Notes - Building Backwards to Biotech

June 30, 2025

Chapter 1: From Bench to Market

Building Backwards to Biotech

The core concept of "Building Backwards" involves defining your end goal early on such that you can more easily optimize your path toward achieving that end. It is not a rigid step-by-step protocol, but rather a flexible method of thinking that adapts to unforeseen scientific complications.

An illustrative example, not from biotech, is the Oakland Athletics baseball team in 2002. General Manager Billy Beane, with Paul DePodesta, applied "Building Backwards" by focusing on the end goal of maximizing runs in a game. They determined that maximizing the number of times players get on base was the key factor. By prioritizing players with high historical "on-base percentages" and disregarding traditional scout perceptions (like weight or batting style), the team went from ten games behind first place to twenty consecutive wins. This demonstrates how clearly defining an end goal can enable focused energy on optimizing the desired outcome.

In the context of biotech, this mindset is crucial for scientists. Academic research often encourages deep dives into topics, but biotech demands a different, more focused mindset geared towards creating a functional end product, typically a new drug. Building Backwards in biotech involves defining the company's ultimate destination, systematically planning daily operations to move towards that end, and proactively assessing and mitigating risks from the outset.

Case Study One: M Therapeutics

M Therapeutics serves as an example of failing to "Build Backwards" effectively. The company was developing a therapy for stage IV cancer by repurposing drugs previously approved by the FDA for other uses. Initial "compassionate use" showed the therapy was very effective in human patients. However, the company ultimately ran out of money without significantly increasing its business value.

Instead of focusing on efficiently initiating clinical trials, M Therapeutics' leadership prioritized obtaining publication-worthy in vivo animal data for months and then years. They hired a large team of twenty to thirty laboratory employees for preclinical research, which was largely unnecessary given the existing human validation data and the known safety profiles of the previously approved drugs. The capital invested in this extensive preclinical work could have been more effectively directed toward generating the preconditions for Phase I clinical trials. As a result, the company struggled to raise further funding due to a lack of momentum and insufficient value creation between fundraising rounds. The failure of M Therapeutics was a significant loss, especially considering the therapy's potential to induce remission in stage IV cancer patients. Like the manufacturing company in "The Goal," M Therapeutics lost sight of its broader end goal by becoming overly fixated on a single step of the process, and it failed to define value inflection points to ensure systematic value increase.

Case Study Two: Sunovion

Sunovion exemplifies the effective application of "Building Backwards". The company aimed to develop a new schizophrenia medicine, with a clear end goal: FDA approval for a novel drug that did not bind D2 receptors and could treat both the positive and negative symptoms of schizophrenia. Existing schizophrenia drugs, which largely blocked the D2 dopamine receptor, were somewhat effective against positive symptoms but often less so for negative symptoms and caused undesirable side effects like weight gain.

To achieve its goal, Sunovion used a novel drug screening method. They tested hundreds of candidate compounds on mice, analyzing their behavior with algorithms to find one that mimicked D2 inhibitor effects without actually affecting D2 receptors. This allowed them to select a drug candidate that addressed negative symptoms in mice and was less likely to have the side effects associated with D2 binding. The resulting compound, SEP-363856, uniquely acts on TAAR1 and 5-HT1A receptors but not D2.

By 2019, SEP-363856 entered Phase III clinical trials, showing significant improvement in negative symptoms and lower side effect rates compared to existing D2-targeting drugs. This compelling potential led Otsuka, a pharmaceutical company, to pay Sunovion $1 billion for co-development rights even before FDA approval. Sunovion's success lay in its ability to define a distinguished and unique drug profile from the start, thereby carving out a market segment for itself. They proactively Built Backwards by leveraging in vivo mouse data for the desired clinical drug profile, aligning market placement with initial data and trial design, and clearly defining the end goal, which facilitated the use of novel technology.

Chapter 2: The Landscape

Overall Process of Drug Development

The process of bringing a new medicine to market is regulated by the US Food and Drug Administration (FDA) and involves several key steps.

1. Preclinical efficacy studies involve non-animal (in vitro) and animal (in vivo) studies to show the drug's potential. For biotech "spin out" companies, early efficacy data often comes from academic labs and forms the basis for an Investigational New Drug Application (IND).
2. Good Laboratory Practice (GLP) and Good Manufacturing Practice (GMP) manufacturing ensure the drug material meets specific quality and testing regulations for clinical trials. This is typically done by Contract Manufacturing Organizations (CMOs) or Contract Development and Manufacturing Organizations (CDMOs).
3. Toxicology studies aim to demonstrate that the new medicine is unlikely to cause widespread safety issues in humans, by testing for toxicities in cells and animals to define a "margin of safety" for clinical dosing.
4. The Investigational New Drug (IND) application is a critical submission to the FDA before human trials can begin. It includes preclinical animal pharmacology and toxicology data, detailed manufacturing information, and clinical protocols with investigator details, ensuring ethical and safe study conduct.
5. Clinical trials involve "in human" testing and are typically the last step before approval.
   • Phase I studies (20-80 participants, usually healthy volunteers, but sometimes patients for severe diseases like cancer) primarily assess drug safety, identify common side effects, and characterize drug metabolism and dosage.
   • Phase II studies (a few hundred patients with the target disease) primarily assess efficacy while continuing to monitor safety. They may compare the drug to other treatments, test combinations, or different formulations.
   • Phase III studies (often thousands of patients) are expanded studies to confirm both efficacy and safety, and to study dosages or drug combinations. This is the final phase before submitting for FDA approval.
6. Filing for approval involves submitting a Biologics License Application (BLA) for biologics or a New Drug Application (NDA) for small molecules. The FDA reviews this comprehensive data to determine if the drug is safe and effective enough for market.
7. Bringing the new medicine to market often relies on the capabilities of larger pharmaceutical companies, which can leverage their resources for scaled production, marketing, and distribution.
8. Phase IV trials are post-marketing surveillance studies conducted after FDA approval to monitor long-term safety issues that might not have been detected in earlier, smaller trials.

The drug development process is extraordinarily expensive and long, with only about a 4% chance of a new drug making it from discovery to market, and roughly $2.6 billion (capitalized costs in 2013 dollars) required to develop one new drug. The average timeline is about ten to fifteen years. Additionally, by the time a drug reaches the market, it typically has only about ten years of intellectual property (IP) protection remaining, leading to significant revenue drops post-patent expiry. These challenges often mean promising scientific evidence alone is insufficient to bring a new medicine to patients.

Understanding Big Pharma Characteristics

Big Pharma companies exhibit distinct characteristics that influence their role in drug development:

1. Financial resources: They possess unparalleled financial backing, allowing them to hire highly specialized personnel. This financial strength comes from having multiple drugs already on the market generating significant revenue, a key advantage over biotech startups. This enables them to conduct in-house clinical trials.
2. Emphasis on market size: Large pharma companies must consider the commercial viability of a drug. They need to recoup substantial direct costs (average $1.4 billion per drug, uncapitalized) and the costs of failed drugs (totaling about $2.6 billion when capitalized). Their limited market exclusivity (due to patent life) creates pressure to develop new drugs with large market potential to fill revenue gaps. Rare diseases, for example, often have lower thresholds for market size for smaller, specialized companies compared to large pharma.
3. Advantage in later-stage drug development: Big Pharma excels in complex, later-stage development due to deep expertise, specialized equipment, certifications, and regulatory familiarity. They can perform most "nuts-and-bolts" work in-house, from IND filing to large-scale Phase III clinical trials, unlike lean startups that often outsource these functions.
4. Established channels for distribution and marketing: They have extensive sales, marketing, and distribution networks, enabling them to quickly reach large markets and maximize sales during a drug's patent life. This involves building relationships with physicians and direct-to-consumer marketing, capabilities that small biotech companies generally lack.

Making Space for Biotech Characteristics

Biotech companies typically complement Big Pharma's strengths with their own distinct characteristics:

1. Typically excelling in early-stage drug development: Biotechs are inherently innovative, often originating new ideas and driving paradigm shifts in medicine. Unlike Big Pharma, which frequently acquires leading products from smaller companies or academic groups, biotechs are often the originators of new drugs.
2. Working "nimbly": Start-ups, including biotechs, are known for their agility and willingness to embrace risk by trying novel approaches that larger, more bureaucratic pharma companies might avoid. Genentech's revolutionary production of insulin using recombinant DNA technology is a prime example of such a high-risk, high-reward approach.
3. Being cash conscious: With significantly fewer financial resources and no revenue streams from marketed drugs, biotechs are highly "cash constrained." This forces greater thriftiness and innovation in project completion, often leading to lower per-drug R&D costs compared to large pharma. Biotechs face intense investor pressure to make rapid, measurable progress, driving them to be extraordinarily fast; for example, Humulin received FDA approval just five years after Genentech's founding.

