Starting a Biotechnology Business
Starting a biotechnology business entails many of the same legal and business principles required to start any business and reviewing the page “Starting a Business” is a good starting point.
The following is an overview of the biotechnology industry beyond generally applicable principles:
Biotechnology Business Generally
Biotechnology is a field of science and invention in which biological techniques are used to engineer organisms, cells, and body parts into products for sale to industries such as medicine, agriculture, and energy. While biotechnology has existed for thousands of years, starting with selective breeding of livestock, the industry of biotechnology as it stands today started in 1953 when James Watson and Frances Crick discovered the double-helix design of DNA.
As with all scientific and technological endeavors, laboratory advancements such as the discovery and development of recombinant DNA techniques lead to moral, ethical and ecological concerns. These concerns are addressed through government regulation of the biotechnology industry. Whether viewed as necessities for conscientious advancement or hindrance from an overbearing governmental bureaucracy, any person or entity in the business of biotechnology in the United States needs either a strong understanding of the government regulation of biotechnology research and products or the counsel of a trusted advisor with this knowledge.
IIn addition to government regulation, the business of biotechnology poses issues and barriers to financial growth not found in any other industry. With hundreds of millions of dollars required for investment into the development and commercialization of a single product, a biotechnology business must be attractive to investors and strategic partners, acquire and protect intellectual property, license new technologies created in federally funded university research, and exercise business control over its employees. Bringing all these factors together requires strong technical knowledge, a well-managed infrastructure, and sound legal advice.
Biotechnology Business Finance
The capital required to get a biotechnology business from start-up to first product launch is measured in the hundreds of millions of dollars. This money comes progressively from several sources, including private placement or angel investors, venture capitalists, corporate partnerships, and public stock offerings over a period of seven or more years.
Each progressive stage of financing poses unique threats to a biotechnology business. From complying with federal and state securities regulations to preventing dilution of share prices in subsequent rounds of funding, San Diego Corporate Law can help a biotech secure the funding necessary while protecting ownership interests.
A typical biotechnology business will be financed in the following, progressive steps:
Once an idea for a biotechnology product is conceived, seed money is needed to do some initial research which, hopefully, will show that the product idea has merit. A venture capital firm is unlikely to have much interest in a completely untested product idea, so the success of these initial tests is critical to the next stage of financing. Some sources of seed money are:
Seed money from government institutions, such as the NIH, used to fund research in a university laboratory is one resource for initial research. However, university research means university ownership of the target developed. While a university may be willing to license the target to a startup biotech for further development, venture firms might be hesitant to invest in the startup based upon the university’s involvement.
An angel investor is a high net-worth person or group who make high risk initial investments in new businesses with the hope of a large return on the investment. Angel investors are interested in acquiring an equity interest of a biotech only in the seed stage of financing, and these investors should not be expected to make further investments.
After initial testing, and based upon both a biotech’s business plan and acquisition of intellectual property rights, a venture capital firm may choose to invest in the biotech.
Venture capitalists typically invest in “rounds” of financing to limit exposure to a company. If a venture investor wants to invest $12 million in a particular biotech, that investment will be made with a small first round, perhaps $2 million, a larger second round of $4 million and a larger, final round of $6 million. To progress through the financing rounds, the biotech will need to meet the “milestones” set forth in the previous round. These milestones are put in place by the venture investor to ensure the biotech is making progress on its research. Failing to reach milestones on time may cause the venture firm to cease financing, or continue financing at a reduced price per share.
The infrastructure needed for full scale development and commercialization of a biotechnology product requires funding beyond that which can be provided by angel investors and venture capital firms. A large biotech will exchange funding for a smaller biotech and often development of the smaller biotech’s target in exchange for licensing, marketing, and distribution rights. While a smaller biotech does give away many of its rights to the target in a strategic alliance, such alliances are often the only way to continue financing the target.
The most important funding event for a biotech is the initial public offering (IPO). While the most expensive form of financing, the initial public offering is less dilutive of the stock price than a private offering. The time to go public should depend upon both the financial need of the biotech for more capital and the expected condition of the financial markets which will thereafter determine the price of the stock.
Although copyright and trademark laws are important to the protection of biological intellectual property, by far the most prevalent forms of protection are patents and trade secrets. San Diego Corporate Law counsels biotechnology businesses regarding intellectual property rights, but leaves the drafting and prosecution of patent applications to third party patent attorneys.
