The Entrepreneur's Guide to a Biotech Startup, 4th Edition

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Peter Kolchinsky, PhD

The Entrepreneur's Guide to a Biotech Startup

Contents

ABOUT THE AUTHOR ................................. 1 ACKNOWLEDGEMENTS.............................. 2 AUTHOR'S NOTE .......................................... 3 THE BIG PICTURE........................................ 5 EVALUATING THE IDEA............................11 THE BUSINESS PLAN..................................15 PEOPLE ..........................................................19 PATENTS....................................................... 22 ATTORNEYS................................................. 29 LEGAL ISSUES...............................................31 ACCOUNTING & FINANCE ...................... 36 REAL ESTATE .............................................. 42 RISK MANAGEMENT & INSURANCE ..... 46

MEDIA & PUBLIC RELATIONS ................ 50 PHARMACEUTICAL BUSINESS DEVELOPMENT ...................... 52 DEVICE, DIAGNOSTIC, & INSTRUMENT MODELS ............................ 57 DRUG PRICING PRINCIPLES ................... 58 CLINICAL DRUG DEVELOPMENT.......... 62 MEDICAL DEVICE APPROVAL ................. 70 EQUITY ......................................................... 76 RAISING MONEY ........................................ 82 GOVERNMENT GRANTS........................... 89 IPO: GOING PUBLIC ................................... 93 NETWORKING............................................. 95

In praise of The Entrepreneur's Guide to a Biotech Startup:

"I have not seen in one reference all of the topics which the Guide covers; it should be an invaluable aid to biomedical entrepreneurs." -Michael Lytton, General Partner, Oxford Bioscience Partners

"The Entrepreneur's Guide is also relevant for non-entrepreneurs with industry experience who want to know how a biotech company gets to where it is and where it can possibly go. Well done. " -David Bancroft, PhD, VP Automation & Head of Intellectual Property, GPC Biotech AG

COVER: Original artwork and cover design by Paul Krasnoo, based on his study titled "Ezekial" of Michelangelo's Sistine Chapel. To see more work by the artist, visit .

Copyright ? 2001, 2002, 2004 by Peter Kolchinsky, pkolchinsky3@ This document may not be reproduced in any form without the permission of the author.

Peter Kolchinsky, PhD

The Entrepreneur's Guide to a Biotech Startup

ABOUT THE AUTHOR

Dr. Peter Kolchinsky performs due diligence on investment opportunities at RA Capital Associates, a biotech-focused public equity fund. He works closely with Richard Aldrich, a founding employee and former CBO of Vertex Pharmaceuticals.

Harvard Biotech Club, both of which exceeded 2000 members in their first two years and continue to prosper. He has spoken at colleges and graduate schools on biotech entrepreneurship and career development and enjoys helping scientists consider the leap into business.

Peter is the author of The Entrepreneur's Guide to a Biotech Startup, a business aid published on . Evelexa is an online resource for biotech entrepreneurs and investors, which he launched in 2001 and grew to a membership of 5000 within two years. He also cofounded BiotechTuesday, a popular monthly networking series for the Boston biotechnology community, and the

Peter received a Ph.D. in Virology in 2001 from Harvard. His thesis research in Dr. Joseph Sodroski's laboratory at the Dana-Farber Cancer Institute focused on HIV entry mechanisms. He graduated cum laude from Cornell University with a degree in Microbiology. He is also an alumnus of Phillips Academy Andover.

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Peter Kolchinsky, PhD

The Entrepreneur's Guide to a Biotech Startup

ACKNOWLEDGEMENTS

This guide would not have been possible without the generosity of the people whose professional experiences are reflected in this text.