Building Backwards to Business Models

By understanding the generalized characteristics of both Big Pharma and biotech, entrepreneurs can "Build Backwards" to strategically position their biotech company within the drug development landscape. This allows them to leverage Big Pharma's strengths while focusing their innovative energy on areas where biotech has an inherent advantage.

Chapter 3: The Business of Science

Biotech Business Model Lifecycle

The backbone of the business model lifecycle for most biotech companies generally follows these steps:

1. Identify prospective spinout assets from a university.
2. Recruit founding team, form the new company, and raise capital.
3. Complete key experiments, often utilizing contract research organizations.
4. Eventually "exit" the company, typically through an acquisition.

Case Study: Seurat Therapeutics

The author’s early experience with Seurat Therapeutics illustrates this lifecycle. Seurat, founded in 2016 by Martin Sanders, Richard Kraig, and Yuan Zhang, aimed to develop a novel therapy for chronic migraines, a condition affecting 12% of the world's population with often ineffective existing treatments.

Life cycle step 1: Identify prospective spinout assets from a university. Richard Kraig, an academic, discovered that the protein IGF-1 (Insulin-related Growth Factor 1) could reduce migraine incidence in a rat model by inhibiting oxidative stress in the brain. Recognizing this potential, experienced biotech entrepreneur and investor Martin Sanders partnered with Kraig, Zhang, and Scott Meadow to form Seurat Therapeutics.

Biotech business model principle: Biotech companies often originate from university out-licensing. To commercialize a university discovery, the intellectual property (IP), typically patents, is exclusively "out-licensed" to the new company through the university's tech transfer office. This involves an exchange of upfront cash, equity in the company, and/or a royalty stream on future revenue. Seurat, for example, out-licensed the IGF-1 patents from the University of Chicago. Formal steps for starting the company also included incorporating as a Delaware C Corporation, opening a business bank account, purchasing corporate insurance, issuing stock, and creating company bylaws.

Biotech business model principle at work: Biotech companies often have a heavy reliance on outside capital. Unlike many other industries where founders can "bootstrap" a company with personal savings or revenue, this model is generally not feasible in biotech. Biotech companies have no revenue in their early stages and face significantly higher costs, resulting in a high "burn rate". This necessitates raising substantial amounts of money from investors sooner and with greater frequency. For instance, Juno Therapeutics, a biotech company, raised $1.56 billion over five funding rounds, whereas Gimlet Media, a podcast company, only needed to raise $26.83 million over its entire lifespan. Because biotechs spend money without making revenue for potentially 10-15 years, they are entirely reliant on outside capital, leading to founders often having only single-digit ownership percentages even before further dilution in subsequent rounds.

Biotech business model principle at work: Generally speaking, biotech companies largely have a milestone-based valuation (when they are pre-revenue). A key distinction for biotech companies is that their valuation increases sharply, not gradually, based on achieving specific developmental milestones, rather than revenue. As a biotech progresses from preclinical to Phase I, Phase II, Phase III, and eventually FDA approval, its valuation increases in a stepwise function. This is because each successful phase creates more value in the form of data and reduces risk, even without immediate revenue. For example, Juno Therapeutics was valued at $953 million during its Phase I clinical trials, while Gimlet Media was valued much lower, at $74.83 million, despite generating revenue.

Life cycle step 3: Complete key experiments, often utilizing contract research organizations. As a "virtual" company without its own physical facilities or research team, Seurat Therapeutics primarily conducted experiments out of Kraig's academic lab at the University of Chicago and utilized Contract Research Organizations (CROs) for specialized work.

Biotech business model principle at work: Biotech companies often heavily rely upon CROs. Since biotech companies typically lack the extensive in-house capabilities and resources of large pharma, CROs are essential for overcoming these limitations. CROs offer a wide range of services, including formulation, cell line development, toxicology studies, and in vivo efficacy studies. They are particularly valuable for highly regulated and specialized processes like manufacturing or clinical trials, as they possess the necessary expertise and regulatory certifications. Even non-virtual biotechs heavily depend on CROs.

Life cycle step 4: Eventually "exit" the company, typically through an acquisition. From the outset, the Seurat team understood that it would likely be acquired as it advanced through development, recognizing it would lack the financial resources, marketing capabilities, and distribution capacity to independently bring a new medicine to market. Therefore, they proactively built relationships with potential future acquirers.

Biotech business model principle at work: Ultimately, biotech companies are often acquired. Acquisition is the most common exit strategy for biotech companies, similar to other startups. This arrangement is mutually beneficial: biotech companies, excelling in early-stage innovation, develop promising assets, which are then acquired by larger pharmaceutical companies that are better equipped for later-stage development, manufacturing, marketing, and distribution. This process is often described as a "passing of the baton". The scale of biotech acquisitions can be immense; for example, Juno Therapeutics was purchased for $9 billion, significantly higher than Gimlet's $230 million acquisition.

As of the book's writing, Seurat was preparing to initiate toxicology studies and had raised $510,000 in nondilutive grant financing. As a preclinical company, it was operating with "negative" money but had a positive valuation, with the expectation of a future acquisition by a large pharmaceutical company.

Chapter 4: Start with a Problem

Picking the Right Problem

One of the fundamental lessons in business is that a successful business is defined by "starting with a good problem to solve". This means identifying an unmet need in the market and then developing a business or product to address it, leading to "product-market fit" where the solution genuinely fits a market need.

For example, Uber and Lyft successfully solved the problem of inconvenient and costly urban transportation where car ownership was impractical or taxis were inefficient, by creating ride-sharing services that customers were willing to pay for. Another example is Southwest Airlines. In 1967, air travel was structured around business travelers, making it unaffordable for leisure travel. Southwest "Built Backwards from the problem of unaffordable airfare" for leisure families. They cut costs by flying at less popular times, to smaller cities or secondary airports, offering few amenities, and using only one plane model (Boeing 737). This strategy allowed them to offer the cheapest tickets, attracting a new customer segment and leading to forty-seven consecutive years of profitability. This illustrates the importance of identifying a problem and profitably solving it through the business model, achieving excellent product-market fit.

In biotech, it's crucial to start with a problem—identifying the needs, wants, and "pain points" of potential customers. Scientists, however, often tend to begin with an exciting new technology and then seek a problem to match it. This is a frequent cause of startup failure, as businesses fail not because their product doesn't work, but because it doesn't meet a real market need, meaning no customer and thus no successful company. John Cumbers, founder of SynBioBeta, refers to this as "poor technology-market fit," emphasizing the need to be "market driven".

Case Study: Lumizyme, Novazyme Pharmaceuticals, and Amicus Therapeutics

The story of John Crowley is a compelling example of starting with a problem. In 1998, his two youngest children were diagnosed with Pompe disease, a rare and fatal neuromuscular disorder where the body cannot break down stored sugar due to a deficient enzyme. With no existing cure or treatment, Crowley, a JD/MBA, left his finance job to create a new medicine to save his children.

He focused on existing research on Pompe disease, particularly the work of William Canfield on enzyme replacement therapy (ERT). Crowley and Canfield launched Novazyme Pharmaceuticals in March 2000, which was acquired by Genzyme (later Sanofi Genzyme) a year later. Their clear goal was to deliver the functional enzyme into patients' cells, particularly muscle and heart cells, where the symptoms originated.

Their efforts led to Lumizyme, a life-saving medication for Pompe disease. Lumizyme involves an intravenous infusion of a precursor enzyme that is processed in the body to break down glycogen stores, dramatically reducing the risk of death in early-stage Pompe patients. This medication saved Crowley's children and hundreds of others.

Crowley is now the CEO of Amicus Therapeutics, where he continues to develop therapies for Pompe and other rare genetic diseases. For the next-generation Pompe treatment, AT-GAA, he is combining ERT with a "chaperone" protein to stabilize the enzyme and improve cellular uptake. AT-GAA successfully completed Phase III clinical trials and was filed for FDA approval.

Crowley's success stems from his "patient-centered perspective" and his practice of Building Backwards by starting with a problem. He aims to create "best-in-class" medicines that make a real, impactful difference for patients and their families. This involves close interaction with patients to understand their unmet needs and "pain points". He is "technology agnostic," meaning he first identifies the greatest unmet medical need and then sources the best technology to solve that problem, rather than starting with a technology and seeking an application.

This approach allowed Crowley to optimize for his desired outcome, achieve focused problem-solving leading to treatments like Lumizyme, and ensure product-market fit by addressing diseases with clear unmet needs. This contrasts with the initial failure of Abbott-ABC, a drug that received FDA approval but lacked market penetration because it didn't solve a clear unmet need in the crowded cholesterol market.

