Stuart R. Gallant, MD, PhD

In the late 1950s, electronics scientists and engineers like Robert Noyce, Gordon Moore, and Eugene Kleiner invented the idea that technically minded people could do more than work for a corporation, they could own it (or at least a piece of it).  They shook up the assumptions about how business was done in the United States and around the world, founding companies like Fairchild Semiconductor and Intel and spawning a host of “Fairchildren” spinoff companies in the Silicon Valley.

More than a half-century later, it is routine for scientist and engineers to take a leading role in founding corporations.  The photo at the top of this post features Özlem Türeci and Uğur Şahin founders of BioNTech, a manufacturer of the Pfizer-BioNTech COVID-19 vaccine.

Today’s post takes a high-level look at the startup playbook, covering some ideas that will help you get from the first conception of your invention to investigational new drug (IND) application filing.  Hopefully, you can avoid some hazards along the way.

Intellectual Property

The first rule of starting a pharmaceutical company is to guard the intellectual property—that means you need to patent your idea.  PharmaTopo^TM has an entire post devoted to patent strategy [1], please take a look at it if you are intending to start a company.

Your idea will need to be novel, non-obvious, and useful.  Let’s focus on the novel aspect.  In order to ensure novelty, you will need to have a thorough prior art search of the scientific literature and the patent literature completed.  But, before you involve a patent attorney, you can and should do a literature search on your own.  Scour the scientific literature to discover not only references to your particular molecule or drug concept but also related molecules and drug concepts.  The related ideas are important because they will help you define the extent of your claims within the patent.

If you cannot convince yourself that your idea is novel, then there is no reason to proceed.

Legal Counsel

You will need some lawyers:  1) a business lawyer who can help you to incorporate and assist in contract negotiations and 2) a patent lawyer to help you apply for patent protection.  Here are some things to think about as you search for counsel:

• Lawyers are worth every penny you pay them.  They keep you out of trouble and prevent you from making mistakes.  So, love your lawyers.
• Lawyers come with many rates.  You want lawyers who you can afford.  In my experience, the best way to find counsel is talk to angel investors.  Angels meet a lot of people in the course of reviewing possible investments, and they are aware of which firms provide effective and economical counsel.  So, ask a few angels, and you will get good leads.
• You want patent counsel with experience in pharma.  In my experience, a patent attorney who has not worked in pharma will usually say something like, “I have a colleague with more experience in drugs.”  Talk to counsel about their pharmaceutical experience prior to hiring them.
• Ask you lawyers how much they think it will cost to achieve your corporate goals (incorporation and patent filing the two major goals) to have a budget in mind.  Make sure you talk to several lawyers before signing an engagement letter.
• Talk to your lawyer about any legal agreements you have signed or plan to sign.  If you have a daytime gig, your employer likely required you to sign an employment agreement.  Make sure that any agreements you are party to do not imperil your intellectual property.

Incorporation

Incorporation is the critical step to making your idea investible.  Unless you are wealthy, you will need investors to purchase portions of your company, so do not delay, incorporate.  Some things to think about regarding your corporation:

• Make up a professional sounding name for your company.  (As an example, this blog is called PharmaTopo.  That’s a short, catchy, professional sounding name that no one else was using.  You will want something with those properties for your company.)
• Snag the URL.  You will want to be able to receive email at jane.smith@uberpharma.com (or whatever your company is called).  Set up the website with a basic home page that allows folks to contact you—even if you are in stealth mode, you can have a generic landing page.
• Incorporate as a C corporation.  Delaware is a popular state of incorporation because of its thoroughly elaborated business law, but you will need a representative in Delaware if you incorporate there.  It’s often most convenient to incorporate in your own state.
• Think about what your co-founders bring to the table.  The typical early startup has about three founders.  You will want to set aside 20% of the stock for future employees.  The easiest thing to do is divide the remaining 80% into three equal shares (if there are three founders), but does that reflect everyone’s contribution?  Equity can be a tremendously tough topic to address—if you get it wrong, it can lead to resentment.
• Create an Excel cap table.  This will help you think not only about founder stock, but also about investment—how much of your company you are selling in exchange for investment.

