Emerging life sciences ventures: The quest for legitimacy

Business Horizons (2010) 53, 211—220

www.elsevier.com/locate/bushor

Emerging life sciences ventures: The quest for legitimacy Donald F. Kuratko a,*, Travis J. Brown b a b

Kelley School of Business, Indiana University, Bloomington, IN 47405-1701, U.S.A. School of Informatics, Indiana University, Bloomington, IN 47405, U.S.A.

KEYWORDS Life sciences ventures; Scientific entrepreneurs; Life sciences start-ups; Investors; Stakeholders

Abstract As an emerging life sciences venture, gaining legitimacy (credibility) with external stakeholders (e.g., investors) is a critical challenge in today’s environment. This quest for legitimacy relates to issues that focus on the individual, the environment, and the process. Integrating insights gained from interviews with three CEOs of life sciences companies along with the academic literature, we provide guidance for entrepreneurs regarding the unique challenges facing life sciences ventures. We propose that these ventures are driven by a ‘‘quest for legitimacy’’ and that life sciences entrepreneurs therefore must be aware of the strategic issues which impact legitimacy in the eyes of external stakeholders (e.g., investors). # 2009 Kelley School of Business, Indiana University. All rights reserved.

1. Life sciences entrepreneurs: The importance of keeping it real An unrealistic optimism on the part of scientific entrepreneurs tends to cause a belief that an automatic market exists for their discoveries and that the process to establish a solid business around the discovery is relatively smooth. Research demonstrates that the majority of fundamentally sound technology- and science-based products fail due to a lack of understanding of the business challenges that must be overcome. While literature on the subject is replete with basic challenges confronting

* Corresponding author. E-mail addresses: [email protected] (D.F. Kuratko), [email protected] (T.J. Brown).

nascent ventures, it is evident that the problems most entrepreneurs face are often industrydependent. Life sciences companies are regularly confronted with significant hurdles unique to that industry, such as Food and Drug Administration (FDA) regulatory compliance and the recruitment of employees skilled in the underlying science on which the business is built. We interviewed three CEOs of life sciences start-ups–—Joe Muldoon of FAST Diagnostics, a company developing a revolutionary kidney function test to fill a large and unmet healthcare need in the diagnosis and treatment of acute kidney injury; Wade Lange of ImmuneWorks, a biotechnology company developing novel therapies for autoimmune diseases; and Alisa Wright of BioConvergence, a company offering drug product development, supply chain and materials management, toxicology and clinical materials manufacturing and

0007-6813/$ — see front matter # 2009 Kelley School of Business, Indiana University. All rights reserved. doi:10.1016/j.bushor.2009.11.007

212 packaging, QC testing, and consulting services for the pharmaceutical and life sciences industries–—to gain insights on the unique considerations for life sciences companies. Integrating their views into the academic knowledge of start-up challenges, we demonstrate the critical issues involved in emerging life sciences companies’ ‘‘quest for legitimacy.’’

2. General reasons for new business failure As a foundation for understanding why the early operations of life sciences start-ups are difficult, it is helpful to review some of the basic reasons for the failure of new business ventures. Every year millions of dollars are spent on starting new ventures; however, many of these newly established businesses vanish within a year or two, with only a small percentage ultimately succeeding. Studies have found that the factors underlying the failure of new ventures are, in most cases, within the control of the entrepreneur (Bates, 2005; Michael & Combs, 2008). Based on research on failed firms, Kuratko (2009) reviewed some of the most common reasons that are associated with failure. We examine some of these early pitfalls involved in the startup of new life sciences ventures because the transition from an idea to a potential venture can be the most critical stage for the success of new-venture development. Among these pitfalls are lack of objective evaluation, lack of market insight, inadequate understanding of technical difficulties, poor understanding of funding requirements, lack of product uniqueness, and ignorance of legal issues.

2.1. Lack of objective evaluation Many technical entrepreneurs lack objectivity with respect to the business aspects of life sciences ventures. Scientists and technically trained people are particularly prone to falling in love with their ideas, a phenomenon that often stems from many hours of difficult research. They often fail to give their ideas the same close scrutiny they would give to a design or project developed by others in the ordinary course of their professional work. Given that biotech firms often go public prior to their products receiving FDA approval, management teams can be blinded by their share price and lose sight of reality, as was the case for Samuel Waksal, the former CEO of ImClone. He was found guilty of insider trading after he attempted to profit from the meteoric rise of ImClone’s stock after discovering that the FDA was about to publicly reject Erbitux, the company’s sole product (Ulick, 2003). The way

D.F. Kuratko, T.J. Brown to avoid this pitfall is to subject all ideas to rigorous study and investigation through a proper assessment by outside advisors skilled in the managerial aspects of new ventures (Chakravorti, 2004; Morse, Fowler, & Lawrence, 2007).