Steven Aaronoff, Attorney, McDermitt, Will, and Emory Beth E. Arnold, Attorney, Foley, Hoag & Eliott LLP Michael K. Barron, Attorney, Nixon Peabody LLP Frank Bilstein, Managing Director, Simon-Kucher Janice T. Bourque, President, Mass Biotech Council Anthony R. Briggs, PhD Candidate, MIT Sloan Joyce Brinton, Director of Tech Licensing, Harvard David E. Brook, Attorney, Hamilton, Brook Mark Chalek, Director of Corporate Research, BIDMC Paul T. Clark, Attorney, Clark and Elbing LLP Ron Cohen MD, President and CEO, Acorda Therapeutics Dave G. Conlin, Attorney, Edwards and Angell LLP Dana B. Edelman, Collaborative Seed & Growth Partners Barry Eisenstein MD, Executive Vice President, Cubist Ron I. Eisenstein, Attorney, Nixon Peabody LLP Martin E. Fishkin, Attorney, Prince, Lobel, Glovsky Gregory J. Glover MD, Attorney, Ropes and Gray Marc E. Goldberg, BioVentures Investors Robert Gottlieb, Managing Director, Feinstein Kean Peter Hecht PhD, CEO, Microbia Mark A. Hofer, Attorney, Brown, Rudnick, Freed, & Gesmer Julie Huang, Vice President, Financial Dynamics Jonathan H. Hulbert, Attorney, Foley, Hoag & Eliott LLP Skip Irving, Managing Director, Health Advances Paul Kidwell, Communications/PR Consultant Michael King, Managing Director, Banc of America Securities William A. Knowlton, Attorney, Ropes and Gray Roberto G. Kolter, Professor, Harvard Medical School Liisa T. Kuhn PhD, Instructor, The Children's Hospital Jeffrey Labovitz PhD, Director of Tech Transfer, UCLA Evan M. Lebson, VP-Treasurer, Genzyme Corporation Gregory P. Lucas, Senior Managing Director, Insignia ESG Michael E. Lytton, General Partner, Oxford Bioscience Gary P. Magnant, President, Thermoceramix Jack Malley, Partner, FirstJensenGroup Louis Myers PhD, Attorney, Fish and Richardson Lita L. Nelsen, Director of Technology Licensing, MIT Michael R. Pavia PhD, Partner, Oxford Biosciences

E. Robin Plumer PhD, Attorney, Wolf, Greenfield & Sacks Randy J. Pritzker, Attorney, Wolf, Greenfield & Sacks William S. Reardon, Partner, PricewaterhouseCoopers Robert H. Rubin MD, Professor, Harvard Medical School Bruce Rubinger PhD, Managing Director, Global Prior Art S. Una Ryan MD, CEO, Avant Immunotherapeutics Alfred Server PhD, Attorney, Hale and Dorr LLP David Sherris PhD, Sherris Pharma Partners Steven D. Singer, Attorney, Hale and Dorr LLP Albert L. Sokol, Attorney, Edwards and Angell LLP Ashley J. Stevens PhD, Director of Technology Transfer, BU Matthew P. Vincent PhD, Attorney, Ropes and Gray Christopher T. Walsh PhD, Professor, Harvard Med. School Jeffrey M. Wiesen, Attorney, Mintz, Levin Steven A. Wilcox, Attorney, Ropes and Gray Walter Winshall PhD, Collaborative Seed & Growth Partners Larry S. Wittenberg, Testa, Hurwitz & Thibeault LLP

I am very grateful to the guest authors for generously contributing their expertise to the Guide:

Peter B. Finn ESQ, Senior Partner, Rubin and Rudman Nathaniel S. Howe Jr., Vice President, Marsh USA Inc Kenneth B. Klein M.D., Endpoint, Michael D. Miller MD Betsy M. Ohlsson-Wilhelm Ph.D. and Katharine A. Muirhead Ph.D., SciGro, Jack Malley, Partner, FirstJensenGroup, Christopher Pimental, Vice President, Lexten Inc. Alfred Vaz, Vice President, Vertex

I also thank Cayce Denton, Jennifer D'Onofrio, and Daniel Zahler for providing valuable editorial support.

