Funding and early valuation

As the industry readies itself for the January 2023 pilgrimage to the J.P. Morgan Healthcare Conference (JPM) and Biotech Showcase in San Francisco, our market-leading life sciences and health care industry team has prepared a series of updates that we hope will help strategically guide your 2023 partnering and investment decisions.

Caution remains a strong theme in the current market downturn. But caution should not lead to paralysis. Life sciences companies must confidently seek out and approach the opportunities that do exist. Now more than ever, companies must think strategically and be more nimble about attracting investments and/or strategic partnerships, pathways to regulatory approval, and product commercialization. 

How can innovators build value in their life sciences and health care emerging companies in a challenging investment landscape? In today’s financing environment, companies may need to advance further into the development process with their own de-risking strategy before institutional venture capital investors or big pharma will partner or invest. Here are our tips for early steps you can take to help advance your technology toward the clinic.

At time of launch, the right velocity and trajectory are critical

Successfully launching a biotech company is all about having the right velocity and trajectory for the company starting on the day it is formed. Biotech emerging companies consume a lot of money early on, and a key challenge from day one is “valuing” the company for the purposes of raising capital through the sale of equity. Early stage companies should think along a three-year horizon: what are the key inflexion events over this period of time, such as filing an Investigational New Drug (IND) Application, which will be needed to develop and advance the technology? Even if framed as a best case scenario, this thinking will help to anticipate when capital will be needed along your development timeline, as well as where valuation and funding inflexion points are likely to occur. These early drug development decisions can make or break a company’s timeline and cash burn. You must think about how to efficiently and systematically de-risk your assets which increase value and attract investors and business partners.

Non-dilutive funding opportunities

Start-up funding can either be dilutive, which requires selling equity in the company in exchange for cash or other value and in which the founders’ and early shareholders’ ownership percentage is reduced, or non-dilutive, which does not result in a percentage reduction in founder ownership. Particularly in today’s challenging fundraising market, emerging companies should consider available non-dilutive funding opportunities. In the U.S., these include government grants, such as from National Institutes of Health (NIH), National Cancer Institute (NCI), National Science Foundation (NSF), Biomedical Advanced Research and Development Authority (BARDA), U.S. Department of Defense (DOD) as well as regional options including the Cancer Prevention and Research Institute of Texas (CPRIT) and California Institute for Regenerative Medicine (CIRM). Many rare diseases also have national nonprofit foundations that can provide funding opportunities for companies involved in research and commercialization within specific focus areas. Strategic development partnerships can also provide funds to develop and commercialize products without impacting the cap table.

However, when raising money, it is always wise to remember the old adage: “It is better to have part of something than all of nothing”. Many are the stories of faltering life sciences companies that turned down money because the terms where too harsh hoping for a better deal down the road.

Building value in the company

Building company value is an iterative process.  The most important and often first valuable asset in a life sciences company is its intellectual property (IP). The magic formula for valuable IP is technology that has the promise to lead to a marketable product plus the human talent to run the obstacle course to take that technology from the lab bench to the bedside. Acquiring IP requires in-licensing patent rights from academic institutions or other parties who have conducted basic and some translational research, as well as securing naming and trademark rights, and access to appropriate website URLs relevant for the company name. Building an IP portfolio will help to provide freedom to operate and IP protection for the company’s technology, but will also complement the value building that comes through equity, debt and non-dilutive funding of the company.

Once IP is secured, technology advancements will further create value for the company and there are measurable value inflexion points along the way. The company’s management team must know how to raise capital and recognize and take advantage of value inflexion points in a competitive market. It is also important to have a good public relations team in order to frame a professional and consistent message to investors. Founders must always be prepared to answer the question:  “Why is the company’s technology unique, how is it protected, and how does it serve an addressable market?“ 

Adding value through licensing

A forward-looking licensing strategy is a necessity that also helps move the company on an accelerated trajectory. As mentioned above, business-critical IP will need to be obtained through in-licensing from research institutions or market partners. Once the IP is in-house, the scientific team and IP professionals should seek out ways to expand and grow the IP portfolio and pursue new, related research discoveries. Companies must also consider at the outset what it will take monetarily to acquire this IP, as well as what further rights or technology acquisition might be necessary to execute and reach the market with a defined product or service. Many early innovators overlook the importance of relationship building. Aligning interests with relevant technology transfer offices (TTOs), their university administrative teams, and principal investigators are important considerations to ensure that when your emerging company’s technology makes it to the patient, the tech transfer office and researchers also win. Sponsored research programs can also be a great way to create goodwill with university researchers and can serve as an efficient way to improve the technology the company first licenses.

While the patent portfolio may be the foundation, the complete IP portfolio is often equally important, including the know-how relevant to manufacturing, copyrights relevant to executing algorithms, and trade secrets. Balancing the economics of up-front fees with future milestone payments is also important, so that early sunk costs  are minimized until the company reaches revenue or least a meaningful value inflexion point, which may be several years away. Companies should also consider the importance of sublicensing rights and control of prosecution strategy.

When negotiating an exclusive license, a crucial consideration is the definition of the licensed product. In addition, it is important to avoid royalty stacking that will undermine the value of the ultimate product, and in the context of combination products, to avoid obligations outside the value that the company’s technology contributes to the overall product.

Finally, in addition to patent life cycle analyses, it is important to consider any available paths for obtaining regulatory exclusivity to extend or sit parallel to the patent term of the company’s product portfolio.

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From corporate formation to patent protection and a consistent strategy through initial financing rounds to regulatory and reimbursement approvals to market revenue or an exit, we help your company lay a strong foundation, with a life sciences and health care industry specialization at the forefront of everything we do. As your business grows and your needs evolve, so does our team of lawyers who can support your company's strategic business needs relative to your product's development stage, including regulatory approval planning and execution, clinical trial design and implementation, pricing and reimbursement strategy, licensing, collaborations and other commercial transactions (sales and marketing and distribution agreements, manufacturing agreements and relationships, CRO arrangements and more), and commercialization and product launch planning. Hogan Lovells is a global law firm with over 40 offices worldwide and importantly in all the major global life sciences and innovation hubs. Accordingly, we can strategically assist you with our industry experts in markets across the globe.

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Authored by Andrew Strong and Barry Burgdorf.


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