Top 10 mistakes biotechs make (and how to avoid them)

As biotechs navigate the always-tricky drug development and approval world, mistakes are inevitable. From IP to marketing, there are endless ways a small, inexperienced company can run into problems. At the very least, these errors cost time and money; at worst, they can lead to the demise of a promising drug or even an entire company.

In his 18 years as an attorney, Stephen Ferruolo (right) has seen plenty of mistakes. He's a partner in the Business Law Department at Goodwin Procter, an 850-person firm that has helped large and small companies alike negotiate the development process. Ferruolo has worked on public and private financings, acquisitions, joint ventures, strategic partnerships and technology licenses. In the course of his work he has witnessed the same mistakes repeated time and again, giving him insight into the best ways for companies to minimize risk, as well as save time and money. From the mismanagement of IP to not knowing when to partner, Ferruolo discusses the blunders he regularly sees small drug development companies make--and what you can do to avoid them.

1. Not thinking strategically about IP

Intellectual property and licenses are at the core of everything a biotech company does. But too often, biotechs don't think strategically about their licenses and patents--both what they own and what they'll have to license from others. In order to be successful, a company needs to think about the IP relating o its drug candidates on a variety of levels early on. How strong is the patent protection? Will the company have freedom to operate? How will a buyer or partner view the terms and conditions of your licenses? How well will the patents hold up against challenges from generic companies?"Think globally," encourages Ferruolo. What plans are in place to develop and commercialize the drug in the U.S., Europe, Asia and emerging markets? Companies need to think strategically about IP and spend their money wisely. "The key is to have the right advisors internally or externally who think long term." So what can you do to avoid an IP nightmare? Instructs Ferruolo, "Ask yourself this: If I were a buyer or partner doing IP due diligence, where would I poke holes and see issues? Identify the and fix them now."

2. Not understanding the target market

Before investing millions of dollars and many years into a drug, biotechs should think about the commercial viability of the end product. "Don't treat your R&D process as just a research project," advises Ferruolo. Not only should your company assess the drug's activity, management must also determine if there's a reasonable and timely path to approval. As for its market potential, ask yourself this: Can the drug be differentiated? Will it be reimbursed? Study Medicare and Medicaid and find out how drugs or other products like yours are being reimbursed in the current market. Have realistic expectations, because healthcare costs are on the rise and there's less tolerance for expensive meds. A super-expensive drug--even an effective one--may not be worth pursuing if there are alternatives on the market.

3. Not raising enough money

Too often, biotechs don't raise as much money as they could because management wants to avoid dilution. Often, the decision is made to raise just enough money to the next development milestone, with the assumption that the company will then be able to raise a new round at a higher valuation and thinks the company has enough cash to get by. "That is just plain dumb," Ferruolo says bluntly. Drug development inevitably takes more money and time than anticipated, so biotechs should raise as much money as they can, when they can. "Alex Zaffaroni use to say, "It's not the size of your slice of the pie; it's the size of the pie that matters,'" notes Ferruolo. Too often founders and investors fight over the relative size of their slice of the pie. "Even in this environment, people continue to have unrealistic expectations about valuation." As a result, a lot of money is sitting on the sidelines and not being put to work in the industry.

In addition to raising as much money as possible, biotechs need to pick their VCs wisely. It's important to pick an experienced VC with deep pockets to lead, one that will be able to syndicate of similar investors. Those are the investors you want on your board to support subsequent rounds, even if they grind you down some on the initial valuation.