Pivoting to a Problem

The example of Abbott-ABC highlights the importance of understanding a company's fit in the market landscape. To increase sales of Abbott-ABC, Altman, the executive director, conducted market research to identify unmet needs in the cholesterol-lowering drug landscape. He found that existing drugs effectively lowered LDL cholesterol, so there was no real need for Abbott's new medicine. Building Backwards by starting with a problem early on helps inform decisions regarding: the most valuable clinical indications for potential acquirers, and the current standard of care (which dictates how much better a new therapeutic needs to be for adoption). The process of "customer development" is essential to validate whether a perceived problem is an authentic need.

Chapter 5: Customer Development

Customer Development

Customer development is a core philosophy of the "Lean Start-up Method," originated by Silicon Valley entrepreneurs Steve Blank and Eric Ries. It's about not allowing personal bias to influence the determination of a new product or service without first synthesizing what the marketplace has told you.

The "lean" approach is characterized by three key tenets:

1. Untested Hypotheses: Entrepreneurs begin with a series of untested hypotheses about their problem-solution fit.
2. "Get Out of the Building" Approach: They test these hypotheses through customer development, which involves directly soliciting feedback from potential users, purchasers, and partners on all elements of the business model. This means rapidly assembling Minimum Viable Products (MVPs)—the simplest version of a product with minimal features needed to test a market hypothesis—and immediately eliciting customer feedback to revise assumptions.
3. Agile Development: This works hand-in-hand with customer development, focusing on iterative and incremental product development. It involves continuously asking for feedback and readjusting, preventing wasted time and resources on products no one wants.

If initial hypotheses prove wrong, companies must either revise them or "pivot" to new ones. Failure to follow these principles is a significant reason for startup failure, with "no market need" cited as the top reason (42%) for business failure in 2019. The purpose of customer development is to Build Backwards from the end customer to inform the specifics of your product.

Before engaging in customer development, it's crucial to identify "who is the customer?". In biotech, while the patient is ultimately the end beneficiary, it's vital to evaluate the perspectives of all key stakeholders. The five primary stakeholders are: 1) patients, 2) physicians, 3) investors, 4) pharmaceutical companies (potential partners or acquirers), and 5) insurers.

Case Study: Laurel Therapeutics

Laurel Therapeutics, developing a novel eye drop (EBIN) for wet age-related macular degeneration (wAMD), provides a practical example of customer development. Current wAMD treatments involve frequent, uncomfortable, and costly eye injections of anti-VEGFs, which are also ineffective for about 10% of patients and place a huge financial burden on the healthcare system (e.g., 12% of Medicare Part B spending in 2018).

Laurel developed initial hypotheses for EBIN's value proposition:

1. The five key parties felt the current standard of care was insufficient.
2. All five key parties wanted a noninvasive approach.
3. Patients, insurers, and physicians wanted more affordable solutions.
4. There was a need for new mechanisms of action to treat wAMD.

Customer Development: Patients: Conversations with wAMD patients validated hypotheses 2 and 3. Patients consistently expressed dislike for high out-of-pocket costs and the need for injections, and wished for more convenient, affordable therapies.

Customer Development: Insurers: Discussions with insurers (private companies, Medicare, Medicaid) further validated hypothesis 3, showing their interest in lower-cost therapies due to the high spending on current wAMD treatments. Understanding reimbursement incentives is crucial, as it impacts physician prescription rates.

Customer Development: Investors: Venture capitalist groups expressed interest in EBIN's novel route of administration (validating hypothesis 2) but questioned if the standard of care would easily change (challenging hypothesis 1).

Customer Development: Physicians and Pharmaceutical Companies: The author attended an ophthalmology conference to interview these stakeholders. The key to effective customer development interviews is to avoid biasing the "customer" or revealing hypotheses, focusing on understanding their organic opinion of the problem, not the potential product.

Physician Feedback: Initially, physicians highly praised the current anti-VEGF injections (rejecting hypothesis 1). However, further probing revealed their desire for new mechanisms of action (anti-inflammatory, neuroprotective effects) (confirming hypothesis 4). Critically, they also emphasized the burden of injections, stating that an eye drop or more convenient method would be cheaper, better for patients, and free up their time (affirming hypothesis 2). The consistent emergence of these themes from multiple physicians was a key validation.

Pharmaceutical Company Feedback: Discussions with pharma business development representatives aimed to understand the market landscape from their perspective and what types of wAMD products would be novel and interesting to them. In biotech, an MVP is conceptualized as the "target product profile" that guides the initial data needed to prove a future drug's key attributes. Presenting this profile to potential partners is crucial for feedback on desired data. Pharma feedback helps determine how much improvement a new therapeutic needs over existing ones to be relevant. They indicated that in vivo distribution experiments (in rabbits or primates) were desirable, and that an "additive product" (used in conjunction with existing injections) was preferred over a replacement, due to the high regard for current standard of care. They also highlighted that previous eye drops failed due to lack of distribution to the back of the eye, indicating that addressing this issue was crucial for overcoming skepticism.

Result for Laurel Therapeutics: These customer development efforts provided Laurel with crucial insights and data. The company learned to focus its efforts on developing strong efficacy data for anti-inflammatory and neuroprotective effects of EBIN. They hired a CRO to optimize EBIN's formulation for delivery to the back of the eye and conducted distribution studies in rabbits. By Building Backwards from its end customers' problems, Laurel positioned itself to address specific, real-world patient needs, increasing its likelihood of securing venture financing or a pharmaceutical partnership, and avoiding wasted time and money.

Chapter 6: The Fundamentals

Building a Company: The Key Ingredients

To optimize for a successful outcome when establishing a new biotech company, industry leaders identify six key ingredients:

1. Build a company for the long term, not just to get acquired. While planning for a strategic exit is prudent, a shortsighted focus on an early acquisition (e.g., after Phase I) can lead to insufficient long-term positioning and hiring individuals who are not "big thinkers". Refusing complementary partners (academic groups, other companies, government, experienced investors) because of concerns about sharing profits or equity is shortsighted, as these partnerships provide validation, credibility, and resources essential for success.
2. Develop an idea that’s big enough to support a mega company. The underlying technology must be sufficiently innovative and impactful to generate excitement, attract funding, and draw talented teams. Ideas that offer only incremental improvements (e.g., a new delivery method for an existing drug) are less likely to achieve this. Top-tier venture firms, like ARCH Venture Partners, seek technologies that are "tenfold better along two orthogonal 'figures of merit'" (e.g., lower cost, more convenient administration, fewer side effects). An example is Vizgen's MERFISH technology, which improved single-cell imaging across four key metrics: multiplexing, spatial context, sensitivity, and cost. Additionally, a "platform" technology that enables multiple applications ("multiple shots on goal") can lead to higher valuations and a greater likelihood of success.
3. Form a strong team. A credible founding team is essential for attracting investors and successfully executing the company's value proposition. Key skill sets for a founding team include:
   • A Principal Investigator (PI): often an academic scientist who is widely recognized as a leader in their field and ideally the inventor of the technology. Their reputation and track record (CV, awards, publications) provide credibility for the technology.
   • An individual with industry drug development experience: someone who understands how to translate a molecule into a functional drug in humans and navigate the regulatory process, ideally with experience bringing drugs to market or into clinical trials. This can be a full-time hire or a consultant.
   • An operations/finance/business development person: responsible for fundraising, budget management, and aligning day-to-day operations with company goals.
   • A veteran biotech entrepreneur (bonus): someone with experience in past successful ventures and exits, who can fill various roles and add significant credibility to the team.
   • Access to stellar biotech-specific intellectual property (IP) lawyers is also crucial.
   • While a CEO or full-time laboratory scientists might not be present at launch, companies often hire lab technicians, outsource research to CROs, or retain the original PhD/postdoc inventors. Scientific advisory boards provide guidance, and boards of directors ensure management acts in shareholders' best interests.
4. Build a strong intellectual property (IP) portfolio. IP, typically patents, represents what a biotech company "owns" in terms of novel science. Without strong IP protection, a company's ability to make business deals, attract investment, or prevent competitors from infringing on its ideas is severely limited. VCs rigorously assess IP during due diligence.
5. Capitalize your company appropriately. This means finding the "just right" amount of financing, avoiding both too little and too much. Raising too little capital can prolong timelines and hinder progress, potentially leading to a "anorexic state" where the core hypothesis isn't properly tested. Raising too much capital can dilute ownership, inflate valuation, and lead to a lack of spending discipline. A crucial strategy is to forecast the capital needed to reach major value inflection points (e.g., filing an IND, achieving critical animal data) and fundraise in tranches tied to these milestones. This demonstrates momentum and increases the company's value.
6. Develop a patient-centric mission that drives you. In biotech, the ultimate purpose is to fight for scientific progress on behalf of patients. A clear, patient-centric mission helps maintain focus and guides decision-making toward the ultimate benefit of patients. John Crowley, CEO of Amicus Therapeutics, views his company's mission as a "sacred responsibility," involving patients and their families in the drug development process. This deep commitment can motivate tough decisions, as seen when Crowley halted a $50 million Pompe drug trial that was making patients worse, ultimately leading to an even better solution. This mission provides direction and ensures the company makes better medicines.