2.2. Lack of market insight In other cases, scientific entrepreneurs fail to realize the importance of developing a marketing approach in laying the foundation for a new venture (Fischer & Reuber, 2007; Levitt, 1960). As Ogawa and Piller (2006) indicate, ‘‘many new products fail not because of technical shortcomings but because they simply have no market’’ (p. 65). Even when markets are correctly identified, too many entrepreneurs react to their own perceptions of the product as opposed to taking a more proactive approach through market research (Van Gelder, de Vries, Frese, & Goutbeck, 2007). Further, they do not understand that a product’s life cycle must be considered when introducing a new product or service. No product is instantaneously profitable, nor does its success endure indefinitely. Scientific entrepreneurs must not only accurately understand and be able to project the life cycle of new products, they must also recognize that introducing products at the right time is critical. Actions taken too soon or too late will often result in failure. One recent example has been the transition of the medical industry toward personalized medicine, which forced companies to develop drugs around biomarkers–— substances in patients which indicate a biologic state or predisposition–—in order to remain competitive (Alsever, Durst, Borzo, & Datta, 2006). Given that investors are currently seeking out companies with products associated with biomarkers, life sciences entrepreneurs have no choice but to consider the transition as they formulate an appropriate strategy, despite the fact that the market has yet to unfold to reveal how companies will be affected by this shift.

2.3. Inadequate understanding of technical difficulties The development of new life sciences products often involves using new techniques for research and production that can bring with them a multitude of problems. Failure to anticipate the technical difficulties related to developing or producing a product can sink a new venture. Scientific entrepreneurs cannot be too thorough when studying a project before initiating it. Encountering unexpected technical difficulties frequently poses timeconsuming and costly problems (Chakravorti, 2004).

Emerging life sciences ventures: The quest for legitimacy Even when the technical obstacles can be overcome, the functionality of the product might be lacking as a result of the solution developed. This situation has arisen with the introduction of electronic health records, which are technically feasible but lacking in functionality, resulting in physicians working around the new systems or avoiding them completely by continuing to use old paper file systems (Kattan, 2009).

2.4. Poor understanding of funding requirements A general cause of venture failure relates to financial difficulties such as assuming debt too early. Start-ups that assume too much debt can be marred by a burden that they cannot service. Additionally problematic are venture capital relationship problems that can arise due to differing goals, visions, and motivations of entrepreneurs and venture capitalists, leading to a withdrawal of funding support by investors (Rutherford, Oswald, & Gardiner, 2005). However, the most common difficulty with the development of a new life sciences product is an overly optimistic estimate of the funds required to carry the project to completion. Sometimes scientific entrepreneurs are ignorant of costs or are victims of inadequate research and planning. Quite often they tend to underestimate development costs by wide margins. It is not unusual for estimates to be less than half of what is eventually required (Schweinbacher, 2007). Given the technical requirements of life sciences start-ups, entrepreneurs can lose sight of the escalating costs of taking medical products to market. The government is putting greater pressure on the medical community to lower healthcare costs; those reductions will inevitably impact companies supplying products being used by medical professionals, shrinking the market and reducing investment in the industry. President Obama’s administration has recently reported commitment from several industry groups to reduce healthcare spending by 1.5 percentage points annually, generating a savings of $2 trillion over the next decade (Liberto, 2009). As a result, life sciences entrepreneurs are going to have to be increasingly diligent when securing funding and effectively managing the investments they receive.

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product and competitors’ products is through product differentiation. Pricing becomes less of a problem when the customer sees the product as superior to its competitors. A product that is unique in a significant way can gain the advantage of differentiation (Verhees & Meulenberg, 2004). Given that life sciences companies are primarily focused on gaining FDA approval, they can lose sight of whether their products will be competitive once in the market. For instance, Vanda Pharmaceuticals was lauded for convincing the FDA to reevaluate Fanapt, the company’s schizophrenia drug, after it had already been rejected. Although the company was rewarded for its efforts with a 1,600% increase in share price, industry analysts were quick to point out that the drug would be entering a saturated market with no proven increase in efficacy or safety, calling into question the sustainability of the company’s market value (Herper, 2009). As a result, there is the impending risk that the market value could drop, thereby endangering Vanda Pharmaceuticals’ future and destroying its legitimacy.

