September 28, 2022
Adam Hoeksema
We recently released our biotech financial projection template and as I was building out the financial model it dawned on me just how tough it would be to be a biotech startup founder. Biotech, or life science startups, are literally saving lives, so I am glad that some founders are brave enough to take the leap. Most of our tech related customers at ProjectionHub are building some B2B SaaS or Marketplace business which is difficult in its own right, but new medical devices or pharmaceuticals just take the complexity of starting a business to a whole new level.
In this article I wanted to highlight some challenges and answer some common questions as it relates to finance for biotechnology startups. I plan to hit on the following:
- How to create a financial model for a biotech startup?
- How to finance a biotech startup?
- How to secure grant funding for a life science startup?
- How long should it take to secure FDA approval for a biotech startup?
- How much should it cost to secure FDA approval for a medical device or pharmaceutical?
- How to value a biotech startup?
- Exit strategies for life science startups
Let’s dive in!
Creating a Financial Model for a Biotech Startup
The first question, and the reason we created 70+ financial projection templates for various industries before developing our biotech financial model, is “why even bother creating financial projections for a biotech startup?” This really is a good question because most biotech startups won’t even have any meaningful revenue for the life of the company prior to getting acquired by a larger pharmaceutical company. So do you really need a revenue model for a new drug startup or medical device startup?
I think the answer is still probably yes. I think that building out a financial model can help you think through the market opportunity, it can provide some clear guidance on how big the opportunity might be and how much market share you would need to capture in order to recognize that opportunity.
From an expense perspective, it can be really important to project your expenses for your biotech startup in order to calculate your cash runway. Since you will likely need FDA approval before you can generate any meaningful revenue, you will basically need to raise capital from investors, lenders and grant funders and then try to make that cash last as long as possible. A detailed financial model can help you see which month you expect to run out of cash.
Next, let’s jump into different options for funding a biotech startup.
Financing a New Biotech Company
From my perspective there are really only two ways to finance a biotech startup. Raise investment from investors to cover your expenses while you develop the drug or medical device and seek FDA approval, or secure grant funding. In the United States some of the best opportunities for grants can be found on grants.gov. Grant opportunities that you might want to research include:
There are also investors that specialize in investing in biotechnology companies. A couple of the most active biotech VC firms include:
Since biotech companies are so unique in terms of their financial model it does make sense to work with investors that specialize in the life sciences.
FDA Approval Process for a Medical Device or Pharmaceutical
One of the biggest impacts on your financial model is how long you will have to pay for expenses before you can secure FDA approval and actually start selling your product. It really depends on what you are developing, but for a new drug PhRMA suggests that it takes 10 years and $2.6 billion for a new drug to go from initial discovery to sales in the market! This is why this industry is so incredibly tough!
How to Value a Biotech Startup
Bay Bridge Bio has an incredible amount of data on biotech valuations and I would encourage you to check out this latest piece. With that said, I will give you my perspective on how to value a really early stage biotech startup. Since you won’t have any revenue during the early days, you can’t value the business like a typical SaaS startup based on a multiple of ARR - annual recurring revenue. Instead I think investors will do the following type of calculation:
- What is the population of the geography that you are seeking approval to sell your drug or device or therapy in?
- How prevalent is the ailment you are hoping to treat or cure?
These two assumptions will allow you to figure out how many potential customers you could have someday. Next you need to determine:
- How much can you sell your product for per month per person with that particular condition?
- What % of market share do you expect to be able to capture over time?
These assumptions will help you project revenue for the business and based on that revenue you may be able to assume some multiple to come up with a rough valuation.
Once you have a rough valuation, then you should multiply by the percentage likelihood of FDA approval. So for example if you have 100% market share and you were FDA approved perhaps the business could be worth $1 billion dollars. But if you expect a 10% chance of FDA approval based on the stage you are currently in, you might take that $1 billion opportunity x 10% to come up with a $100 million valuation.
This is just a rough idea of how an investor might think about valuation for a biotech company.
You can see how some of these assumptions will get included in our biotech financial model in the screenshot below:
Exit Strategies for Pharma and Medical Device Startups
For many biotech companies, once you actually get FDA approval and are ready to go to market, that is probably the time when you will need to sell the business to a larger biotech or pharmaceutical company that can integrate you into their manufacturing, sales and distribution system. For every biotech company that IPOs there are probably many more that simply get acquired once they get FDA approval.
As you dive into building out your financial model please don’t hesitate to contact us and let us know how we can help customize your financial model or simply answer any questions you have. Best of luck in a tough but important industry!