Combining Ingredients: Case Study: Receptos

Receptos, founded in 2007 by Raymond Stevens, Kristina Burow, Keith Lenden, and Hugh Rosen, exemplifies the successful combination of these ingredients.

• Developed a big idea: Stevens pioneered a G protein-coupled receptor (GPCR) structural biology platform, which enabled GPCR crystallization and opened up new avenues for drug discovery, a significant innovation. They also in-licensed ozanimod, a drug candidate for the S1P1 receptor, for multiple sclerosis.
• Formed a strong team: The founders included Stevens, a top-tier academic and two-time successful entrepreneur, and Burow from ARCH Venture Partners, along with other highly experienced industry professionals (CEO, CFO, CMO). This balanced team, with strong scientific and business acumen, was crucial.
• Capitalized appropriately: Launched in 2007, during a recession, they struggled to raise a $25 million Series A. To stay afloat, they generated early revenue by partnering with pharma companies to use Receptos's GPCR platform for target crystallization. This "scrappy" approach allowed them to prove their technology platform and reach critical milestones.
• Built for the long term: Despite the early financial struggles, they didn't just aim for an early exit. They identified the active enantiomer of ozanimod and quickly moved it into clinical trials within eighteen months. They also identified new applications beyond multiple sclerosis, such as ulcerative colitis and inflammatory bowel disease, expanding the drug's potential market and value.
• Strong IP portfolio: The selection of a groundbreaking, first-of-its-kind technology (GPCR platform) and the fact that pharma companies paid for access to it, and later acquired the company, implies a strong IP position that was built and defended.
• Patient-centric mission: Receptos was founded with the goal of developing "best-in-class and first-in-class GPCR therapeutic candidates". Their drug, ozanimod, revolutionized multiple sclerosis treatment by effectively preventing new damage, reducing relapse rates, and offering a more convenient oral administration (compared to injections). This commitment to paradigm-changing medicines that truly benefit patients was a driving force.

In 2015, Celgene acquired Receptos for a massive $7.2 billion during ozanimod's Phase III trials, and ozanimod later received FDA approval in 2020. Receptos demonstrates how establishing these foundational "key ingredients" by Building Backwards from the outset significantly increases the probability of a new biotech startup's success and its ability to create value for patients.

Chapter 7: Risk and De-Risk

Importance of De-Risking

Drug development is inherently risky, with a success rate of only about 4% from discovery to market. De-risking is about strategically enhancing the chances of success by mitigating potential failures in advance.

A prominent example of late-stage failure is the development of BACE inhibitors for Alzheimer's disease. Beta-secretase (BACE) was identified as a promising "first-in-class target" for Alzheimer's, theoretically preventing the buildup of amyloid beta plaques in the brain. Multiple large pharmaceutical companies developed BACE inhibitors that successfully blocked BACE and decreased amyloid-β peptides in preclinical and early clinical phases. However, in Phase III clinical trials, the fundamental scientific assumption—that blocking BACE would slow Alzheimer's—proved incorrect. Patients on BACE inhibitors sometimes experienced worse cognitive decline or unanticipated side effects. Consequently, all five companies halted their trials. This illustrates how late-stage clinical failures are disappointing, expensive, and time-consuming, and can "tank a biotech company" that relies on sustained investor support. The success rate for novel, first-in-class agents is particularly low (below 25% for late-stage trials). While not always avoidable, it highlights the critical need to minimize such outcomes.

Building Backwards to De-Risk (Strategies)

"Building Backwards" can proactively mitigate developmental risk and increase the probability of clinical success. There are four key strategies for de-risking:

1. Leave uncertainty outside the company from the outset when possible. Academic research often embraces uncertainty to advance scientific understanding. However, in biotech, the end goal is a working drug, which necessitates minimizing risky research questions early on, when failures are less costly. This means conducting "de-risking" preclinical experiments within academic labs or through CROs before officially launching the company or in-licensing a new asset. Jake Glanville, CEO of Centivax, emphasizes the importance of asking questions upfront to reduce downstream risk, a core tenet of the "Building Backwards" mindset.

2. Be willing to fail fast. This strategy involves designing experiments to quickly determine whether a core hypothesis is valid, allowing for prompt "go/no-go" decisions.

   • Case Study: Nivien Therapeutics: Founded by Nathaniel Brooks Horwitz and Nikita Shah, Nivien aimed to develop a drug targeting the Hippo-YAP pathway for pancreatic cancer. Early genetic manipulation in mice showed promise, destroying drug-resistant tumors. Nivien launched with limited capital and designed a high-bar proof-of-concept experiment with predefined "failure" parameters. This approach allowed them to quickly test their underlying hypothesis and pivot if necessary. Prioritizing the patient perspective, Nivien understood that patients desired increased lifespan and fewer side effects, not just tumor shrinkage. They set their "go/no-go" bar high based on this. When the experimental results showed only mild efficacy, failing to reproduce the profound genetic effects, the team declared the program a failure and shut down Nivien.
   • Outcome: Nivien is considered a success because it rapidly obtained actionable data on a complex scientific idea (from idea to preclinical results in two years, much faster than the BACE inhibitor's two decades). This saved significant time and money that could otherwise have been wasted on a marginally beneficial idea or a "zombie company". The lesson is to ask the riskiest questions early and be prepared to fail quickly.

3. Select targets with as much human biology data as possible. Embrace technical risk and avoid biology risk.

   • Technical Risk refers to the challenge of actually creating a drug candidate that effectively modulates the target (e.g., whether a BACE inhibitor could be created).
   • Biology Risk refers to the risk that even if the target is modulated, it won't actually treat the disease (e.g., BACE inhibitors failed here).
   • According to Benjamin Cravatt, biotech companies should "embrace technical risk and avoid biology risk" by leveraging abundant human biology information (especially genetic data) to validate targets early.
   • Example: Vividion Therapeutics: An ARCH portfolio company co-founded by Cravatt, Vividion uses an innovative chemical proteomic platform to drug challenging proteins. They focus on targets with "compelling human biology evidence" to minimize biology risk. While the technical challenge of finding drugs for these targets is high, the payoff in clinical success probability is greater due to the validated biological significance. This strategy made Vividion attractive to Bayer, which acquired it for $2 billion.
   • Case Study One: Gleevec & Blueprint Medicines: Gleevec, a groundbreaking drug for chronic myelogenous leukemia (CML), transformed the disease from deadly to treatable. Its success was a result of minimizing biology risk by using human genetic data upfront for target validation (identifying the BCR-ABL fusion gene as the driver mutation in CML). This was done despite high technical risk, as BCR-ABL was initially considered "undruggable". Dr. Brian Druker, a key player in Gleevec's commercialization, noted that many drug failures stem from high biology risk due to poor model systems for target validation. Blueprint Medicines, co-founded by Druker, follows a similar approach. They analyze genetic sequencing of tumor samples and screen compounds, integrating data to predict critical genetic changes and validate targets. This led to the rapid identification of a KIT tyrosine kinase mutation in Gleevec-resistant Systemic Mastocytosis patients and the development of avapritinib, a highly effective drug. Blueprint deliberately pursued "well-validated targets but in very small-market diseases" where no effective drugs existed, confident in success due to their rigorous target validation.
   • Case Study Two: PCSK9 Inhibitors: Developed by Amgen (Repatha) and Regeneron/Sanofi (Praluent) for high cholesterol, these drugs target PCSK9. In the early 2000s, the PCSK9 gene was identified through studying human populations with extreme cholesterol levels, revealing its clear link to high or low LDL cholesterol and heart disease risk. Animal model knockouts further confirmed this. This upfront human biological data significantly decreased biology risk, strengthening the odds of clinical success, leading to highly effective drugs that lower LDL by 47-60%.
   • Case Study Three: Abide Therapeutics: One of Cravatt's previous companies, Abide Therapeutics, developed inhibitors for the MAGL enzyme. Lacking clear genetic validation for MAGL, they sought human pharmacology and safety information early by studying MAGL's role in the endocannabinoid system, the same system targeted by THC (marijuana's psychoactive component). Comparative studies in rodents showed MAGL inhibitors lacked "cannabis-like behavior," suggesting fewer negative side effects in humans. This approach, using existing human data from a related system and confirming it in animal models, provided confidence in the biology, leading to Abide's acquisition by Lundbeck for $400 million.