2.6. Ignorance of legal issues The life sciences arena is replete with legal challenges and requirements. Complying with regulations set out by federal agencies can be a challenge unto itself. Examples of these obstacles include providing safe, reliable products and services or understanding the necessity for patents, trademarks, and copyrights to protect one’s inventions and products. When these legal issues are overlooked, major problems can result (Mallor, Barnes, Bowers, & Langvardt, 2009). Adding to the legal complexity is the fact that the company, not the FDA, is liable for endangering consumers. Pharmaceutical giant Merck paid nearly $5 billion in 2004 as a result of a study linking FDA-approved Vioxx, an arthritis painkiller, to an increased risk of heart attack and stroke (Smith, 2008). Scientific entrepreneurs are sometimes convinced that they are immune to these issues. However, the aforementioned pitfalls are real. Even when all of these marketing, technological, economic, and logistical problems are considered, we contend there is a more serious overarching challenge that new life sciences ventures confront: the quest for legitimacy.

2.5. Lack of product uniqueness There should always be special characteristics and design concepts that draw a customer to a product, providing performance or service superior to competitive offerings. The best way to ensure customer awareness of differences between the company’s

3. The legitimacy challenge Resources are the building blocks of emerging organizations (Katz & Gartner, 1988). Resources are often acquired through an ‘‘exchange’’ process

214 where cycles of transactions occur with external organizations. Emerging life sciences firms are faced with an added unusual resource paradox. While these nascent scientific firms require resources such as financial capital, managerial talent, and industry intelligence to become operational organizations, the resource ‘‘gatekeepers’’ are reluctant to engage with them due to a perceived lack of legitimacy (Tornikoski & Newbert, 2007). It is this ‘‘legitimacy challenge’’ that may be the most crucial to understand and overcome in the development of a life sciences venture. It should be noted that there are two distinct forms of legitimacy: conforming and strategic.

3.1. Defining new venture legitimacy There are two major forms of legitimacy as it applies to new ventures. Both types of legitimacy are essential to external constituents’ perceptions of the new venture. Conforming legitimacy refers to the certain standards or expectations that become the accepted norms by which firms are deemed legitimate or credible. The business environment is comprised of several universal expectations that determine the ‘‘appropriateness’’ of an organization. In conforming to these accepted business standards or expectations, the firm gains legitimacy by definition of its existence as opposed to anything it initially achieves (Meyer & Rowan, 1977). Elements such as an experienced management team, corporate structure, standard accounting statements, and a verifiable prototype would be examples of universal expectations that, if met by an emerging firm, would confer a judgment of acceptance or legitimacy. It is through these ‘‘passive’’ standards that a nascent venture will gain what is known as conforming legitimacy (Suchman, 1995). One example of a life sciences venture achieving conforming legitimacy through these means is ImmuneWorks via its hiring of Wade Lange, an experienced life sciences entrepreneur, as the CEO. Since the hiring of a professional CEO, ImmuneWorks has gone from being perceived as a laboratory experiment to its current state as a professional firm. This form of legitimacy also led to greater investor interest in FAST Diagnostics upon the arrival of Joe Muldoon. He brought significant external contacts to the business, resulting in greater investor confidence and additional capital from the early investors (J. Muldoon, personal communication, June 12, 2009). For a life sciences company, gaining conforming legitimacy frees the management team from having to convince potential investors, partners, and customers that they have the necessary resources and experience to successfully execute

