Contract research organizations make good money providing critical services to young biotech and drug development companies early on. But often, those companies are cash-strapped at the stage when they need a CRO. That’s why some CROs are becoming stakeholders in the companies they work with, offering cash or services for equity in life science startups.
“We fundamentally believe that we should be aligned with our clients,” said David Gee, strategic business development at Cato BioVentures, the venture capital affiliate of a CRO called Cato Research. “I think it’s reasonable, particularly with early-stage companies, that we have some skin in the game. (Then) we have reason to come to a positive endpoint and to get there as quickly and efficiently as possible, because that’s how part of our value is going to be generated.”
Gee shared Cato’s story in a discussion of CROs as investors at Life Science Nation’s Redefining Early Stage Investments conference. The firm often co-invests in companies with other institutional investors and assists portfolio companies with product development and regulatory affairs.
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“For investors, where a lot of the investments fail is in the accuracy of the prediction of the regulatory pathway,” he said. “That happens to be our expertise.”
Michael Recny, president of Calvert Research, told a similar story. Calvert Research is the strategic advisory and equity investment affiliate of Calvert Laboratories, a CRO that Recny and R.C. McLauchlan co-founded to run pharmacology and toxicology testing for small biotech companies.
Several years ago, the founders realized that many of their clients who needed IND-enabling studies done were “cash poor but rich with assets,” he said. So they decided they’d be willing to take on some risk and invest a portion of the costs of those studies into certain companies in exchange for equity.
“I know what it costs me to run (IND-enabling) studies, and I know the balance of my internal costs,” he said. “So when we talk about a service-equity investment, if the package is $800,000, you would actually pay me $800,000 but I would kick back $400,000 in cash into your company in the form of an equity investment.”
So far, three of the firm’s portfolio companies have exited.
Then there’s medicinal chemistry firm MedChem Partners in Lexington, which started its early-stage investment efforts almost accidentally while incubating a friend’s company. Co-founder Tsvetelina Lazarova said that most of the firm’s clients were startups coming out of universities, and the team eventually realized there were other ways they could help those companies.
So MedChem set up an accelerator that’s a fully equipped chemistry incubator. In exchange for equity, companies get lab access and can tap MedChem’s expertise and network of service providers, Lazarova said.
All of the panelists agreed that these models will expand as young life science companies continue to explore alternative funding sources to bridge the preclinical funding gap.
“I think it’s the model of the future,” Gee said. “And I think those who don’t practice it, you have to test them and ask them why.”