In summary, de-risking in biotech is a "Building Backwards" strategy that involves minimizing downstream risk upfront by carefully selecting projects, being willing to fail quickly, and prioritizing targets with strong human biology validation. This approach aims to increase the probability of successful new medicines reaching patients.

Chapter 8: Building Backwards to an Exit

Always Have an Exit Strategy

An exit strategy is a plan for an entrepreneur and/or investors to eventually sell their ownership in a company, either to another company or on the public markets. It is crucial to Build Backwards to an exit strategy from the beginning of a business. An exit is a fundamental part of a start-up's life cycle because it serves as the company's "path to liquidity," allowing founders and investors to realize the majority of their financial return. Investors are particularly concerned with exit strategies because their own investors typically expect a return on their capital in less than ten years.

Beyond financial returns, an exit also involves passing the "baton" to the appropriate party to guide the company to its next stage of growth. For instance, a large pharmaceutical company might have developmental advantages that make an acquisition appealing, while an Initial Public Offering (IPO) can provide immediate and future growth capital if founders are not ready to sell. Robert Okabe, a start-up advisor, likens planning an exit to driving on a freeway, where you must constantly be aware of "which exit is appropriate" at any given moment, informing your choice of "lane" (strategy).

In biotech, an exit typically takes one of two forms: an acquisition (mergers and acquisitions, or M&A) where the company is bought by another, or an initial public offering (IPO), where the company becomes publicly traded. Both options can offer liquidity and high returns when executed effectively, making it vital for founders to continuously Build Backwards from potential exit strategies as the company grows. Investors usually want to see an exit plan from the very first round of funding, and this plan is likely to evolve over time.

A is for Acquisition

An acquisition occurs when a corporation, often a large pharmaceutical company in biotech, purchases another company. This arrangement is mutually beneficial: biotech companies excel at early-stage innovation and nimble development but often lack the capital and resources for full commercialization. A larger acquiring company provides these resources, allowing the biotech's innovation to reach its full potential. This is also advantageous for biotech founders, as the acquiring company often pays a premium, and their technology can advance. Bruce Booth emphasizes this cycle, noting that biotech takes early-stage R&D risk, while larger firms take later-stage and commercial risks, driving many biotech valuations.

Setting up a Bidding War

Part of Building Backwards to a potential acquisition involves positioning the company for a bidding war. Keith Crandell, cofounder of ARCH Venture Partners, suggests that the best price is achieved when multiple interested buyers bid against each other. Therefore, a company should consider early on if there are several potential acquirers for its technology, as a "too niche" product can make a bidding war difficult. This foresight can also inform other developmental business questions, encouraging the creation of a desirable product that is easily integrated and understood as additive to other businesses.

An example from outside biotech is Troy Schrock's landscaping business. Initially focused on one-off projects, Troy realized there were minimal acquisition opportunities because such projects lacked recurring revenue contracts. He then expanded into fertilization services, which were contract-based. By securing contracts for future work, he made his customers "stickier" and the business more attractive to potential acquirers, even though he wasn't ready to sell. This illustrates Building Backwards to ensure future saleability.

Understanding Valuation in M&A

Valuation describes a company's worth. In biotech, a primary valuation method is precedent transactions analysis, which uses data from previous M&A deals of economically similar companies as guideposts for projecting future valuations. Relevant data points include companies with similar indications and those acquired at similar development phases. The source provides an example of precedent transactions for proof-of-concept exits in migraine, showing potential acquisition values at different phases. The more interest in an asset, the greater the potential exit figure.

Strategic partnerships can often lead to an acquisition down the road. For indications less attractive to venture investment, support from strategic partnerships signals buy-in from knowledgeable, experienced groups. For example, Distributed Bio, an antibody discovery business, was acquired by Charles River Laboratories after forming a partnership with them.

Going Public: The IPO Route

An IPO is often considered an exit, even though the act of going public is not, itself, an exit. When a company "goes public," it typically involves a primary offering where new shares are sold to public investors to raise capital, which dilutes existing investors and founders. However, founders and investors only obtain liquidity (cash) by selling their own shares in a secondary offering after the company is publicly listed. This process can take years, as stock sales are often limited per day to prevent downward pressure on the stock price.

The public biotech markets have seen rapid growth, with the number of public biopharma companies nearly tripling since 2012. This has led to an increase in biotech companies pursuing IPOs. Crandell estimates a 30 to 40 percent increase in valuation when a company goes from private to public, an effect known as the "liquidity premium". IPOs are also seen as prestigious "branding events," often celebrated with bell-ringing ceremonies broadcast on television, signifying leadership and endorsement from investors. While tempting, a pharmaceutical CEO noted that going public should be "the right step in the path on which you’re guiding your company," not solely an exit.

IPO versus M&A

Both IPOs and M&As have pros and cons:

• Risk/return profiles: An M&A typically involves sharing downstream risk and reward with the acquirer through milestone payments. An IPO offers more downstream upside but also carries increased risk for the longer involvement in the company.
• Time to liquidity: M&A provides liquidity at the time of the deal, while an IPO can take years for insiders to fully exit, especially for thinly traded stocks.
• Dilution: Going public can result in 20 to 40 percent dilution for existing shareholders due to new securities being issued, which decreases their returns. M&A does not cause this type of dilution.

Overlap in Exit Strategy

Preparing for an IPO and an M&A often involves overlapping strategies. For instance, market comparables used for M&A are also helpful for IPO preparation to demonstrate valuation. The prospect of an IPO can also stimulate M&A interest; sometimes, an IPO acts as a "stalking horse" strategy, where the company's IPO plans prompt acquisition offers, potentially driving up valuation. Securing buy-in from institutional investors for an IPO also requires demonstrating consideration of strategic M&A options.

The case of Vividion Therapeutics exemplifies this overlap: the company was planning to go public but was acquired by Bayer for up to $2 billion instead. Co-founder Ben Cravatt noted that access to Bayer's substantial resources would allow Vividion to make fewer "trade-offs" and develop more medicines than it could have as an independent public company, making the acquisition a "much more preferred path".

Building for the Long Term

Ultimately, Building Backwards to an exit should not trivialize the importance of simultaneously building a company for the long term. Kristina Burow emphasizes that "the best way to optimize for a terrific outcome is actually to build a company for the long term". The goal is to establish an organization that creates long-term value, as companies with a clear long-term vision often attract institutional investors or potential acquirers. Crandell advises "relentless" interaction in the marketplace to test hypotheses about market receptivity, which can provide early clarity on both exit type and timing.

Chapter 9: Building Backwards to an Effective Financing Plan

The Search for Funding

An effective financing strategy is fundamental to a biotech company's success. Biotech companies often do not generate revenue, have high capital costs, and are typically acquired before drug approval, meaning the search for funding is an ongoing process. The finance plan must reflect the costs and timing of the drug development process, along with the realities of the investor marketplace.

The text illustrates the importance of a well-thought-out financing plan with Company B, an early-stage preclinical spinout. Company B confidently sought to raise $400 million for its Series A, aiming to cover all three phases of clinical trials, despite an estimated valuation of only $1 million. This would result in the founders giving away 99.8 percent of the company's value. This scenario highlights the need for a better financing plan, informed by the Pre-Money Valuation (value before investment) and the Post-Money Valuation (value after investment).

The Dilution Dilemma

The phenomenon of raising capital by "selling" ownership is called dilution, which is largely inevitable and a normal part of growth in biotech. However, without Building Backwards, dilution can become excessive, questioning the benefit of building the company for the founders. Unlike many tech companies that require less capital to reach initial revenue, biotech faces the unique challenge of needing hundreds of millions of dollars for scientific research, clinical trials, and manufacturing before generating revenue. Despite this, reasonable dilution is acceptable because while percentage ownership decreases, the value of the shares increases due to the overall valuation increase. Biotech entrepreneurs are often driven by a desire to make a difference for patients, which can influence their willingness to build a company even with lower personal profit potential.

Understanding Valuation

A hallmark of biotech is that company valuation increases sharply in distinct stages of development, not gradually. As a company progresses from preclinical to Phase I, Phase II, Phase III, and eventually FDA approval, its valuation increases in a "step function". Each successful progression to the next phase is a value inflection point. For example, reaching Phase I significantly increases valuation, reflecting a de-risked program. The probability of drug failure is highest early in development and decreases as it progresses. An increased valuation is also crucial for existing investors to consent to subsequent funding rounds, as it offsets any dilution they experience.

