Whether you’re a scientist or a serial entrepreneur, founding a life sciences startup comes with various breakthroughs and challenges. From successfully raising funds and navigating the clinical trial process to planning for an exit or commercialization, the span of a life sciences company requires a variety of skills and specialized knowledge.
The life sciences industry refers to companies that focus their work on scientific research and development centered on living things, including pharmaceuticals and biotechnology (biotech).
For businesses seeking to develop and distribute new medications or create technology to improve a patient’s standard of care, environmental sustainability and other areas, knowing the demands of each stage is essential. With the right preparation and resources, you can successfully navigate the specific needs of the life sciences lifecycle.
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Discovery Stage |
Preclinical Stage |
Clinical Stage |
Expand or Exit Stage |
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Phase 1: Discovery and R&D Stage
The first phase of a life sciences company revolves around sourcing and developing a new drug or biologic. Researchers or principal investigators (PI) may discover new medications through existing treatments with unanticipated effects, new insights into a disease process or numerous rounds of testing of molecular compounds.
Once a strong drug candidate is identified, the focus will turn to more research and development (R&D), including:
- Performing early-stage research
- Undergoing initial regulatory assessments
- Filing for intellectual property (IP) patent protection
Funding in this early stage will typically be in the form of private investments from family offices, angel investors and high-net-worth individuals, as well as founders’ friends and family. Grants and personal savings from founders may also serve as a funding source.
Example of the Discovery Stage
A management team (the Team) identifies a market need for a new endometriosis drug and licenses the IP from the University of Michigan Medical School. They secure a Small Business Technology Transfer (STTR) or Small Business Innovation Research (SBIR) grant to fund the initial research and begin regulatory assessments. The Team decides to outsource the company’s finance function so they can focus on growth and preparation for preclinical trials.
Phase 2: Preclinical Stage
After initial discovery and development, a life sciences company will move into the preclinical research stage, which may last several years. Preclinical research focuses on determining the safety profile of a drug, with a focus on efficacy and toxicity. These tests must be performed in compliance with the Food and Drug Administration (FDA)’s Good Laboratory Practice (GLP) and Good Scientific Practices (GSP).
Undergoing Series A funding is also essential at this stage to ensure the company has adequate resources to move into the clinical trials. Startups will generally aim to raise $2M to $15M during a Series A round. Series B funding may also take place in the preclinical stage, with companies seeking to raise $10M to $60M.
Some form of an exit can also occur during the transition from preclinical to clinical, as companies seek to raise money through an initial public offering (IPO) or minority investment from venture capital or family offices.
Example of the Preclinical Stage
The endometriosis drug undergoes extensive in vitro preclinical research to determine safety, stability and bioavailability. The results found that the drug did not have the potential to cause serious harm, so the Team submitted an Investigational New Drug (IND) application to the FDA to move into the clinical research stage.
As the company moves closer to market readiness and increases its fundraising efforts, the Team contracts an external accounting firm to fulfill its audit or grant compliance requirements, maximize R&D credits and satisfy tax return filing requirements.
Phase 3: Clinical Stage
Phase three focuses on clinical trials, or testing new medications on humans. This stage may also span several years as sufficient research is performed to prove that the drug is safe and effective for its intended use. Depending on the complexity of the drug or disease, a single clinical trial can cost anywhere from tens of millions to over one billion dollars.
Outsourcing to a clinical research organization (CRO) is common during this phase, as they can handle the details of clinical trials, including study design, patient recruitment and data collection.
Three Phases of Clinical Trials
| Phase 1 | Phase 2 | Phase 3 | |
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Participants |
20 to 100 volunteers, either healthy or with the condition | Up to several hundred volunteers with the condition | 300 to 3,000 volunteers with the condition |
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Length of Trial |
Several months to a year | Six months to two years | One to four years |
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Purpose |
Safety and dosage | Efficacy and side effects | Efficacy and monitoring for reactions |
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Success Rate |
Roughly 70% move to next phase | Roughly 33% move to next phase | Roughly 25% move to next phase |
Once your product or drug begins to receive successful trial results, you may start preparing for an exit, with the hopes of a sale to a large pharmaceutical company, a capital raise or an IPO. Initial preparation for an exit necessitates significant financial due diligence, as the scrutiny life sciences companies face during this process extends into scientific validation and regulatory assessments.
Due diligence documentation may include:
- Financial data with key performance indicator tracking
- IP portfolio documentation
- Regulatory compliance history
- Pipeline and development data
The final step of this stage is submitting a New Drug Application (NDA) to the FDA for market approval and preparing financial statements for public scrutiny.
Example of the Clinical Stage
The endometriosis drug begins to successfully move through each phase of clinical trials. The Team is thrilled to be closer to market readiness and decides to open an Australian entity to secure increased R&D benefits. However, they start receiving unexpected bills from the CRO. They decide to hire a team of consultants to work with the CRO and manage trial billings. Throughout this process, they begin working on an exit plan and ensure that the company is prepared for the related due diligence procedures.
Phase 4: Expand or Exit Stage
By this point, the drug may be awaiting approval or may have been cleared to market, turning the priority to exit planning or preparing the company for commercialization operations, which may include:
- Engaging investment banks, accountants and legal firms
- Finalizing financial, legal and R&D due diligence
- Hiring key executives with commercialization or public company experience
- Deploying growth capital to expand marketing and sales operations
When it’s time to go public or pursue mergers and acquisitions (M&A), your company may require additional support for registration statement filings, sell-side due diligence, transaction tax planning and post-deal business optimization.
Example of the Exit Stage
After years of trials and regulatory approvals, a large pharmaceutical company acquires the endometriosis drug. The Team leans on its outsourced finance and accounting partner to help manage transaction tax issues, R&D credit optimization and valuation services throughout the sale.
Your Guide Forward
Cherry Bekaert’s experienced professionals can help your life sciences company stay ahead of the curve and succeed in a rapidly changing marketplace. We serve life sciences companies through all phases of development, whether your business needs help evaluating tax structures, optimizing operations, fulfilling financial reporting and compliance requirements, or capturing tax credits.
