Should a European pre-clinical biotech startup create a presence in the US?

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Deryck Jordan

Deryck is admitted as an Attorney at Law in New York and Berlin.

European biotech companies with pipeline projects in the clinical stage will almost certainly need a presence in the US (unless their business model does not envision commercialization in the US). But what about European biotech startup companies that only have pre-clinical pipeline projects? When should they start considering establishing a presence in the US? This article examines that question by addressing four key issues: personnel, capital, networking and liability.

Personnel: The intellectual property related to a biotech startup company’s pipeline product is important, but so is the human capital.   European biotech startups may face a recruitment challenge when they seek employees who have expertise in US requirements for manufacturing and clinical development: risk aversion. Culturally speaking, Europeans generally value job security more than Americans do. This disparity contributes to the relative ease of finding biotech entrepreneurs in the US (compared with in in Europe).

The above notwithstanding, a US-based subsidiary would be amiss to bring on new personnel only from the US. I’ve seen European biotechs commit post-merger integration errors on both ends of the spectrum: (a) giving full, unfettered deference (when making managerial decisions) to the new US entity and (b) giving no deference to the new US entity, not trusting the expertise of the new US team members. The ideal middle ground would typically involve new employees with local expertise, but with some current employees from European parent company expatriated to the US to ensure transparency and increased corporate knowledge.

Capital: How, when and where will the European biotech startup raise capital? Wall Street loves biotechnology stocks. However, many (if not most) of the venture capital firms in the US will only invest in biotech startup companies that have a US presence. Several European startup companies have recognized this and have therefore incorporated and gone public in the US, hoping to get valuations higher than they would otherwise get in European stock exchanges.

Naturally, if a startup biotech company is sufficiently funded to fully cover the cost of the clinical development plan through phase 3, raising capital may be a non-issue. Most startup biotechs, however, do not have this luxury and would typically seek funding through venture capital firms, development partners or a combination of the two.

Networking: Human capital is important, but the EU biotech company has to consider more than just employees. For example, US advisory board(s) will give the company access to key opinion leaders who can give US-centric guidance during the pre-clinical stage not just on the target product profile and clinical development plan but also on relevant standards of care and treatment pathways in the US.

Also, until you’ve demonstrated proof of principle it may be challenging for you to raise capital. Networking with potential licensing partners will be facilitated if your business development team is situated within one of the US biotech hubs (eg, Boston, San Francisco, NJ/NY and Research Triangle Park).

Limiting liability: Despite the benefits of establishing a presence in the US during the pre-clinical phase, European biotechs should plan carefully to limit their liability from a legal (‘piercing the corporate veil’) and tax perspective. While a European biotech could choose a number of different pathways (based on its particular set of circumstances), one general option would be to incorporate in the US and give the new American company’s board of directors full authority to make strategic managerial decisions. For funding, the US company could operate as a service provider (a bit similar to a contract manufacturing/research organization, but with full autonomy), charging the European biotech company a fee for the services of developing the pipeline drug (which is still owned by the European company). And full operational costs of the US company could be covered by initial funding from the European biotech company in the form of an interest-bearing loan.

As you see, there are ways for an early-stage life sciences company to benefit from establishing a presence in the US market while limiting risk. To learn US market entry strategies that are appropriate for your corporate goals, consider speaking with a lawyer to discuss your R&D strategy and business plan.

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