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Biotech entrepreneurs are all too familiar with the phrase “the valley of death,” which describes the period between promising biomedical research and successful commercialization.  In years past, venture capitalists (VCs) were all too willing to fund early stage drug development.  However, current economic conditions require investors to be more risk-adverse and VCs have a tighter grip on their money than ever before.  Before VCs are willing to dole out millions of dollars to fund drug development, they are requiring more information in the early research stages from companies.

One reason for this hesitancy is that clinical trials have become longer and more expensive.  There is also increased regulatory uncertainty from the FDA.  In this environment it is more difficult for VCs to make strong investment decisions.  Rather than investing in early stage drug candidates, many VCs opt to invest in companies with drug candidates in later stages of development.  More venture capital firms have also increased their investing portfolio to include medical devices rather than drug candidates because medical devices generally move through the regulatory process with greater ease.

The increasingly small amount of capital available for early stage drug development leaves biotech companies in a quandary.  How do biotech companies make their early stage drug candidates more attractive to investors?  Companies need to show investors that they have developed a novel compound that has a strong potential for commercial viability.

Commercial success of a drug is inextricably tied to payer reimbursements, i.e. health insurance reimbursement.  It is increasingly likely that payers will require the use of companion diagnostics to ensure that the drug will be effective in a specific patient before the payer agrees to pay for the drug.  Companion diagnostics provide personalized biological information used to determine whether a patient will respond positively to a specific drug.  The use of companion diagnostics also provides investors with early efficacy data, which in turn allows them to make decisions sooner about whether to fund or continue to fund development.

Another critical step to secure investment capital is strong patent protection.  VCs want to see how the drug candidate fits in the marketplace with its potential competitors and if the drug candidate has been securely protected with patent rights.  Further, VCs want to access the likelihood of patent disputes, i.e., will the company have freedom to operate?  It is too great a risk for VCs to invest millions of dollars into a company that has poorly written patent claims protecting its investment.  Therefore, biotech companies need to seek patent counsel in the very early stages of development and invest in developing strong patent rights.

The success of entrepreneurial biotech companies depends on payer reimbursement and strong patent protection.  By using these tools, biotech companies reduce the potential risk for investors and in turn, create more attractive investment opportunities.