First Steps in Creating a Pharma Start-up

A primer for ophthalmologists on starting a new pharmaceutical company and bringing a new drug to market.

William C. Stewart, MD, Jeanette A. Stewart, RN, and Lindsay A. Nelson, BS, Cheyenne, Wyo.
4/2/2014

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As a basic scientist or physician you may have conceived of a new idea for a product that might be a good basis for a dynamic pharmaceutical start-up. However, perhaps your initial euphoria about the idea may have quickly receded and you realized that the difficulties of actually creating such an enterprise seemed insurmountable.

Physicians and scientists typically are not trained to create pharmaceutical start-ups. As your routine responsibilities of teaching, patient care or research demand your time and resources, taking steps to initiate your new company may appear impossible. In addition, the effort required to resolve any university-related intellectual property and contract issues may impose further obstacles.

Join us in the next few pages as we discuss the foundational steps in beginning a start-up that can lead to an actual functioning pharmaceutical company. We hope the article eases your burdens as you implement your idea to help patients in the coming years. This article is intended only as a primer on starting a new pharmaceutical company and cannot replace more detailed information from Food and Drug Administration documents and appropriate consultants.1 Additional information is also available in our prior global overview “The Start-up: From Dream to Reality”) (See Review of Ophthalmology, April 2013 issue, p. 62.)

Is It the Right Idea?

• Can the medicine work? Even now you may have a spectacular new idea for a new medicine and are excited over its prospects for success. Perhaps this potential product will fulfill a personal dream related to professional, financial or humanitarian reward.

But be careful. Your excitement can lead to “product blindness.” The facts are brutal: On average, a new, undeveloped medication has only a very low chance of reaching commercialization.2 Further, there are already more than 300 products currently being developed by both large and small pharmaceutical companies in ophthalmology alone. (Internal data, PRN PharmaFarm) Consequently, despite your enthusiasm you should make an honest assessment of your idea and its potential for success.

This assessment begins with a frank discussion with yourself regarding several vital questions, shown in Table 1.
Table 1. Initial Questions About the Function of a New Medicine
What is the mechanism of action?
What is the exact indication?
What unique problem does your medicine solve?
What is the molecular biological link to the targeted disease?
Can this medicine be delivered to the target tissue in sufficient levels to initiate its pharmodynamic action?
What are the advantages over current therapies?
Are there any potential safety issues?

Ideally, the answers should be backed by data and not just opinion. Answering these questions is important so you can create a complete and compelling story about your new medicine’s advantageous actions on a molecular level to treat the targeted disease.

If you cannot yet answer all the questions in Table 1, they preferably should be known before you seek institutional funding. Consultation initially, perhaps with close knowledgeable colleagues, may be needed to help answer these questions in areas beyond your own expertise. Importantly, before seeking other opinions, you should protect yourself legally. (Please see confidentiality discussion below in “Legally Correct.”) After executing confidentiality commitments, you may more safely initiate discussions with colleagues.

However, despite your close colleagues’ advice, you may need more assistance. Even at this early stage of development, brief initial discussions with industry-based consultants or contract research organizations (CROs) dedicated to assisting start-ups may help answer the more difficult questions. The type of consultants contacted would depend on the advice you need. (Please see Table 2 for the list of consultant or contractor types we discuss in this regard.) Often these individuals or companies will offer a complimentary initial discussion regarding a new idea, or work in part for equity.

• Can you develop it? To a large degree, answering this requires an examination of some regulatory issues. First, identify the exact indication. Next, determine whether it has a known regulatory pathway, including a clear primary efficacy variable and if that pathway is feasible, too time consuming or expensive. Early consultation with a regulatory expert may be helpful.

Table 2. Potential Types of Consultants/Contractors to Assist a Pharma Start-up
Legal
Patent attorney

Corporate attorney

Start-up-experienced attorney
Administrative
Assistant

Accountant

Bookkeeper

IT expert
Pharmaceutical
Overall development specialist

Product manufacturing

Formulation manufacturing

Regulatory

Clinical development

Preclinical development
Market
Market assessment
  Reimbursement
*Consultant or CRO
 
Assuming your product is not a generic (505j application), another early step is to identify the type of new drug application, or NDA, that you will file to gain approval for the product. Most applications will require a 505b1 route, which is a full application for a new clinical entity, or NCE. There are occasions, however, when prior data exist for a new product, which allows for submission of an application known as a 505b2.3 This type of application can save much time and money in your development process.