D.F. Kuratko, T.J. Brown the strategy they have formulated. These examples illustrate that perceptual changes in the leadership of a company can result in the bestowal of conforming legitimacy by external constituents. Strategic legitimacy refers to the actions and behaviors of a firm that lead to business success; thus, entrepreneurs can take a more active role in developing this acceptance. As Zimmerman and Zeitz (2002) argue, this type of legitimacy can be an operational resource that is extracted proactively through calculated strategic behavior. Examples of strategic legitimacy could include gaining customer testimonials, receiving endorsements from subject matter experts in the field, demonstrating business success with similar unique products in analogous industries, and developing and demonstrating execution of a comprehensive business plan. Through these strategic maneuvers, the perceptions of external parties can be manipulated into seeing the relevant behaviors of the new firm as acceptable in terms of business performance. Thus, a new firm could actively pursue behaviors that the key resource gatekeepers would deem appropriate, conferring legitimacy to the new venture. In this manner, a firm gains strategic legitimacy (Suchman, 1995). An instance of strategic legitimacy at the life sciences firm BioConvergence is the management team members’ use of the connections they established throughout their careers to establish a network for their own company and tap into a market they discovered through their previous work experience (A. Wright, personal communication, March 25, 2009). The team members’ ability to demonstrate earlier success in analogous industries enabled them to legitimize their business and establish a clientele more quickly than they might have otherwise been able to accomplish. Strategic legitimacy is important to the life sciences industry because the conforming standards can be nebulous in this emerging field; as a result, the entrepreneur must take an active role in establishing the legitimate behaviors. Tornikoski and Newbert (2007) argue that in order to emerge successfully, nascent ventures must engage in behaviors that convince external stakeholders of their legitimacy. The authors assert that the individual, the environment, and the process are the key elements for firms in gaining strategic legitimacy. 3.1.1. The individual’s role in gaining legitimacy As an individual, the lead scientific entrepreneur works to establish initial credibility with the external gatekeepers. He/she may possess intangible resources that offer a foundation for building such credibility. However, that lead entrepreneur cannot

Emerging life sciences ventures: The quest for legitimacy lose sight of his/her limitations, as doing so could damage initial credibility. There is considerable agreement among scholars that intangible resources are crucial to the development of technology-based ventures (Brush, Manolova, & Edelman, 2008). Studies have demonstrated that an entrepreneur’s education, work experience, industry-specific experience, and managerial capabilities are all correlated to the eventual success of the venture (Cooper, Gimeno-Gascon, & Woo, 1994; Sapienza & Grimm, 1997). The unique combination of an entrepreneur’s cognitive resources of knowledge and experience may be manifested in expertise, information, or technology and, as such, could serve as the foundation for the development of a new organization (Hall, 1992, 1993). Another critical individual factor may be the entrepreneur’s ability to network. Davidson and Honig (2003) point out that ‘‘social capital’’ is embedded in the structure and content of social relations and could be derived from family, community, social, and business relationships. In essence, social capital is the goodwill created through social relations that can be mobilized to facilitate the attainment of needed resources, influence, and sponsorship (Adler & Kwon, 2002). It may be a source of credibility that an entrepreneur can yoke to gain entry into networks that would otherwise be unavailable to them. Given the insular, conservative nature of life sciences companies, stemming from the cost of generating intellectual property, social capital is particularly valuable in this field. As with most businesses, the level of faith that investors have in the management team’s ability to build a successful company will be a larger factor than the business concept when determining whether the company is a good investment candidate. At ImmuneWorks, Wade Lange initially served as a consultant as the company negotiated a licensing agreement with Indiana University. His consulting experience with the company, along with his previous leadership experience, made him a strong candidate to be the CEO of ImmuneWorks. Once hired, Wade leveraged his existing social network in the life sciences community, which resulted in an immediate investment from a family friend, as well as subsequent investments from local funds with which Wade had already established relationships (W. Lange, personal communication, June 12, 2009). Given the scientific complexity of life sciences businesses and the associated investment risk, management teams with a strong social network have a competitive advantage in their pursuit of legitimacy. It is generally recognized that most scientific entrepreneurs start their businesses alone or with a few close associates in a laboratory. In effect, the

