A little customer focus goes a long way for a biotech being acquired
By Candaice Newell
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Executive Summary
As EY reported in their annual biotech report, recent biotech M&A deals are less lucrative and venture capital dollars less available to sustain the firms, so companies are rushing to make themselves more attractive on the acquisition market and in a shorter window than normal.
Research published in the Journal of Business Venturing suggests that extraordinary “market orientation” (ie customer focus) practices can increase the likelihood of a biotech start-up being acquired by 33%. High market orientation has the biggest effect on firms at early-product stages, resulting in a 53% greater likelihood of acquisition (vs 20% greater likelihood for late-stage biotech firms).
The investments a biotech firm can do to improve their customer focus are minimal compared to their expenditures on R&D and significantly impact their chances of being acquired at all.
Financial impact: startups running out of options other than acquisition
Available capital in the biotech sector topped out at $119 billon in 2020 as investors flocked to innovative companies during the rise of COVID-19 (“Beyond Borders: EY Biotechnology Report 2023”, EY, 2023). As of 2022, capital has dropped drastically to $54 billion. With a majority of deals coming from the United States (US), new US regulation on drug pricing, R&D, and market concentration and reduced funding options has decreased interest from would-be buyers—leading to record low biotech firm acquisitions for a reduced price (“Beyond Borders: EY Biotechnology Report 2023”, EY, 2023). The remaining biotech startups are simply running out of cash to continue operations.
According to the DealForma, today the average amount raised in Series A rounds in a biotech firm is about $54 million —far less than the $318 million to $2 billion needed to develop a successful drug, so any way to increase the likelihood of acquisition is the only financially feasible avenue for many biotech firms to even stay afloat.
A biotech firm's marketing budget (as part of SG&A) can range from 5-10% of its total revenue (“How much should a life science company spend on marketing”, BioStrata, 2018). A conservative but comprehensive market research program can cost between $160,000-$240,000 per year for firms with revenue between $20 million and $200 million, respectively (“Cost and benefit of market research”, Hinge Marketing, 2023) – just 1% to .1% of revenues. For pre-revenue companies, as a percentage of R&D spending the number is still nominal.
Quantitative findings: early-stage biotech’s gain the most from customer focus
Being acquired by big pharma companies is a key exit strategy for many biotech firms. Unlike traditional tech start-ups that may become acquirable based on benchmarks of “product-market fit,” biotech firms often prioritize the innovation while firm- and customer-focused positioning and marketing often fall to the side. A recent study published in the Journal of Business Venturing isolates the firm- and customer-focused factor and investigates whether a biotech start-up’s “market orientation” - when controlling for their technology and performance - affect the likelihood of their acquisition.
The study measured a firm’s “market orientation” based on a 38-question survey of the top business development lead of each firm, assessing their firm’s activities in market research, customer experience and interactions, competitor knowledge and tracking, and responsiveness to wider market trends. It defined “high” market orientation as one standard deviation above the mean, whereas “low” simply being at the mean.
The study examined 84 biotech firms across the US, Sweden, and Finland over a short 7-8 year period. Structured field interviews were conducted with those executives in 2003-2004 and again in 2007, with the endpoint measure of acquisition status (either gone-out of business, still independent, or been acquired) being measured in 2011. Data was collected from biotech ventures focused on research and development in therapeutics and diagnostics with a maximum of 250 employees (so start-up size) and spanning four stages of project development (pre-clinical, early-stage clinical, late-stage clinical, and approved-in-marketing phases).
Results showed that when controlling for the firm’s technology (size of product pipeline and number of patents) and performance (revenues, growth, and capital invested), firms with a higher market orientation were 33% more likely to be acquired than firms with a low market orientation (56% vs. 18% absolute likelihood, respectively). Further analysis showed that while both firms in pre-clinical/early-stage and late-stage/approved were more likely to be acquired if they have a higher customer focus, the effect was associated with a 53% increase in likelihood of being acquired for firms in earlier-stages compared to a 20% increase for firms in later-stages.
Strategic recommendations: make small shifts that can have big signals
While increasing market orientation through improved competitor research and customer-focused initiatives as outlined in the 38-question survey will require an initial investment, data from this research will better inform firms of the specific needs of their customer and how they can benefit from their biotechnology. Findings will also allow biotech firms to understand the needs of pharma companies and how their product will be of value to an acquirer’s portfolio. When extensive market orientation is done from an early stage, a firm can better define, prioritize, and focus their R&D initiatives, product development, and messaging to the target patient and target acquirer to increase the likelihood of acquisition. Additionally, these expenses are nominal relative to R&D expenses, which at a minimum account for 25% of a biotech firm’s spending. Many other activities from the survey, such as customer experience or competitor tracking, require no additional costs at all. Thus, this marginal increase in spending, that can increase the likelihood of acquisition in early-stage biotech companies by 53%, would be well worth it and largely risk free.
Emerging biotech entrepreneurs, especially those running early-stage companies that are facing tough fundraising headwinds and shorter acquisition windows, should make greater priority for market research to make a firm more attractive in the acquisition market. This study delivers critical insight for the senior management of emerging biotech ventures on how they might maximize the likelihood of acquisition. Here is a roadmap for biotech executives to strategically optimize market orientation within their teams:
Assess: Assess current market orientation (ie customer focus) practices: Initially, this may be as easy as using the market orientation survey outlined in the study. But it may require a more comprehensive audit conducted internally or by an outside consulting firm (including identifying gaps in the biotech and acquirer pipeline and unmet patient needs, budget allocation, and performance outcomes).
Implement: Pilot Programs: Following the audit, firms should implement a strategic and systematic program to improve market orientation. This includes establishing a clear and compelling vision and mission that emphasizes the customer and the market, developing a customer-centric culture, investing in market research and analysis tools, and communicating and sharing market information with the company.
Track: Track Key Indicators: Firms should thereafter collect and analyze those key performance indicators from market-oriented actions. Market-oriented strategies should be tailored according to the stage in product development and acquisition positioning of a firm (as those may change).
The caveat to the study, and the current biotech acquisition climate in general, is that there is a difference between simply being acquired and being acquired at the right price for initial investor returns. The research used a binary variable so did not distinguish between acquisition valuation, and today’s biotech start-up executives may be in a position to have to compromise on previous years’ acquisition values. But with the alternative being simply running out of funds to survive, market orientation could prove to be a key differentiator in a competitive acquisition environment that now may favor the acquirers.
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Candaice Newell is a PhD candidate in Pharmacology at the University of Toronto and a member of the Graduate Management Consulting Association (GMCA Canada). The research applications proposed in this article are solely the views of the author and do not necessarily reflect the views of the original academic journal article authors nor any individual member of our Editorial Board