• Can you sell it? Once you determine your medicine can function as you intend, with a reasonable regulatory pathway, you must consider whether you can actually sell it. Again, this assessment requires critical, realistic thinking. Please see Table 3 for a summary of key questions to ask.

The initial question—potential market size—is the easy one; it’s the number of people with the disease within the chosen treatment indication, to whom you can sell your product. This data generally is accessible from an Internet search. This is the point where many inventors, and even chief executive officers, stop their analysis. Be careful though. Do not assume that doctors will readily prescribe a product only because it becomes commercially available. Unfortunately, this may not be the case.

Therefore, you must consider the next level of questions: What market penetration can your product realize within the existing patient population? And at what level of therapy will the product be used? Answering these two questions will help you project the rate at which your new product might be reasonably prescribed. Importantly, these questions should be answered by factual data, not just the opinion of a close colleague or you.

You can perform inexpensive analyses by surveying ophthalmologists or optometrists to better understand if there is a perceived need for the new treatment. Further, cost effective patient surveys can be performed in physicians’ offices, shopping malls or online as appropriate. Consider using an inexpensive survey website such as Survey Monkey ( surveymonkey.com). The survey questions might assess: delivery route; dosing; willingness to pay out-of-pocket; perceived clinical need; place in therapy; and impact of potential safety issues. Additionally, speaking with members of the business development office at large pharma companies may provide you with a sense of potential future interest in your product.

Also important is a SWOT analysis, which involves thinking though the Strengths, Weakness, Opportunities and Threats of every product. You should include an honest assessment of the current competition and why your new idea is better. Consider also future competition based on what is currently in development.

Next ask yourself: Who will pay? Will this be a self-paid product or is it for an indication and price level that will require private and government reimbursement? Consultants again are available to create initial assessments regarding this reimbursement.

Last, consider what you will do if your primary plans for your chosen treatment indication fail. What backup plans do you have as a secondary indication for commercialization?

Legally Correct

Protecting your valuable intellectual property and your own personal assets is important even at an early stage. Consider a few relatively simple steps.

• Patent protection.
As soon as able, you should find a reliable pharma-experienced patent attorney to aid in developing an initial filing for your patent in the United States or other target country. The initial filing for a patent can be fairly inexpensive. The patent filing is not an issued patent itself, but will provide protection so another individual cannot file the same invention. This attorney also can initially analyze your start-up’s freedom-to-operate within the scope of existing patents and public information (prior art) for the product, its formulation as well as its indication and how it will be delivered.4

• Confidentiality. Prior to discussing your medicine with anyone you should request a confidentiality agreement, or CDA. Templates for these documents can be found online and adapted to personal preferences. If any doubts exist about the quality of a CDA template, you should send it to a corporate attorney to review. Once a CDA has been signed, discussions about intellectual property can proceed. However, take care always to limit your IP discussions to those you trust, as even a well-written CDA may not assure complete confidentiality.

• Incorporation. Early in the development process you should incorporate to protect yourself legally and provide a basis to expand your company. We advise you to seek assistance from a corporate attorney. A C-corporation has the advantage of allowing for the distribution of multiple different stock types.4 Incorporation is also important for contract development and provides a structure that allows funding of your company by investors.4 It also helps protect your personal assets from financial liability if the company should go bankrupt.

• The university. If you are employed at a university your contract probably states that the institution receives some measure of patent rights for your discoveries. Consequently, early in the start-up process you should engage the university’s technology licensing officer to determine their willingness to provide an exclusive license with favorable terms. Take care in developing the terms of this license. Creating an agreement with your university that will share improvement risks with the institution at a reasonable equity ownership and royalty rates will better enable you to attract investors and negotiate with a large pharma company for ultimate licensing. Again, outside counsel with an attorney familiar with such deals is helpful.

