacturing.

A product launch is a very complex undertaking and requires skills beyond research and development. Investors need to be confident that the team can not only develop the product, but also bring it to market at scale. A failure results in a total loss of the investment. Investors need to know who on the team has gone through the entire life cycle of a product before. How well does the team fit in? Do the skills overlap or does each team member bring a unique set of skills and experiences to the team? What is the record of the members of the management team individually and collectively?

How strong is the value proposition?

More often than not, drugs developed in startups were similar to the standard of care or only a slight improvement, representing a more difficult launch position than those with more dramatic clinical benefits.

One MVP (minimal viable product) is not at all enough to start a journey in drug discovery and development. Medical innovation, today, must stand head and shoulders above the competition and deliver a value proposition that is compelling (demanding attention), relevant (goal oriented) and meaningful (meaningful) (being useful/ value) to all decision makers regarding patient use.

What are the investments in people and dollars?

Launching a new drug takes years and requires a huge amount of capital before generating revenue. The average time to market is almost 12 years, and there will definitely be pitfalls along the way. CEOs need to make sure the startup is well funded and understand fundraising criteria.

The startup needs a clear plan on how long the product will be developed and when it will launch to best estimate the funding needed for each phase. Otherwise, the startup could be halfway through the approval phase and running out of capital. A startup must have a solid financial footing and have the funds to pay the people needed to bring the product to market. Talent costs money, but ultimately paying for talent gives investors the best opportunity to get a solid return on investment.

What is the probability of success?

When evaluating a investment in a pharmaceutical company, investors must calculate the expected return on investment. It starts with the type of drug. A recent study showed that oncology, rare disease and multi-indication drugs are the most profitable for investors.

Additionally, investors need to understand the startup’s plan to get the product out of the research and development phase and into testing. A recent report related to startups found that only 4.3% of new drugs developed by startups leave phase 1 development and have a successful clinical trial. This is a small number and should give investors pause. What makes a particular startup different? Has he carried out preliminary studies on the viability of the product? What is the marketing plan? Have other companies tried and failed to develop similar drugs? These questions must be answered.

What is the new product planning strategy for launch?

Only 4% of primary care launches and 6% of specialty launches achieve launch excellence.

It is a complicated and time-consuming process to take a drug from concept to generating revenue. An investor should pressure test the process the startup has developed to lead the team through the cycle. What resources does the team have? What are the constraints imposed on the team? What risks need to be mitigated?

Solid goals and timelines should be established to guide the team through the various stages of the process. Not everyone can work in silos. They should be a cohesive unit that works well together and have established processes and goals. It requires a strong team and a complex understanding of the drug discovery and approval process. How is the team able to balance multiple stakeholders when achieving goals? What are the deadlines for the different phases of the development process? Are the resources in place to help the team succeed?

Conclusion

Once all the questions have been asked, very few companies pass the test. Investors need to be picky. This increases the chances of success and can create a huge return on investment. There are an extraordinary number of doctors and researchers who have created pharmaceutical companies in recent years, but very few will succeed. Investors should take the time to review the startup and decide if the organization has a reasonable chance of success.

About the Author:

Hettie Stroebel is a former executive of Merck & Co., Inc. which owns boutique professional services firm Launch Excellence Partners. She has over 25 years of experience in the life sciences. She focuses on global strategic marketing and commercialization. She led seven product launches, all of which exceeded profitability targets.