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business is the entrepreneur and the entrepreneur is the business (Brigham, De Castro, & Shepherd, 2007). However, a danger arises if the scientist refuses to relinquish any authority as the emerging business grows. Some entrepreneurs fail to delegate responsibility to employees, thereby retaining all decision-making authority. Recent studies reveal that in entrepreneurial firms, the owner exclusively carries out most planning and other operational activities (Gruber, 2007). This ‘‘One-Man-Band Syndrome’’ often is derived from the same pattern of independence that helped start the business in the first place; however, the entrepreneur who continues to perform as a one-man-band can restrict the growth of the firm as the owner’s time and ability to deal with an ever-widening set of decisions and actions become limited. One suggested tool that entrepreneurs can use in avoiding the One-ManBand Syndrome is effective delegation of responsibilities to employees. However, an impediment to effective delegation, as observed by Alisa Wright of BioConvergence, is that employees often have an entrepreneurial attitude regarding taking on new responsibilities yet lack the necessary skills to successfully manage those responsibilities. This impediment became evident to her when employees hired for their technical expertise were appointed to management roles. She soon realized that their prior work experience had not prepared them for supervising employees and that they would be more successful if their management responsibilities were delegated to experienced managers (A. Wright, personal communication, June 8, 2009). One solution to this problem, as proposed by Wade Lange of ImmuneWorks, is to hire consultants to complete specific tasks; he has found this to be an effective way to manage the shifting needs of a growing company while avoiding the creation of an organizational bottleneck as a result of overburdening an individual (W. Lange, personal communication, June 12, 2009). The key to preventing the One-Man-Band Syndrome is to assess not only the willingness of current employees, but also their aptitude when delegating responsibilities. This can be particularly difficult to do in a life sciences company, where the skill sets required are highly technical and specialized. Time is the enemy of new product introductions, as numerous managerial duties increase exponentially and may effectively shut the nascent firm’s window of opportunity. One solution to this dilemma rests with the entrepreneur in effective time management. Recognizing the limited staff and resources that most nascent scientific firms possess, time management is often a critical challenge for the entrepreneur. In order to perform daily managerial activities in the most time-efficient manner,

216 entrepreneurs should ideally follow four critical steps: 1. Assess his or her daily activities and rank them in order of importance. 2. Prioritize the day’s activities based on his or her ability to devote the necessary time to the task that day. In other words, categorize activities and avoid procrastination. 3. Create procedures that can be handled easily by an employee if instructions are provided. This organization of tasks can be a major time saver for the owner that would allow the fourth and last step to be put into effect. 4. Delegate tasks to employees based upon the procedures created for various jobs. These steps in effective time management require self-discipline on the part of lead entrepreneurs; however, time management in life sciences companies presents unique challenges for entrepreneurs that cause them to regularly stray from their work plan. For instance, obligations such as staying abreast of changing government regulations and path-breaking medical innovations are particularly time-consuming for management in life sciences companies (J. Muldoon, personal communication, June 12, 2009; A. Wright, personal communication, June 8, 2009). The fluidity of the life sciences industry makes following a routine difficult; however, utilizing the framework presented could provide a foundation for those involved in management to ensure that they do not become overwhelmed as they are inundated with competing priorities. 3.1.2. The use of the environment in gaining legitimacy Some scholarly literature shows that nascent firms located within geographic industry ‘‘clusters’’ gain advantages due to access to knowledge ‘‘spillovers’’ (Audretsch, 2008). Such geographic industry clusters are concentrations of interconnected organizations, including suppliers, service providers, universities, trade associations, etc., where proximity leads to shared advantages through the aggregation of expertise and specialized resources (Engel & del-Palacio, 2009). Spillovers are the direct or indirect transfer of knowledge from one organization to another due to proximity. Spillovers related to technology assist firms in gaining credibility by allowing the use of the latest technologies or access to the most attractive markets. Gilbert, McDougall, and Audretsch (2008) found that emerging technol-

D.F. Kuratko, T.J. Brown ogy ventures located in industry clusters achieved higher levels of product innovation and sales growth activity than ventures founded in locations with limited or no clustering. Their results demonstrated that technological spillovers are positively and significantly related to product innovation, and signal that scientific entrepreneurs’ selection of the founding location of their business may be critical in the initial establishment of legitimacy. Since the success of life sciences firms is partly defined by their ability to remain on the leading edge of new technological developments, effectively partnering with universities should be a component of any life sciences company’s strategy. Firms that do not leverage university resources tend to struggle (Patzelt & Shepherd, 2009). Given that universities generally do not share the same sense of urgency as companies, entrepreneurs can be dismissive of the benefits gained from working with universities. Nonetheless, to be competitive, entrepreneurs need to actively engage high-caliber, university-affiliated researchers they could not otherwise afford to hire on a full-time basis. Establishing consulting agreements with key researchers can be an effective technique. Even though business and research objectives can sometimes appear to conflict, the reality is that publication in top scientific journals desired by academic researchers can serve as an excellent marketing tool by helping to legitimize new technologies (J. Muldoon, personal communication, March 12, 2009). In addition, working with universities to form research consortiums can enable companies to leverage resources across universities, thereby gaining synergies by combining the research expertise of multiple academics. Universities are often interested in, and committed to, locating companies that are open to using students for project assistance. Life sciences companies can be well served by offering projects that expose students to their business environment, while gaining low-cost labor and creating a pool of potential and experienced employees upon their graduation (A. Wright, personal communication, March 25, 2009). Certain fields of science are particularly difficult to understand, which can make hiring for life sciences companies a challenging endeavor. Typically, entrepreneurs are in the market for employees at two different levels of scientific understanding: employees who understand the science well enough to effectively represent the company, and top scientists who believe and possess in-depth expertise in the underlying science (W. Lange, personal communication, February 26, 2009). Finding people who really understand the subtleties of the business, who are also sufficiently entrepreneurial, can be