San Diego Corporate Law provides counsel on topics such as:
Sample and Data Exchange
The open exchange of data and biological samples among researchers in academia might seem like unrestricted collaboration to pure researchers, but to those interested in the development and commercialization of biological materials, these transactions should only be conducted pursuant to a written agreement between the researchers. Undocumented exchanges risk implied-in-fact proprietary contracts which require analysis to determine if the materials were misappropriated or if information was wrongly disseminated. Contractually documenting exchanges to establish ownership in advance of an exchange prevents future disputes regarding ownership of the biological materials.
Protecting proprietary biological materials from misappropriation is an important task for any biotechnology based business. Genetically engineered microorganisms, DNA, and other biological materials are capable of virtually unlimited reproduction. The misappropriation of tiny quantities of these materials can have severe financial consequences for a biotech, especially if the misappropriated materials are commercialized by the misappropriating party before proprietary rights in the materials have been established.
Establishing ownership interests in patents and trade secrets is a contractual matter. The proprietary rights available under a specific patent or trade secret depends upon the obligations under which the patent or trade secret has been licensed and under what arrangements the specific materials or information was developed.
The rights to inventions arising from university research are captured using patents and generally become the property of the university. Universities profit from the patents by licensing the technology to industry for improvement and commercialization through a university’s office of technology transfer.
Once a biotech finds a technology of interest, a non-disclosure agreement is executed between the university and the biotech and additional, confidential information about the technology is released to the biotech for review. This additional information may be data or processes held by the university in confidence as a trade secret or developments made by university researchers which are not yet protected by patents.
If a review of the technology is positive, the biotech may license the technology. Licenses may be exclusive, granting the biotech the sole right to develop and commercialize the technology, or non-exclusive, wherein two or more biotechnology businesses may have the right to develop and commercialize the technology. Sometimes non-exclusive licenses are geographically limited, meaning each licensee may only develop and commercialize a technology for eventual use and distribution within certain geographic boundaries (e.g. Asia, North America, etc.)
Adeptly licensing technology involves complex business and legal planning and strategies. San Diego Corporate Law can help negotiate the licensing terms and review the resulting licensing agreements to ensure that the investment made in a technology is sound and that the rights granted under the license are sufficient for the overall purpose of the licensing.
Regulation of Biotechnology
San Diego Corporate Law helps biotechnology businesses navigate the layers of regulation otherwise encumbering advances in biotechnology. Under the Coordinated Framework for the Regulation of Biotechnology by the Office of Science and Technology Policy, as established in 1986 by 51 Code of Federal Regulations § 23301, biotechnology is regulated by agencies of overlapping jurisdiction, meaning, in many cases, more than one regulating body and more than one set of federal regulations is applicable to a research project.
Without undertaking to explain all the overlaps, the basic jurisdiction of the Coordinated Framework lies with the following agencies:
National Institute of Health
The NIH Recombinant-DNA Advisory Committee controls all NIH supported research, which is effectively all nonprofit biomedical research conducted in the United States.
Food and Drug Administration
The FDA regulates biotechnology products for human health care, food additives, and veterinary drugs under the Food, Drug and Cosmetic Act.
United States Department of Agriculture
The USDA regulates veterinary pharmaceuticals under the Virus, Serum, Toxin Act and plant experimentation involving recombinant, transgenic, and microbial species under the Plant Protection Act.
Environmental Protection Agency
The EPA regulates pesticides and other plant regulators under the Federal Fungicide, Insecticide and Rodenticide Act and any recombinant organisms not regulated by other agencies under the Toxic Substances Act.
Employment Law for Biotechnology
In addition to all the burdens employment law compliance places onto a business, the hiring of scientists and other technical personnel by a biotech business have serious implications upon the protection of the biotech’s intellectual property. Other employees with access to technical information, business strategy information, and other proprietary resources are also a threat to a biotechnology business.
While 100% retention of employees would be ideal, in reality, people change jobs when moving to new cities for pay increases and to take advantage of opportunities for growth when promotions are not available with their current employer. While some people change careers, many people only change employers. The loyal employee of a biotech today may very well be working for that biotech’s biggest competitor tomorrow, taking with them all the knowledge and ideas formed while working for their previous employer.
San Diego Corporate Law drafts written employment contracts, employee handbooks, non-compete agreements, and strict employee non-disclosure agreements. These documents should not be considered optional by a biotechnology based businesses, as proper written materials allow a biotech to exercise business control over employees both during and after the employment relationship. Properly prepared documents will protect a biotech from every day, employment based lawsuits as well as disputes over shop rights and cases of valuable proprietary information being divulged by a former employee.
Where to Start
Contact San Diego Corporate Law for a consultation, to discuss your current business situation, and to receive personalized suggestions for your business situation.