Airtight Organization

• Administrative details. Keep detailed records from the very beginning. All aspects of your new venture are important to keep well-organized, but especially contracts, promises, legal communications and financial matters. There are a number of excellent, inexpensive organizational electronic tools available, many through the Microsoft Office suite of products. Numerous useful templates are built into the software, with additional pre-formatted document shells easily identified for download by a quick Internet search. Excel spreadsheets are one example of a useful tool for tracking and organizing development tasks. Alternatively, there are free products available on the Internet, but be sure to read privacy rules carefully before using them.

Table 3. Market Assessment Outcomes
What is your potential market size?
What percent of the market can you capture?
At what stage of therapy will the medicine be used?
What is the SWOT analysis?
Who will pay for the medicine?
What are the backup plans, should the primary plan fail?
 
Online data storage not only provides secure storage and backup of documents, but also allows remote access for team members. Strongly consider implementing cloud services for your new start-up. Again be careful, however, to read and understand the security policies of the host.

Other experienced contractors, apart from an administrative assistant, can help you or your CEO establish essential procedures. For example, finding an IT expert to help establish your initial setup, troubleshoot technical issues and keep you abreast of IT advances, or a bookkeeper and accountant to set up your accounting, audit and tax-related procedures.

A well-organized development team is essential for your success. We recently published a study that evaluated success factors for ophthalmic pharma start-ups and found a greater chance statistically of a financial exit (sell or licensure) for companies doing so five years or sooner after incorporation than those further along in the development process. Although the study was small (n=25) it implies indirectly that an efficient, well-financed development plan might increase the chance for a financial exit.5

• Business plan. If you are still convinced that you have a viable product, the next step is to develop a comprehensive business plan. Although this seems like an arduous task, it will help assure you have formulated answers to basic, pertinent questions regarding your product. Further, it prepares you to articulate your company’s story so you can better express it to others. Business plan templates are available on the Internet. The typical organization is shown in Table 4.

Funding & Founding Documents

Paramount to a successful start-up is funding your venture. Recently we evaluated ophthalmic start-up CEOs, and noted that funding their venture was most often the greatest hurdle they faced.6

You may decide to use personal funds to initially fund your company. Unless your wealth runs to nine digits, though, you almost assuredly will need outside investment to mature and complete development of your product. You, however, do have ownership equity, which can be used to induce others to help develop the new treatment.

Owner’s equity can be a difficult subject because you may desire to keep your ownership of the company to protect the rewards of your invention. However, investors also have worked hard for their money and seek an equitable return for what they might view as a high-risk endeavor. Consequently, the investor and you can help each other, but it requires you to disperse your owner’s equity, over time, in a judicious manner. In the end, you may own only a small percentage of the entity you founded. However, in a successful company, the remaining equity will have a higher valuation and should make your efforts financially worthwhile.

Funding a new start-up generally occurs in three rounds: A, B and C. The A round is often called the “friends and family” round, from whom you might receive initial funding for the venture to help found your company. Importantly, even at this early stage a clear and detailed budget is useful to assist you in telling your investors the exact product they are purchasing, to the stage the current investment round should take the company, and a description of the next steps to procure new financing.

Once you receive initial funding from interested early investors, your corporate attorney should put a founders’ agreement in place. This document will specify the stock distributions, as well as the rights and restrictions upon the founders and the stock. This should be a detailed document delineating the relationship among the founders.4 Try to resist the temptation to conduct the deal on a handshake. A detailed agreement will help determine the relationships between founders in future years and help keep disputes to a minimum.

Table 4. Typical business Plan Organization
Summary
Company description
New medicine description
Product need
Competition analysis
Funding request
Budget

In addition, your attorney should assist the founders and you in formulating a stock option plan among the founders to specify how the remaining equity (typically about 20 to 40 percent of the total potential shares) will be distributed to management, employees and contractors.4 Typical ranges of percentage of ownership exist for each of these different company roles.4 It is the options that allow a start-up to save salary and contractor payments and induce qualified personnel to assist in product development.4 You will likely need an attorney experienced in pharma-related start-up deals to assist you with the above documents.

