In a time when it's difficult to raise capital through the public markets, licensing deals are necessary to fund programs, and M&A has developed into the go-to exit strategy for private biotechs.

And if that's your plan anyway, why not set it up right from the start?

This month, Quanticel Pharmaceuticals Inc. struck a deal with Celgene Corp. to discover and develop first-in-class cancer drugs. As part of the deal, Celgene retained an exclusive option to acquire the start-up. (See BioWorld Today, Nov. 7, 2011.)

This "build-to-buy" model is being championed by Quanticel investor Versant Ventures, which has other start-ups it's incubating with the hopes of pushing them down the same path. The crux of the strategy is to partner early to ensure that the potential acquirer is getting what it wants.

"We think this is an interesting model to pursue for some of the Versant portfolio companies to establish early on the potential path to liquidity, especially in those areas where we're going to need resources and help from pharma companies who have drug development and commercialization skills," said Brad Bolzon, managing director at Versant.

Versant started talks with Celgene when Quanticel was still working on its business plan and had just two or three employees. "Discussions with Celgene resulted in both sides really resonating with how we could exploit [Quanticel's technology] for both the translational and drug discovery application," Bolzon said.

The shop-early business model started gaining momentum a few years ago, as troubles in the broader markets translated into a shortage of limited partners willing to put money into venture funds. At the time, Standish Fleming, managing member at Forward Ventures, told BioWorld Insight that if VCs want to make money in biotech, they need to define their customer base, figure out what the customer wants and build it. Rather than building companies they hope to one day sell on the open market to the highest bidder, they need to build biotechs on a made-to-order basis for their one reliable customer: big pharma. (See BioWorld Insight, Aug. 24, 2009.)

In time, the build-to-buy model became a favorite of product development corporations. BioPontis Alliance LLC has partnered with multiple large pharma companies to identify potential therapeutics and technologies being developed at academic institutions. Being informed on a confidential level of the pharma's interest in a particular disease area helps BioPontis develop products that are most likely to be acquired. And other product development corporations, such as Atlas Venture Development Corp., are skipping the newco altogether, electing to license drugs directly from pharma with the expectation that the compounds will be reacquired down the road. (See BioWorld Insight, July 18, 2011.)

Now, with the initial public offering window still tenuous and the much-feared retraction of biotech VC firms starting to play out, firms like Versant are looking at how the build-to-buy model might help them increase the likelihood of an exit.

Like any business model, however, there are challenges with building to buy.

Big pharma is notorious for changing strategies, so the start-up has to pick its partner carefully since the long-term commitment introduces a danger that the acquiring company might change focus mid-development. "It's always a balance between those that have established capabilities in a field and those that want to further build in the area," Bolzon said.

And developing molecules specifically for a licensor with the expectation that the firm will be acquired could create a conflict of interest for the financial backers of the start-up, but Bolzon doesn't seem worried in the Quanticel-Celgene deal. "There's a real strong alignment as to how to best take advantage of this unique technology."

Finally there's always the possibility the "buy" part of build-to-buy doesn't come to fruition, so biotechs need to have a backup plan. "It's critical that we build these business models to be independent in the event that the partner does change course," Bolzon said. "It's very important that we have a path on our own."