Defining Value Inflection Points

To minimize dilution while building value, it is strategic to fundraise in tranches that correlate with value inflection points. This means raising only the minimum sufficient (or slightly more) capital needed to reach the next value inflection point. By timing a raise to occur when the valuation is higher, a company gives away less equity for the same amount of money. For instance, waiting until after a successful Phase I trial to raise $400 million would result in significantly higher founder ownership compared to raising it preclinically.

Building Backwards to a financing strategy involves roughly determining the major value inflection points and projecting capital needs for each. While this plan will likely change over time, it should be consistently reassessed. Good value inflection points adhere to three rules: 1) They increase the value of the company. 2) They decrease the risk of scientific failure. 3) They demonstrate the future potential of the technology.

The source provides example milestones/value inflection points:

1. Show the potential of a particular target or pathway to treat a disease:
   • Value: Increases company value by demonstrating the "value" of owning IP on the novel target/pathway.
   • Risk: De-risks the company by decreasing the probability of scientific failure in treating the disease.
   • Potential: Demonstrates the prospective value of creating therapeutics targeting this pathway.
2. Define a "lead" compound:
   • Value: Brings the company closer to the clinic and validates the target's relevance.
   • Risk: Reduces the risk that the target/pathway is "undruggable".
   • Potential: Increases the potential of developing a singular working drug.
3. Define a clinical candidate:
   • Value: Progresses the company to having a drug candidate almost ready for clinical trials.
   • Risk: Substantially decreases risk as many drug candidates fail to achieve drug-like properties.
   • Potential: Creates a clear potential future product for the first time.
4. Obtain a clean toxicology study:
   • Value: A clear step closer to the clinic; needed for an IND application.
   • Risk: De-risks the asset by providing evidence against future safety issues.
   • Potential: Increases the potential of the new drug and the entire pathway.
5. Begin Phase I trials:
   • Value: Represents a definitive step in validating safety (a major FDA criterion) and the strength of preclinical data.
   • Risk: De-risks the program, as FDA acceptance to enter clinical trials increases the probability of success from 4% for a new drug candidate to 11.83% for a drug entering clinical testing.
   • Potential: Lends substantial credibility to the company, platform, and pathway.
6. Complete a successful Phase I trial:
   • Value: Demonstrates safety in humans, bringing the company closer to FDA approval and potential revenue.
   • Risk: De-risks the program by overcoming the 45.9% risk of Phase I failure, reducing likelihood of safety-related failures.
   • Potential: Further validates the program, company, and technology platform.
7. Complete a successful Phase II trial:
   • Value: Provides the strongest evidence yet of efficacy in human patients, addressing the second major FDA approval criterion.
   • Risk: Substantially de-risks the program by demonstrating efficacy, increasing the probability of a successful Phase III trial from 35.52% (Phase II success) to 61.95% (Phase III success).
   • Potential: Suggests high potential for the drug to pass larger studies and for the rest of the drug development platform.
8. Complete a successful Phase III trial:
   • Value: Higher value than previous stages.
   • Risk: Lower risk than previous stages.
9. Obtain FDA approval:
   • Value: Substantially increases company value, as revenue realization is nearly 100%.
   • Risk: Risk of scientific failure is nearly zero.
   • Potential: High revenue and/or exit potential, and other platform-based drugs are also de-risked.

The source provides a table for Building Backwards from FDA Approval to estimate costs and duration for each phase, helping to understand funding needs and their correlation with value inflection points. For example, if preclinical studies are estimated to cost $15 million and take two years, a company would aim to raise at least that amount and plan its next raise around two years later, with data in hand.

Funding Rounds

Funding rounds (Seed, Series A, B, C, etc.) describe individual financing events where capital is raised from outside investors. There are strategic reasons for both entrepreneurs and investors not to raise all investment dollars at once. Each round reflects the company's development stage and its valuation.

• Seed Funding: Typically small (hundreds of thousands to single-digit millions), often from angel investors (wealthy individuals) or early-stage VCs, and associated with starting the company.
• Series A and Beyond: Subsequent rounds (A, B, C) are usually led by traditional VC firms, often with multiple investment groups forming a "syndicate". These rounds are stepping-stones to growth, potentially leading to an IPO. Biotech Series A rounds are roughly double the median size across all start-ups, averaging around $40 million for preclinical companies, while Series B rounds are often around $75 million.

Chapter 10: Building Backwards to Financing Sources

Understanding Investor Types

A critical element of raising capital is understanding the requirements of both the target investor and the company itself. This helps to improve the pitch "hit rate". The type of investor appropriate to approach changes depending on the company's stage.

Key points generally applicable to biotech financings:

• Any investor provides "signaling value"; more experienced and well-established investors lend credibility, making it easier to secure follow-on funding.
• Funding capacity generally increases with investor sophistication (e.g., VC firms have greater capacity than individual angel investors).
• The reasonable amount to ask for is "a bit more than the amount of money needed to reach the next stage" for the drug candidate, or more if in a "hot sector" or developing multiple molecules.
• Few companies receive more than two phases' worth of funding in a single round due to high failure rates and the likelihood of an earlier exit.
• Dilution is often not as concerning as initially perceived, as the value of shares should rise with increased valuation.

R&D, Early Preclinical Stage

For companies in the earliest stages of development, small business grants or academic funding are often helpful because they require less initial data. Early-stage venture groups are also an option.

• Option 1: Grants

  • Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) grants encourage R&D with commercialization potential. Funded primarily by NIH or NSF, these are nondilutive, meaning the company does not give up equity. This helps build early value needed to approach other investors.
  • Grants are competitive and undergoing a rigorous review process, thus receiving them lends credibility to the project. It also signals "hustle" to investors.
  • SBIRs are more common and have larger budgets than STTRs. They are broken into phases (Phase I, Phase II, Phase IIb), with increasing competitiveness and longer timelines for later phases.
  • Building a relationship with a program officer early is crucial, as they can provide guidance on eligibility, deadlines, and even increased funding opportunities.

• Option 2: Angel Investors

  • Angel investors are individuals, often more flexible on terms and quicker to respond than VC firms. They are typically sought in Seed Rounds for smaller capital amounts.
  • Securing biotech-specific angel investors is important for credibility, especially if not combined with a grant.

• Option 3: Early-Stage VC

  • Many top-tier biotech venture firms primarily invest early, especially in university spin-outs with leading PIs and high-impact publications.
  • Taking venture financing early offers a long-term partnership approach and industry expertise. However, securing meetings is difficult, often requiring warm introductions.
  • VCs prefer higher-scale returns (around ten times their initial investment) and typically invest in fewer deals than angels.

Later-Stage Preclinical Studies

Costs increase in later preclinical stages.

• Option 1 & 2: More Grants / More Angel Investors: Still possible, but federal grants are "slow" and not guaranteed, risking cash shortages. Too many non-specialist angel investors can dilute the cap table without adding sufficient domain expertise.
• Option 3: Going Public (Early IPO, SPAC): The public markets have become more favorable to early biotech IPOs. However, this route requires extreme caution:
  • Going public too early can remove the incentive for private investors to invest later.
  • Requires a compelling public capital markets "story" and commitment to solely public market funding for future capital.
  • Comes with significant scrutiny and regulatory requirements, which can divert time and resources.
  • Bad news can severely impact stock price, and VCs generally do not invest in public companies, closing a future funding door.
• Option 4: Revenue Stream/Cash Flow: Uncommon for biotech pre-approval, but early revenue (e.g., selling services to pharma like Distributed Bio) can decrease dependence on investors. However, some VCs may not be impressed by service-based revenue if it's not "core" to the long-term therapeutic value. A company-generated revenue stream can be a "cheap" cash source, avoiding equity dilution to reach key clinical value inflection points.

Clinical Stage: Phase I, Phase II, Phase III

These phases are incredibly expensive, making options 1-4 generally insufficient. VC groups remain a common option.