Stages of Funding

Every company goes through stages of funding:

• Self-funding and Bootstrapping:  Self-funding involves the founders kicking in to pay for lawyers, lab work, and other items.  Investors like to see founders with “skin in the game,” so be ready to put some of your own money in.  But, also think about your co-founders finances—ask them how much they are comfortable investing.  Bootstrapping (sweat equity) is the free work that founders donate in order to run their startup.  That is the price of entry to the startup game, so be prepared to work late if you have a daytime job.
• Friends, Family, and Interested Individuals:  You have a network of possible investors surrounding you among the people you already know.  They may be the ones that help you get that first critical few hundred thousand dollars.  Be very careful to protect their money and the relationships you have with these people.
• Angels and VCs.:  To access larger amounts of money, angels are the go-to resource these days.  Typically, individual angels like to spread their money around to diversify risk.  “Syndication” allows a group of angels to provide a larger pool of capital.  Professional investors like these can be extraordinarily helpful in navigating startup activities that are likely unfamiliar to you.

Data

The central conceit of this post is that you want to move your company from founding to filing an IND.  To engage in all the activities that occur along that journey, you will want to create a drug development plan [2].  Data is the life blood of your drug development plan.  Without data, you cannot file your patent, and you cannot show potential investors that your drug is effective.

This brings us to the concept of an investible event.  Investible events usually involve data—some examples are:

• Positive data on efficacy from an animal model.
• Completion of preclinical GLP toxicity testing.
• Filing an IND application with the FDA.

These are milestones that validate your drug concept.  By achieving success at these milestones, your company has marginally but measurably decreased the risk of your drug concept.  On each occasion that you complete an investible event, you may want to ask investors for additional funds.  Your existing investors should feel more comfortable about providing additional funds, and new investors should be encouraged to purchase a share of your company.

Resources

That was a very quick introduction into starting a pharmaceutical company.  One of the challenges for pharmaceutical startups is that tech startups dominate the discussion of business creation.  So, founders of pharmaceutical companies have to weigh advice carefully and ask:  does this advice truly apply to pharma (or is it more intended for tech)?  With that caveat, I am going to recommend two books that are largely tech focused but contain inspiration for founders of pharma startups.

Gordon Daugherty’s book Startup Success has the key elements of fund raising (strategy, raising, contracts, and valuation) all in an economical 212 pages.  It’s possible to read the entire book in one coast to coast plane flight, but you will want to come back to it as a resource again and again.

Antonio Garcia Martinez’s book Chaos Monkeys is a bit sensational, but it talks about how the sausage is actually made.  It’s invaluable to be a fly on the wall during a meeting between an angel and a founder—Martinez gives you that view.  The other thing I like about Chaos Monkeys is that Martinez does not end up wealthy at the end of the book.  We would all like to end up with a big payoff, but there is a significant chance that any pharmaceutical startup will end in a small payoff or no payoff at all.  That’s an important reality not to be shied away from.

Reading only goes so far, you will want to build a network of experts who can help you launch your startup.  Some ways to build your network include:

• Professional Organizations:  There are a plethora of professional organizations (American Chemical Society, American Institute of Institute of Chemical Engineers, American Association of Pharmaceutical Scientists) that offer general and specialty conferences where you can learn about issues like GMP manufacturing and FDA regulations.
• Investment Organizations:  Through local meetings, angel investors provide valuable advice for free or at very low fee (on the order of $10/meeting).  Check out:  www.bostonenet.org  and www.angelcapitalassociation.org to get started.  Remember, you should never have to pay a fee to pitch your idea.

[1] Gallant, S.R.  “Pharmaceutical Patent Strategy,” PharmaTopo, September 20 (2022).  pharmatopo.com/index.php/2022/09/20/pharmaceutical-patent-strategy/

[2] Gallant, S.R.  “Drug Development Plan,” PharmaTopo, December 31 (2021).  pharmatopo.com/index.php/2021/12/31/drug-development-plan/

Disclaimer:  PharmaTopo^TM provides commentary on topics related to drugs.  The content on this website does not constitute technical, medical, legal, or financial advice.  Consult an appropriately skilled professional, such as an engineer, doctor, lawyer, or investment counselor, prior to undertaking any action related to the topics discussed on PharmaTopo.com.