The A round funding also might include public or private grants (state/local development grants, as well as federal funds, are available from the Defense Advanced Research Projects Agency, the Department of Defense, and the Small Business Technology Transfer or the Small Business Innovation Research programs) or angel group funding. The amount of the grant may help fund initial expenses, usually ranging from $100,000 to $1 million. The A round funding is typically allocated to: IP creation and maintenance; consultant payments; lead product identification; preclinical efficacy; non-GLP (Good Laboratory Practice) pharmacology and toxicology studies as well as an initial regulatory plan; and the initial creation of the drug substance and simple formulation of the new medicine.

Rounds B and C typically involve larger private institutional investors (angel or capital venture groups, large pharma companies) who typically consider the A round as too risky for investment. The second, and maybe the third, rounds of funding should help move your product typically into GLP toxicology and pharmacology, formal regulatory contacts with the FDA, submission of an investigational new device application, as well as early clinical Phase I and II trials. 

• Board of directors. Once you incorporate your company and other investors have agreed to participate in the venture, you should form a board of directors. BOD members should be chosen carefully, as they supervise the CEO and represent the shareholders.4

Board members should be affable, willing to contribute and work as a team and be able to advise the CEO or you as needed. Although individuals can be drawn from a mixture of professional backgrounds, prior ophthalmic pharma start-up experience is a positive. Including several high-profile individuals may help the reputation of your company.4 In addition, some board members should possess enough financial means to support your company in urgent times and help bring new investors to the company. Further, having at least one member of the BOD, or a separate scientific advisory board, with preclinical and clinical ophthalmic expertise is helpful to advise the BOD regarding technical questions. The typical start-up BOD is small and members are usually compensated with at least a company stock options package.4

We hope this review has provided you with the first steps to organize your new ophthalmic start-up with an established funding, legal and organizational basis. Don’t forget the importance, before beginning your company, of carefully analyzing your ability to commercialize your product based on its pharmacology, regulatory pathway and market need.

Persistent, careful attention to administrative and personal details will help you build a successful company and product that will ultimately be an advantage to ophthalmic physicians and their patients.  REVIEW


Dr. and Mrs. Stewart are co-founders of PRN Pharmaceutical Research Network, LLC, an international ophthalmic clinical study management and consulting firm, as well as PRN PharmaFarm, LLC, which specializes in financing new ophthalmic start-up companies to assist towards product commercialization. Ms. Nelson is a research coordinator for both companies. They received no financial support from any private or government funding source for this article.

Contact Dr. Stewart at: PRN PharmaFarm, LLC, 109 E. 17th St., Ste. 3407, Cheyenne, WY 82001. Phone: (843) 606-0776; e-mail: info@prnorb.com.




1. FDA. Development & Approval Process (Drugs). Online at http://www.fda.gov/Drugs/DevelopmentApprovalProcess/default.htm.
2. Invention Success Rates - Odds of Inventor Success. What percent of inventor ideas are successful? What percent of patents make money? What percent of inventions are commercialized? InventionStatistics.com. Online at http://www.inventionstatistics.com/Innovation_Risk_Taking_Inventors.html.
3. FDA. Drug Price Competition and Patent Term Restoration Act of 1984 (Hatch-Waxman Amendments). Online at http://www.fda.gov/newsevents/testimony/ucm115033.htm.
4. Kolchinsky P. The Entrepreneur’s Guide to a Biotech Start-up. Online at www.evelexa.com/resources/EGBS4_Kolchinsky.pdf.
5. Stewart WC, Chaney PG, Stewart JA, Kruft B, Nelson LA. Qualitative factors underlying the successful investment in new ophthalmic pharmaceutical products in the United States. Acta Ophthalmol 2013;91:496-497.
6. Stewart WC. Stewart JA, Kruft B, Nelson LA. Challenges facing ophthalmic startup companies in developing new devices or medicines. Acta Ophthalmol 2013;91:e81-83.