• Option 5: Corporate Partnerships: Available at any stage, but large pharma companies are one of the few non-VC sources substantial enough for clinical trials.
  • Can be nondilutive to equity but may claim ownership via revenue sharing, joint IP rights, or exclusive licensing.
  • Pharma companies are generally less risk-tolerant than VCs and prefer later-stage, de-risked programs.
  • Partnerships often involve upfront cash for jointly developing IP. For example, Roche tapped Vividion in a $135 million protein degradation deal.
  • Keith Crandell notes that corporate partnerships can elevate investor interest by validating the technology. However, he warns against structures that limit investor upside too much, emphasizing the need for "prearranged divorce clauses".
  • The most important takeaway is to maintain meaningful financial upside in co-development agreements.
• Option 6: Out-licensing Specific Programs to Pharmaceutical Companies: Involves a biotech company agreeing to let a third party (e.g., a large pharma company) utilize certain IP in exchange for cash, royalties, or equity. This allows the biotech to fund other programs. For instance, Agios Pharmaceuticals licensed its AG-221 program to Celgene, freeing up resources to develop its next program, AG-120, internally.
• Option 7: Later-Stage VC: Different VCs have different investment philosophies. Companies can research VC groups (e.g., via Crunchbase or Pitchbook) to find good matches based on their funding stage, health sector focus, and whether they invest in competing companies. Cultivating relationships and getting personal introductions are key.
• Option 8: Other Types of Investment Securities:
  • Convertible Note: A mix of debt and equity, starting as debt with interest payments (2-10%). Converts to equity (original debt + accrued interest) at a future financing event.
    • Advantage: Delays company valuation, beneficial if valuation is expected to increase later. Investors get a discount for investing early.
    • Downside: More debt increases perceived company risk ("highly leveraged"). Overloading with convertible debt means giving away more equity later and can deter future investors.
  • Simple Agreement for Future Equity (SAFE) Note: A type of convertible note that pays cash upfront without interest. It converts to equity at a subsequent financing round.
    • Advantage: Delays valuation without accruing interest.

Chapter 11: Building Backwards to Clinical Trials

Building Backwards to Clinical Trial Design

Clinical trials are the final set of experiments required before drug approval, and they are a major cost driver in drug development. Pamela Garzone, a medical and regulatory consultant, highlights the repercussions of failing to Build Backwards in clinical trial design. For example, a large pharmaceutical company's Phase I trial for a drug targeting women largely included male subjects and used a flawed crossover design with an insufficient washout period, leading to a "miserably" failed trial. This illustrates the importance of carefully planning based on the anticipated patient population and how the drug will ultimately be used.

Biotech companies can also overlook Building Backwards by lacking research focus, leading to an inefficient path to the clinic. The practical way to avoid this is by conceptualizing the desired final drug "label" from the beginning of the drug development process. This label, which includes the drug's indication(s), dosage, administration, contraindications, and other vital information, affects how the medicine is positioned in the market and informs both scientific and early business decisions.

How Clinical Trials Actually Work

Clinical trials are conducted in phases, each designed to answer specific questions about efficacy, safety, or both. There are typically three phases before FDA approval (Phase I, II, III) and one post-approval phase (Phase IV). However, lines can blur with innovative trial designs and accelerated approval pathways.

Preparing for clinic involves several steps:

• Developing a synopsis with biostatisticians to determine study design, subject numbers, and statistical models.
• Writing a detailed protocol outlining criteria, tests, procedures, dosages, follow-ups, study length, and, most importantly, endpoints (the measured "readout" for success).
• Engaging clinical contract research organizations (CROs) to conduct trials and hiring regulatory consultants and biostatisticians.
• Scheduling a pre-IND (Investigational New Drug) meeting with the FDA for feedback on study design and product specifications.
• Writing the IND application, which includes the clinical protocol and investigator information.

Getting into the clinic is a significant milestone, demonstrating legitimacy and competence. Human data from clinical trials de-risks the potential drug and serves as a value inflection point.

The phases of clinical trials are:

• Phase I: Involves 20-80 "normal, healthy volunteers" (or patients for severe diseases like cancer). Primary goal is safety (side effects, dose levels, metabolism, pharmacological actions). May seek early efficacy evidence for severe diseases or certain indications.
• Phase II: Involves several hundred subjects with the target disease. Primarily assesses efficacy, while continuing to monitor safety. May compare treatments, test combinations, or different formulations. Also determines optimal dosages. Small biotech companies are sometimes acquired after Phase II because it offers some assurance of efficacy, and Phase III is the most expensive.
• Phase III: The last trials before FDA submission, often requiring two well-controlled studies with thousands of patients. Assesses both efficacy and safety (with emphasis on efficacy) and other factors like dosages. Information confirms claims for final drug labeling.
• Phase IV: Post-marketing surveillance trials after FDA approval to collect more efficacy and safety data in larger patient populations. Evaluates long-term effects and rare adverse reactions.

It is important to lay out the entire development program (Phase I through III) from the beginning, estimating costs per patient by reviewing literature and ClincalTrials.gov. For example, Centivax planned its COVID-19 antibody trial by studying other antibody therapeutics' endpoints and study designs.

Selecting Indications

Building Backwards thinking in clinical trials means considering early on which initial patient population to pursue based on preclinical data and eventual market size/returns. "Following the science" and maintaining a cost structure aligned with the eventual market, even if smaller, is often effective. Smaller markets have advantages: potentially higher per-patient pricing, lower development time/costs, smaller trial sizes, and easier follow-on indication approvals. Gleevec, for instance, was initially approved for rare CML but expanded to four other indications, generating $1.2 billion in sales by 2020.

Orphan Designation and the Economics of Small Markets

"Orphan Designation" is awarded by the FDA to drugs for diseases with fewer than 200,000 US patients. This strategy can be attractive for small biotechs with limited capital as it allows for an affordable development plan. Orphan diseases also have high impact, as larger companies often avoid them. There are over 7,000 rare diseases.

Orphan diseases can act as a "wedge" in the market, leading to later label expansion. Crestor, for example, was initially approved for smaller populations (pediatric familial hypercholesterolemia) where there was no standard of care, making it easier to gain approval before expanding to more profitable indications.

Orphan drugs have favorable economics:

• Smaller trial sizes (e.g., 10-20 participants).
• Higher FDA approval rates.
• Longer market exclusivity.
• Marketing exclusivity: Seven years post-approval, FDA will not approve a subsequent drug for the same use.
• Priority review vouchers: Assurance of a six-month FDA review for the next drug submission, which can be sold to other companies (e.g., for $70 million to a large pharma).
• Streamlined approval: Expedited FDA review.
• Additional R&D tax credits: 25% federal tax credit.
• Waiver of Prescription Drug User Fee Act (PDUFA) fees ($2.9 million in 2021).
• Availability of nondilutive government grants.
• Regulatory assistance and guidance from the FDA.

Building Backwards to an orphan indication can be an effective development strategy, resulting in highly impactful medicines.

The Importance of a TPP: A Tool for Early Success

A Target Product Profile (TPP) is a specific planning tool created early in a company's life to outline the desired characteristics of the future product. It includes:

• Intended indication(s) and patient population.
• Dosage form and administration.
• Clinical pharmacology (pharmacokinetics, special populations).
• Frequency of dose.
• Whether it's a first-in-class drug and its differentiating factors.

Creating a detailed TPP with "best case" and "base case" scenarios helps in planning early experiments and designing clinical trials. This information guides which preclinical and clinical data are necessary to achieve the desired label. An example TPP for ischemic stroke illustrates how specific details like timing of drug administration, patient population, dosage form, and efficacy targets inform development. Functional outcome endpoints, tied to quality of life, are crucial for approval and reimbursement.

A TPP is a short document that guides R&D, helps differentiate the drug from competitors, and frames product filings for regulatory understanding. Company Z failed to use a TPP, leading to a situation where its new drug, despite a novel mechanism, couldn't claim it on the label due to insufficient supporting data, potentially resulting in a failed product or costly rerun trials. Using a TPP early could have facilitated communication with the FDA and integration of necessary studies.

Centivax used a TPP for its SARS-CoV-2 antibody therapeutic, aiming for intramuscular (IM) and subcutaneous (SC) administration for versatility, which required early data collection on concentration and stability for high-volume formulation. They also planned for an intravenous (IV) formulation for hospitalized patients.

In essence, Building Backwards through a TPP efficiently links preclinical development with clinical trials and market goals, ensuring effective planning for new medicines.

Chapter 12: Building Backwards to Intellectual Property

Ticking Clocks and Patents: An Overview

In biotech, patents are paramount because they represent what a company "owns" in terms of novel science, unlike tangible assets in other industries. A patent grants the right to exclude others from using your invention for typically twenty years. This theoretically allows a company to develop novel science without infringement concerns. Marty Sanders, an experienced biotech entrepreneur, stresses that "patents are the most important thing to get right... without patents, you have nothing".

Patents are also crucial for future M&A deals and valuation calculations. Vance VanDrake, a patent attorney, notes that a strong IP portfolio can significantly define the purchase price of an early-stage company, providing value to an "intangible asset". Without a strong IP strategy, negotiating a high sale price or dissuading competitors is challenging. VCs conduct diligence on IP and often pass on deals with weak IP coverage, as it dampens market potential and exit value.

An important exception to patent rights is the "safe harbor" provision (Hatch-Waxman Act), which allows the use of a patented invention for research "reasonably related" to FDA approval without infringement. Another key concept is Freedom to Operate (FTO), which refers to a company's ability to operate without infringing on others' IP. FTO is determined separately from patent rights and is crucial for commercial safety.