Emerging life sciences ventures: The quest for legitimacy problematic. For example, the fact that an employee worked in a large pharmaceutical firm for 20 years does not mean that the individual is appropriate for a start-up company developing a new drug, where employees need to be innovative with limited resources. Consequently, although an understanding of business and science is important, employees should ideally have prior entrepreneurial experience as well. The ability to shift roles is crucial in a startup environment as the business evolves (J. Muldoon, personal communication, March 12, 2009). 3.1.3. The approval process as an impediment to gaining strategic legitimacy Perhaps the greatest hurdle that entrepreneurs in life sciences companies face is the FDA approval process, a difficult test that does not allow for any appreciable margin of error. Given the effect regulatory compliance has on life sciences product development, significantly more time and money are required for entrepreneurs to prove the viability of their product in comparison to firms in other fields. In addition, there is a distinction between pharmaceutical and medical device manufacturers. Medical device manufacturers can complete beta testing and then modify their products based upon the results of those tests. With pharmaceuticals, however, an error results in the necessity of going through the entire approval process again. This initial failure can place the survival of the business in jeopardy due to consumption of limited funds, as well as other resources such as access to scientists and facilities, and possible damage to the company’s reputation (W. Lange, personal communication, February 26, 2009). Life sciences ventures are capital-intensive and high risk. Approximately 1 in 10,000 life sciences projects succeeds, and these can take 10 years to bear fruit while expending over a billion dollars before they turn a profit. The underlying obstacle to decreasing the capital required for a life sciences start-up is managing the conflict between the riskaverse nature of the regulatory environment and the desire of companies to introduce new technologies in order to gain operational efficiencies and lower costs. Because the regulatory process is so long, unforeseen complications can further exacerbate costs associated with the development of new products. As an example, if a new microbe was revealed to be causing infections during the clinical development process, the process would have to be started anew to account for the discovery (A. Wright, personal communication, March 25, 2009). FDA regulations can be very difficult to follow for life sciences ventures since the firms are held to sometimes evolving industry standards rather than

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exclusively by well-defined regulatory standards. In other words, the FDA might stipulate in its regulations that no more than 5% of a residual solvent could remain in a final product. However, if some companies are subsequently able to consistently reduce the concentration to 1%, the FDA would hold all companies to the ‘‘current good manufacturing process,’’ which requires companies to abide by such a standard with the FDA not being responsible for issuing a specific regulatory requirement (A. Wright, personal communication, March 25, 2009). With the FDA being increasingly scrutinized by the media, the regulatory process is having an even greater impact on life sciences ventures. FDA approvals have been decreasing due to media attention given to product contamination and, in turn, the additional procedures in place to ensure regulatory compliance. Whereas in the past getting a product approved in the U.S. was the first step for most life sciences companies, they are now beginning to first seek approval outside of the U.S. due to the FDA’s relatively low approval rate for new products compared with regulatory bodies in other countries. The issue is that companies can now have everyone in agreement except for one member of the regulatory committee, which results in a news story and delays the FDA approval process. In the past, 95% committee agreement was enough; now, total agreement is required (A. Wright, personal communication, March 25, 2009). In addition, developing biological products is highly unpredictable. Even if the science can be validated, the next question is how product changes introduced to take into account new medical discoveries will impact the regulatory path. This is a crucial risk because making a change could shift the regulatory path, lengthening the approval process and making it more costly. The good news is that entrepreneurs can look to predicate rules, which are pre-existing regulatory requirements, in order to get some idea of what to expect regarding product approval. Additionally, entrepreneurs can engage the FDA in informal dialogue to seek guidance regarding the regulatory approval process (J. Muldoon, personal communication, March 12, 2009).

