Introduction to Series on the Lifecycle of a Pre-Sales Revenue Biotechnology Venture Destined for IPO Success

Insights Introduction to Series on the Lifecycle of a Pre-Sales Revenue Biotechnology Venture Destined for IPO Success Mark H. Mirkin · February 11, 2014

How common it is to hear groans and complaints in the startup sector of the U.S. life sciences industry about the extreme difficulty facing entrepreneurs who are trying to finance the launch, development and growth of a drug discovery venture. We hear that angel investors – both individuals and funds — lack interest in investing because of the complexity of the science and because of the tremendous expenses involved in testing molecules and compounds to bring a new drug to the marketplace and the time it takes to obtain marketing approval from the FDA, all of which impact the projected return on early stage investment. Venture capital companies also have grown more particular and discerning over the last decade. The tales of failed big-dollar drug discovery ventures are legendary. Despite the gloom and doom, with pharmaceutical companies’ huge profit reports attracting widespread press and publication as perhaps one incentive, there continues to be no shortage of innovation in new drug research, and certainly not here in the Southeast. The two geographic clusters in which I have been practicing corporate and securities law for three decades are fertile with drug discovery startup ventures, namely the venerable Research Triangle in North Carolina and the burgeoning Palm Beaches and Treasure Coast in Florida. New biotech companies are slowly but surely getting funded, and I account for this positive turn of events based partly on the signal generated by the significant number of seasoned biotech companies that have recently attracted underwriters to take them public despite not having any revenues from sales of products, raising tens of millions of dollars in the process.

Scientists and businesspersons who are entrepreneurial and either poised to create or join biotech ventures or who have already entered the field frequently ask me as their legal counsel to bring to their attention corporate and securities law issues likely to face them on their pathway. Those repetitive requests prompted me to embark on what will be a series of succinct articles describing – wholly apart from the world of science – the lifecycle of pre-sales revenue biotech ventures destined for IPO success.

Because so many biotech ventures begin life by obtaining rights to biotechnology from a university or from a scientific institution in a process known as technology transfer, the first article will explore the licensing process.

The bemoaned drug approval process regulated by the FDA will be covered in the second article, explaining in detail the multi-phased trials that must be passed before obtaining government approval to market a drug in the U.S. The related issue of the expenses attendant to such studies will be covered as well, and I will explain how and when government funding plays into the picture.

Article three will explore the ins and outs of intellectual property protection – patents and trade secrets – from my perspective of not being an I.P. attorney but having worked with many as co-counsel over the years. The first article will have introduced the subject of patenting in the context of tech transfer.

The fourth Article will examine the capital structure that best suits a new venture, acknowledging that many companies begin life structured one way and then convert to a different structure later in the game as required to suit financing imperatives. I will discuss venture capital financing, which is nearly always the path followed by biotech ventures following proof of concept, and in my experience the optimal path. I will explain details of variations of preferred stock, the securities of choice in nearly all venture capital financings. Convertible debt financing will be covered as well, which is often the first and last method of financing before a company publicly offers its securities.

Article five will address corporate law matters such as corporate governance. I will discuss details of corporate charters and corporate statutes, especially maintenance of control provisions.

Executive compensation is always the subject of intense inquiry, and therefore I will devote Article six to that topic, which will explain a range of personnel contracts, both for employees and independent contractors.

The last article in the series will discuss the JOBS Act in general and the emerging growth companies provisions therein in particular, which have been an impetus to the surge in IPOs for biotech — and other — ventures since its passage.

It is my objective and hope that the series of articles will demystify the process to some extent, and by so doing provide both comfort to nervous entrants unfamiliar with the territory as well as issues to ponder, and provoke dialog among the many interested parties.