SAN DIEGO – At the Biocom Global Life Science Partnering Conference, biotech executives and venture capitalists shared their experiences building companies with the intention of selling to a big pharma.

But unlike the typical build-to-buy – or build-to-sell model depending on which side of the transaction you're on – that involves one company and a big pharma that's expressed interest in buying down the line, these companies are making a business out of building and selling companies.

HUMAN CAPITAL

At a typical one-product company, the discovery scientists often get laid off as the drug moves into the clinic because the money gets moved over to the development side, Joel Martin, president and CEO of Dauntless Pharmaceuticals Inc., told the audience. People can also lose their jobs and teams are disbanded after an acquisition, he added as another example.

"It seemed like a pretty inefficient and unfair system," Martin said. "I know of no other industry where success results in you losing your job."

Dauntless, founded by Martin and Mike Powell, a general partner at Sofinnova Ventures, plans to develop multiple single-product companies that can be sold individually to pharma companies while retaining the human capital of drug hunters and developers. As much as possible, the San Diego-based company plans to use the 505(b)(2) pathway to reformulate drugs as a way to keep development costs down. (See BioWorld Today, July 22, 2015.)

"The people can roll on to the next program, so we can preserve the talent pool within the group," Clare Ozawa, chief operating officer of San Diego-based Inception Sciences Inc., which has a similar model to Dauntless with separate holding companies that house each separate candidate with its own budget and investors that are managed by Inception Sciences. "We use a service agreement and almost use the Inception Sciences entity as an internal CRO," Ozawa explained.

Even for teams that haven't had success, keeping together can be a good move. "It's the failures that make them great because they know what not to do," said Jay Lichter, managing director of Avalon Ventures.

Avalon Ventures struck a deal with London-based Glaxosmithkline plc in 2013 to develop up to 10 companies that GSK would purchase – again, without people changing hands. To house the people, Avalon established San Diego-based COI Pharmaceuticals Inc., which stands for Community of Innovation. The company has a portfolio of 13 companies under development, some of which aren't part of the GSK deal. (See BioWorld Today, April 24, 2013.)

FLEXIBILITY

While the holding companies are designed to be sold, when a buyer is found and when the asset is released to the buyer varies among the three companies.

"We usually spend a phase of seed financing and incubate a program first while we're determining the financing strategy," Inception Sciences' Ozawa said. Rather than having one main partner like Avalon, the company has deals with multiple pharmas and big biotechs.

Inception Sciences likes to set up its exit at a preclinical investigational new drug application (IND) stage, while the deal between Avalon and GSK has the pharma taking over the drugs slightly earlier at the clinical candidate stage.

"Once you have that clinical candidate, the innovation piece is done," Lichter said, adding that it makes more sense to leverage the capabilities of a large pharma to do the IND-enabling studies.

Dauntless' plan is to sell much later, at human proof of concept, although the company is also starting with more advanced compounds, so the time they're in the company's hands might not be that much different.

Since most of those deals are structured as an option to buy, the pharma isn't required to make the purchase if there's been a shift in the pharma's need, so the developing companies need to be prepared to develop the asset further. Fortunately, the build-to-sell model makes it easier to find additional capital because the pharma funded some or all of the development. "They're financially in a better place for more reasonable financing than if all the money had come in venture because there's less dilution that's gone in," Ozawa said.

Even for drugs that don't work exactly as planned, but aren't complete failures – what Lichter calls "zombie companies" – the multicompany model provides hope. "The team that developed it is still in the same building, so you put it on the side, you get phone calls, you go to J.P. Morgan, you talk about that company, and you can still have interest in it," Lichter said, pointing out that if the drug was in a standalone company the asset would just get lost after the team disbanded.