4. Threats to life sciences companies’ financial survival To a greater extent than other types of companies, life sciences ventures are presented with some very specific risks that threaten their financial viability. These threats include the need for intellectual

218 property protection, a long product gestation period, and investor defection. Patents and the ability of companies to work around them are a major concern for most life sciences companies. Scientific entrepreneurs recognize that there are alternative modalities, so they have to be cautious when revealing the underlying technology of their products. Life sciences companies usually define their business strategies based on the belief that their intellectual property (IP) is protected. Losing–—or never having–—that protection can result in the abandonment of a company’s strategy, given that the financial viability of life sciences products is typically dependent on the protection of the inherent intellectual property. Life sciences entrepreneurs should spend a significant amount of time developing an intellectual property strategy for their business to ensure significant barriers to entry such that investors are reasonably assured of returns commensurate with their risk (J. Muldoon, personal communication, March 12, 2009). Life sciences entrepreneurs have to use a multi-faceted approach when determining how best to protect the company’s IP, which requires thinking beyond just patents to alternative strategies for IP protection. For example, using a trade secret approach to IP protection–—which offers an unlimited time period for legal protection as long as the secret is never disclosed–—can sometimes be a more attractive route compared with patent protection–— which has a duration of 20 years for regular patents and only 14 years for design patents–—given the risk of loss of exclusive rights when a patent expires. Life sciences entrepreneurs have to consider their IP strategy on a case-by-case basis to determine the course of action that will most benefit their survivability as a company (J. Muldoon, personal communication, March 12, 2009). Conversely, given that life sciences companies benefit from transparency when partnering with various entities for the purpose of exploring new technologies, being overprotective can result in isolation from the industry. One approach utilized by the life sciences firm BioConvergence is to ensure that employees are well-educated regarding the company’s IP policies and procedures so that they can be aware of possible patent infringement. Because some life sciences companies interact with numerous companies on a regular basis, an especially effective strategy for IP protection becomes necessary. To that end, BioConvergence has its employees sign confidentiality agreements and requires them to be trained on IP protection as part of their new employee orientation (A. Wright, personal communication, March 25, 2009).

D.F. Kuratko, T.J. Brown Because there is a longer gestation period to revenue and cash flow with life sciences ventures than with most new enterprises, life sciences entrepreneurs make bigger bets that take longer to pay off, with the assumption that the investor returns will also be greater. In contrast to other industries such as information technology, life sciences companies face major obstacles to success, the most significant being the FDA. Without assignment of a reimbursement code–—the universal identifier assigned by the government to patient diagnoses and associated procedures so that they can be recognized by insurers’ computers–—even pricing can become a major issue (J. Muldoon, personal communication, March 12, 2009). During clinical trials, life sciences entrepreneurs have to try to meet the expectations of investors while still contending with regulatory issues. Unfortunately for entrepreneurs, investors are typically disinclined to take on the risk of funding ventures during the regulatory process. People try new medical products because they lack better alternatives. However, if nothing has been approved in a given space, investors tend to believe that nothing will get approved, creating a circular predicament in finding funding for radically different solutions to offer consumers (W. Lange, personal communication, February 26, 2009). With life sciences companies, the major risk is in the scientific approval process, which must be proved out through expensive clinical trials (W. Lange, personal communication, February 26, 2009). Therefore, the market risk for life sciences companies includes not only receiving FDA approval, but also developing an effective treatment. Entrepreneurs operating life sciences ventures have to spend a significant amount of time and money before they know whether they have a product to sell; therefore, they seek indicators of a product’s potential success prior to investing significant capital. As a result, investors are now looking for companies that have identified biomarkers–—substances in patients which indicate a biologic state or predisposition. Companies with biomarkers are able to predict earlier rather than later whether a product might work.