A special thank you goes to Richard H. Aldrich, my mentor, who, in the time that I have worked for him at RA Capital, has taught me much of what I know about investing and business. I appreciate the time he devoted to discussing and editing the text.

My family and friends, especially Laurie, could not have been more supportive. Thank you.

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Peter Kolchinsky, PhD

The Entrepreneur's Guide to a Biotech Startup

AUTHOR'S NOTE

ORIGIN OF THE GUIDE

In January 2000, a post-doctoral fellow in my research laboratory approached me to discuss a technology he had developed. He wanted to start a biotech company. I offered to draft an executive summary and help secure financing. Two weeks later, we had an attorney and a three-month option to exclusively license the key patents from our research institution. We met with venture capitalists, who told us that without an experienced management team the company was not ready for funding. A local biotech company offered to incubate our venture but demanded a majority stake. At the time, this seemed unreasonable, and we stalled as we considered our lack of other options. With obstacles looming ahead, our three-month option expired and the university technology licensing office made it clear that it would no longer consider giving an exclusive license to a startup company.

After that failure, I began to systematically study the entrepreneurial process. I supplemented what I learned from business books by interviewing attorneys, investors, entrepreneurs, and other professionals (see Acknowledgements). Subsequently, I wrote The Entrepreneur's Guide to a Biotech Startup (the "Guide") and published it on early in 2001.

Shortly thereafter, I was hired as an investment analyst by Richard Aldrich, a seasoned biotech executive who had just left his post as Chief Business Officer of Vertex Pharmaceuticals to start RA Capital Associates. My job was to evaluate a mostly public and some private companies as potential investments for our fund. The last few years have reinforced our belief that the expensive and protracted development cycles of the typical biotech model would not lead to sustainable businesses in the future. Our investments tended to be in biotech companies that operated efficiently and could achieve profitability in the near-term.

Based on my experience at RA Capital, I have revised the Guide several times. Each new edition featured new chapters, many of which were guest authored by experts. This 4th Edition, in particular, is considerably more pragmatic than earlier versions in addressing the challenges facing emerging companies.

THE PURPOSE OF THE GUIDE

The Guide was designed to present a framework for evaluating a business concept and describes the many steps involved in starting a biotechnology company. The

first three chapters of the Guide ask the reader to consider and explain how a new concept will succeed where old concepts have failed. Subsequent chapters are more of a how-to manual on assembling the various pieces that make up a company (e.g. patents, people, and real estate, and funding). The Guide may help to manage the reader's expectations of the risk, reward, and effort involved in starting a company.

The term biotechnology here refers to companies whose products require laboratory or clinical development, including medical devices, diagnostics, and pharmaceuticals. In many ways, all startup companies are alike. However, the biotechnology industry, with its long product development cycles and heavy reliance on science and intellectual property, warrants its own text.

The Guide prompts the reader to ask the right questions. The more one knows about the venture-creation process, the more likely one is to ask the most fundamental question, "Does the idea actually justify starting a new company?" and other questions, for example:

? How much will it cost to develop and commercialize a product?

? How large is the market? ? Will customers buy the products and how much will

they pay? ? What's the competition? ? Will patent protection be required and feasible? ? Will it be possible to attract the right professionals to

the company? ? Will investors want to invest? ? What else could I be doing with my time?

BUSINESS BEFORE SCIENCE The common denominator among entrepreneurs is creative initiative; they pursue opportunities that are not obvious to others. While entrepreneurs must possess the ability to tolerate tremendous uncertainty in their decision-making, good science demands precision, creating an internal conflict for business-oriented scientists.

Scientists have a reputation for sometimes failing to appreciate the difference between a science, a technology, a product, and a company. The goal of a company is to develop and sell products that will generate enough profit to justify the effort and capital that goes into building the company. Science and technology are just a means to that end. Therefore, to be true entrepreneurs, scientists must learn to put business ahead of science when developing a

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