Understanding Patents and How to Obtain a Patent

Obtaining a US patent requires a formal filing and approval process through the USPTO (United States Patent and Trademark Office). Patent laws vary by country, necessitating separate national patents, though the Patent Cooperation Treaty (PCT) streamlines international filings. A specialized IP attorney is recommended for managing multiple national applications.

An invention must satisfy five criteria to be patented:

1. Not excluded from patentability: This means patenting inventions, not discoveries. Laws of nature, natural phenomena, and abstract ideas (like human genes or scientific formulas) cannot be patented in the US. However, applications resulting from discoveries, such as new antibodies or transgenic animals, can be patented. For example, Centivax cannot patent SARS-CoV-2, but they can patent their antibody treatment.
2. Sufficiently disclosed (enablement): The patent filer must provide enough information for someone "skilled in the art" to use the invention. This is part of the "grand bargain" where public knowledge is shared in exchange for patent rights. Minimal data is often sufficient, provided a believable rationale and written description.
3. Novel: The invention must be new and not in the public domain before filing. The USPTO searches for "prior art"—any evidence the invention was already known or available. This includes conference presentations, academic publications, grant abstracts, business incubators, public use, and even informal communications. The critical rule is "patent first, publish later". While data can be published after filing a provisional patent, public disclosure before filing (especially outside the US where there's no grace period) can eliminate patentability. Mohan-Ram advises scientists to be vague in public disclosures before filing to protect patent chances. Universities' IP offices can help with filing. A provisional patent application is a "pared-down" type that sets a priority date without formal claims, providing twelve months to file a nonprovisional application. Provisional applications are confidential and do not set prior art if not pursued further.
4. Nonobvious: The innovation must not be obvious to someone "skilled in the art" based on existing innovation. Patent examiners often combine prior art to reject claims as "obvious".
5. Useful: The invention must be capable of industrial application. While traditionally easy to meet, recent interpretations have rendered some medical diagnostics patent-ineligible.

If the invention meets these criteria, there are additional steps:

1. Writing claims: These are the "legal instrument" defining the invention and determining infringement. Claims range from "narrow" (highly specific) to "broad" (very general). Broad claims are desirable as they have fewer elements, making it harder for competitors to "engineer around" them. Specifications describe the invention and support the claims, but only claims are protected. Rishi Bedi advises crafting broad claims while writing detailed specifications to encompass all possible actualizations of the invention. IP attorneys are crucial for claim writing, balancing specificity and breadth.
2. Patent prosecution: This involves an "office action" and ongoing negotiation with the patent office. It's common for claims to be rejected initially, requiring revision (narrowing) or arguments against examiner conclusions. Successfully negotiating with the examiner leads to patent issuance.

Types of Utility Patents

Biotech companies primarily seek utility patents, specifically:

• Composition of Matter Patent: Applies to novel mixtures and chemical compounds, such as a new molecule's chemical structure. These are considered the strongest type because they are straightforward to obtain (less prior "art") and difficult to defend against infringement. The example of Laurel Therapeutics' EBIN eye drop for wAMD, which obtained a composition of matter patent for a novel formulation that significantly increased drug delivery, illustrates this. The patent specifies the peptide bound to a "carrier peptide or myristoyl group".
• Method of Use Patent ("methods" patent): Protects a series of steps for performing a function or accomplishing a result (e.g., a synthesis procedure, or a way to apply a molecule to treat a specific cancer). These are generally considered easier to "engineer around". However, holding many methods patents simultaneously can be effective by occupying more IP "space," making it harder for competitors to create their own IP. Laurel Therapeutics also holds a broad method of use patent for EBIN for inhibiting angiogenesis across various diseases, illustrating that using EBIN for any listed disease would infringe.

Sean Kendall notes that methods patents are more prone to workarounds, while composition of matter patents offer clear infringement criteria. A strong patent portfolio provides protection in different ways, making it stronger than any single patent.

Building Backwards from IP Basics

Filing for or licensing patents is one of the first steps when starting a company. An ideal scenario involves strong, broad claims that provide an effective monopoly, but in reality, some level of IP strategy is almost always needed. Understanding existing IP strength is crucial for augmenting it.

Formulating an IP strategy through Building Backwards can prevent future IP problems:

1. Augmenting existing IP to Build Backwards to future potential applications:
   • Company J acquired expiring composition of matter patents from a large pharma company cheaply and then filed for several new, broad methods patents for neurodegenerative diseases. They also patented sophisticated synthesis methods, protecting their unique, difficult-to-synthesize active compound.
   • Founders can use whiteboarding exercises with their team or hire a patent attorney/agent/consultant to identify and file for new IP applications stemming from the original invention.
2. Obtaining FTO and eliminating competition from the start by combining IP from multiple sources: This provides three key advantages:
   • Minimizing competition risk: By licensing major underlying technologies, a new company can "own" more of the space, making it harder for competitors to enter. Kendall advises acquiring IP that could be enabling for a strong competitor, even if not immediately needed.
   • Enabling the best technology to win within the company: Licensing IP from competing academic labs and combining it into one company allows the best technology to emerge internally, distributing risk and eliminating potential external competition.
   • More efficiently achieving Freedom to Operate (FTO): Performing diligence on existing IP helps identify potential infringements. Acquiring rights to competing IP can be easier than invalidating it. Ideally, a company should access the "seminal work" (original concept upon which other inventions are built) in its space, as this can provide FTO and effectively exclude competitors. For example, Thomas Edison's invention of the tungsten filament made the lightbulb practical, enabling widespread use. ARCH Venture Partners often licenses multiple pieces of IP from the start, as seen with 908 Devices, which combined licenses from two institutions. David Walt's Illumina DNA sequencing is another example of integrating existing concepts (beads, wells) for a novel application.

To begin, conduct thorough scientific literature searches (e.g., PubMed, Google Scholar, Google Patents) to identify other publishers and their impact. This also serves as a prior art search. Engage with the inventors themselves and an IP attorney to verify assumptions and identify "nice to have" IP.

In summary, IP is complex but fundamental to a biotech company's value. Building Backwards to a solid IP position early on increases potential acquisition prices and fends off competition. Assessing initial IP strength (e.g., broad vs. narrow claims, composition vs. method patents) informs strategies for augmenting or acquiring IP, ensuring a stronger position and increasing success.

Conclusion: Beginning at the Ending

The "Why" for Biotech

The author's personal "why" for entering the biotech industry was the profound discrepancy between terminally ill patients with no options and medical innovations lacking a path to real-world application. A family friend's wife, Jen, died of stage IV kidney cancer, prompting the author to recall the helpless feeling of "There's nothing else we can do for her". This reinforced that patients do not "lose" their fight with cancer; rather, existing medicines fail them. The personal grief experienced by patients and their families in the face of limited treatment options serves as the core motivation for creating more needed medicines.

Building Backwards to Humility

The author proposes that humility is another crucial aspect of Building Backwards for success in biotech. While not quantifiable like other strategies, humility underpins many of the discussed strategies. Without humility, it is difficult to:

• Admit when data is wrong or clinical trial results are inconclusive.
• Accept that the market may not want what was anticipated.
• Build the best teams or do the "unglamorous" yet critical work.
• Take colleagues' input, even when believing one knows better.

The author provides examples of humility from successful biotech leaders:

• Keith Crandell, cofounder of ARCH Venture Partners, despite immense success, maintains humility by working part-time as a Yellowstone National Park ranger, where he counteracts poaching and human trafficking. In this role, credentials are irrelevant, and the mission and mutual support are paramount. This exposure to life-and-death situations and human suffering provides perspective, preventing an inflated ego.
• Jacob Glanville, CEO of Centivax and founder of Distributed Bio, maintains humility despite newfound fame and success. His commitment to principles and refusal to compromise, even on small matters, stems from a childhood spent in a Tzutujil village in Guatemala, where he witnessed widespread illness and death due to lack of medical support. This experience instilled a deep sense of gravity about his work.
• The author's mother, an experienced scientist, taught that "the very top scientists are often the most humble" because they continually realize the limits of their knowledge.

Humility, therefore, is not just a character trait but a tool for operating effectively in the uncertain field of biotech. Sheila Jasanoff's concept of "technologies of humility" emphasizes acknowledging the partiality of scientific knowledge and acting under irreducible uncertainty. Embracing humility allows innovators to recognize and embrace uncertainty while still taking action.

The book's purpose is to empower individuals to bridge the gap between medical innovation and real-world application. The author concludes that biotech, while technical, is deeply personal and driven by a love for people struggling for "that extra year". To Build Backwards to success, beginning with the end—the patients and their needs—is the most powerful foundation.