5. Final thoughts Zimmerer and Baglione (2009) argue that there is little reason for the current amount of new product carnage among technological start-ups, which each year wastes both economic and human resources. Understanding what they refer to as the barriers, pitfalls, and landmines, and preparing the proper analysis to navigate through these challenges,

Emerging life sciences ventures: The quest for legitimacy will position scientific entrepreneurs for greater success. Our intention has been to outline the legitimacy challenge that confronts so many life sciences start-ups, and offer guidance regarding how to strategically gain the needed legitimacy. Understanding their own quest for legitimacy may assist nascent life sciences entrepreneurs through the most trying challenges. Joe Muldoon (personal communication, March 12, 2009) of FAST Diagnostics likened managing a life sciences company to having an effective golf swing. Keeping your head down, having the right grip, swinging through–—all are important, and

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unless all are done correctly, the outcome will not be effective. The same might be said for emerging life sciences ventures. The need to manage the specific risks that threaten a venture’s survival–— such as gaining FDA regulatory approval, developing an effective IP strategy, and monitoring industry developments–—demonstrates the challenge life sciences entrepreneurs face in balancing numerous factors simultaneously in an effort to be effective. Only through an understanding of the critical elements involved with the individual, the environment, and the process can life sciences ventures successfully achieve their quest for strategic legitimacy.

Appendix: Interview bios ImmuneWorks (Wade Lange, CEO) ImmuneWorks, Inc. is a biotechnology company founded in 2006 to develop novel therapies for autoimmune diseases. Its initial focus is treatment of serious lung diseases, including idiopathic pulmonary fibrosis. In 2008, ImmuneWorks, Inc. was recognized by the global publication BioWorld in its listing of Innovations in Biotechnology 2008. Wade Lange is the CEO of ImmuneWorks. Mr. Lange’s background encompasses broad experience in the areas of clinical research, marketing, marketing research, business development, and general management serving the pharmaceutical, medical device, and healthcare sectors. Prior to ImmuneWorks, Mr. Lange led Lange Advisors, a consulting firm that provided business development services to the healthcare, medical device, and pharmaceutical sector, and was President and CEO of the Indiana Health Industry Forum, where his highly collaborative approach built strong momentum for growth of this key economic sector. Prior to IHIF, Mr. Lange acted in a variety of roles, including General Manager at West Pharmaceutical Services, Inc., for 13 years. Mr. Lange received his BS in Pharmacy from Purdue University and his MS in Industrial Administration from Purdue’s Krannert Graduate School of Management. FAST Diagnostics (Joe Muldoon, CEO) FAST Diagnostics is a company commercializing core technology developed within the Indiana University School of Medicine. FAST’s first product will be a revolutionary kidney function test designed to fill a large and unmet healthcare need in the diagnosis and treatment of acute kidney injury. Acute kidney injury has high mortality rates and a significant prevalence that is growing globally. FAST’s advanced diagnostic tool is vastly superior to current standards in the areas of precision, sensitivity, and rapid assessment. Joe Muldoon is FAST’s CEO. With over 20 years of experience, Mr. Muldoon has been active as an advisor for dozens of Midwest entrepreneurs and has occasionally served as acting CEO and angel investor. Previously, Mr. Muldoon was President and CEO of FirstMile Technologies, a venture capital-backed, bundled broadband services provider. Prior to that, he served as President of Brightpoint North America, a $1 billion publicly-traded wireless equipment logistical services provider that grew fourfold under his leadership. He started his career as a CPA in Ernst & Young’s Entrepreneurial Services practice. Mr. Muldoon has a Bachelor of Science in Business from Indiana University’s Kelley School of Business. BioConvergence (Alisa Wright, CEO) BioConvergence is a privately-held, female-owned small business. BioConvergence offers drug product development, supply chain and materials management, toxicology and clinical materials manufacturing and packaging, QC testing, and consulting services for the pharmaceutical and life sciences industries. As a small business staffed with highly experienced personnel, the company moves quickly to provide reliable, responsive, high quality contract services. Its state-of-the-art facilities include a 2,500 SF development lab and 70,000 SF of cGMP, climate-controlled storage. Alisa Wright is the CEO of BioConvergence. She has over 20 years of experience in the pharmaceutical industry, including product development, clinical and commercial manufacturing, new product launches, supply chain management, regulatory affairs, quality assurance, and strategic planning. Her past employment includes work at Eli Lilly, NNC, Cook, and Baxter, and the performance of contract services for more than 400 life sciences firms. Her industry and community interests include ISPE’s Investigational Products Steering Committee, BioCrossroads, Purdue’s School of Pharmacy, IU’s School of Informatics and Indiana’s STEM Resource Network, and Project Lead the Way’s Biomedical Program. Ms. Wright received her BS and MS degrees from Purdue University’s Schools of Pharmacy and Engineering, respectively.

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