By Dr. Kevin J. Laliberte
Editor's Note: This case study demonstrates that a company can be built with a relatively small amount of capital and return outsized market and societal value.
Pharmaceutical companies are commonly in search of the Holy Grail. In pharma terms, the Holy Grail is a product used for an indication that generates billions of dollars in revenue with a life-cycle management program that extends patents, has additional labeled indications, and potentially even results in second and third generation product that replaces the initial product as patent expiry approaches. These products are often developed internally from the benchtop and carried through the phases of drug development by a large group of scientists, clinicians, and regulatory personnel over typically 7 to 10 years, if not longer. While there have been many compounds that were developed in this matter and with tremendous success, this path is neither a feasible nor practical approach for all diseases and for all companies.
While there are alternative pathways for drug development, many require significant upfront capital – both financial and human. One alternative approach discussed here involves partnering with companies in search of the Holy Grail to acquire compounds that may not be of enough commercial value to them to continue development for multiple reasons. Some reasons include: product profile with scientific limitations; indication size insufficient to justify human and financial investment; non-core indication; and probably most importantly, prioritization of other compounds that may meet the Holy Grail definition. Many companies have been established to extract compounds from these pharmaceutical companies, complete development, and commercialize worldwide.
One such example, XCO, was founded in March 2016 for the sole purpose of acquiring a compound from a large pharmaceutical company. The divesting company deemed the compound a non-core asset with desire to focus attention on other diseases under study. The compound was already in Phase 3 development for two indications (i.e., one step removed from filing to FDA). While hundreds of millions of dollars had already been spent on the compound at the time of acquisition the terms of the agreement involved the following financial components: $5 million up front payment; responsibility to pay for remaining development expenses from the time of acquisition to FDA approval (deferred in the form of a note payable upon FDA approval); a supply agreement to purchase product once commercialized; and, sales milestones.
XCO completed a small series A financing round in late 2016 and then hired the first employee in January 2017 once the Phase 3 trials were deemed to be successful. As commercialization was imminent and additional financing necessary, the company filed for an IPO in June 2017 raising $80 million, with a secondary financing in February 2018 raising an additional $75 million. At the time of the IPO and secondary financing, the company had 9 and 50 employees, respectively.
Subsequently, XCO had product approvals in May 2018 in the US in indication 1, June 2019 in Europe in indication 1, and June 2019 in the US in indication 2. Simultaneously, the company initiated a Phase 3 trial in indication 3 which was estimated to be the largest of the 3 indications for the compound. As a result of this clinical and regulatory success, commercial potential for the first two indications, and potential to have approval of a third indication within the ensuing 12 to 18 months, the company was acquired in November 2019 for nearly $1 billion.
XCO’s story presents strategy and methodology for venture capital to apply relatively small amounts of capital to the right situation with the right product and with the right people. Large pharmaceutical companies routinely have a change in focus resulting in shelving of development programs or choose not to pursue indications that do not meet their scientific or commercial thresholds. As a result, these compounds become an opportunity for small biotech companies to not only deliver medications to populations of patients in great need, but also to return value to investors that support these companies. In this specific situation this approach turned an investment of $5 million into nearly $1 billion in approximately 3.5 years.