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5 expert tips on biotech due diligence and technical considerations (Q&A)

Dr. Khoa Nguyen, experienced scientific consultant, shares his top tips for biotech due diligence and technical considerations, specifically for startups and SMBs that are seeking funding. Dr Khoa himself is the founder of Tranquis Therapeutics, a biotech startup that launched with $30 million Series A funding. 

Table of Contents

1. Could you please share with us what would be some important aspects of the process of developing a novel technology?

Proprietary technologies are the driving forces of successful biotech launches. As previously discussed, these technologies need to satisfy unmet medical needs and consequently market demands. However, there are other important “technical” strategies to consider such as first-in-class vs. best-in-class and single indication vs. platform development.

With regard to the former point, first-in-class technologies refer to those that have never been accomplished before and obviously are associated with higher risk and also high reward, providing that the development is successful. One relevant example is the development of mRNA vaccines by Moderna, which has disrupted the field of vaccinology. In contrast to first-in-class technologies, best-in-class inventions are those built on previous products with a lot of optimizations that are derived from real-world data feedback. These are easier to develop as the core technology has been proven to be functional.

However, given the more approachable development path, best-in-class technological development often faces intense competitions. An example of this approach is the development of anti-CD47 antibodies for oncology indications by many biotech companies. While the first product was spun out of Stanford by the Forty Seven team, several subsequent generations of this biologics have been developed to mitigate the shortcomings of the first-generation product such as off-target effect on red blood cells and its associated consequence of anaemia.

Another important strategic consideration is whether the company would target a specific pathway/disease (single indication) or is aiming at generating a new paradigm for therapeutic intervention (platform development). While single indication is quite self- explanatory, platform technology is more complex. This approach might include the development of a series of therapeutics which revolve around a centralized scientific concept. For example, Tranquis relies on my academic research discovery which posits that metabolic dysfunction of brain immune cells is an underlying common defect of various brain diseases and we focus on a research platform that explores the development of various microglia-centric immuno-metabolic therapies. Alternatively, a platform technology could represent a technological breakthrough that is readily applied to different disease contexts. Moderna again is a great example of a platform company with its mRNA vaccine technology. Moderna’s technology platform was successfully applied into the field of infectious disease and this hallmark proof of concept success will certainly pave way for the company to venture into the arena of cancer vaccines with its mRNA approach.

2. Assuming the company has developed a novel technology and would like to start a fund-raising campaign to support further development? What are the key considerations during the due diligence process with potential investors?

Technical due diligence is a process in which investors evaluate the value of a potential asset as well as its risks/risk mitigation strategy provided by the inventors. It requires comprehensive and meticulous analysis of the asset by analysts with relevant subject matter expertise. This process is very important in determining whether the startup would be able to successfully raise funds or acquired by a larger enterprise.

In general, the key considerations include

  • scientific rigor,
  • intellectual property protection status, and
  • transactional documents/business plan.

However, the due diligence process depends entirely on the focus of the investors: some would be very technically demanding (i.e. requiring meticulous scientific data reports) while others would put more weight on business/legal strategy and therefore would require a more well-drafted business plan. In my experience, the due diligence process could be a one-stop-for-all kind of experience where the funding decision depends on a couple rounds of due diligence Q&As to clarify previously undiscussed topics or a more extended months-long iterative process, in which queries from the investors would trigger further empirical optimization of the technology/business plan/legal protection status.

3. Could you please elaborator further on the scientific rigor aspect of the due diligence process?

Technically savvy investors will dwell heavily on the science behind the technology, from in vitro/in vivo proof of concepts to critical studies for clinical development of the technology.

  • Data analysis and verification: Specifically, investors will employ a series of consulting experts to carefully analyze the data to ensure that the correct experimental settings, preclinical models, statistical analyses were employed in the generation and interpretation of the data.
  • Data validation: Many would require data to be independently validated by at least two sources (the primary inventors and an independent CRO) to confirm scientific soundness of the findings.
  • Technology evaluation: Once these proof-of-concept studies have been shown to be well executed; the next step would be to evaluate whether the technology is properly developed for use in humans.
  • Assessment: This includes careful analysis of safety/toxicology profile/biomarkers for target engagement-efficacy in relevant ex vivo/in vitro biological systems/standard animal models for these types of assessment.
  • Scope for scale up: In addition, investors would like to know whether the technology could be properly formulated and easily scaled up for manufacturing or whether the company has invested in exploring developmental paths to achieve these goals.

These are only some key points that are related to the “scientific rigor” aspect of the due diligence process. In theory, investors could have questions for any parts of the scientific presentation that don’t sit well with them so the entrepreneurs should come well prepared to address any “fuzzy” aspects of their science. The rule of thumb to is to be your own worst critic in advance so when it comes to scientific due diligence, there will not be any major surprises.

4. Is IP protection status something the entrepreneur needs to pay attention to during the due diligence process?

Investors are particularly interested in determining whether the core technology of the company that they would invest in will not be easily imitated by competitors, meaning that all patents, trade secrets/know-hows are thoroughly documented and legally protected. Many important questions will be raised initially by the investors during the examination of IP protection, such as:

  • who are the founders/inventors of the company/its core technology and whether they are legally restricted from using the core technology of the current company for the development of another entity;
  • do the founders/inventors have any conflicts of interests with regard to other companies that they have been involved with prior to the foundation of the current enterprise?;
  • is the IP related to the technology wholly/partially funded by private/governmental foundations/academic institutions and if so, have joint ownership issues been addressed?

Once these issues have been ironed out, investors would like to know whether the agreements have been documented as part of the foundation of the company. For example, owners of the technology must agree to transfer the IP to the company in patent filings, specify waivers/disclosures of conflicts of interests and abide to confidentiality agreements.

5. What about transactional documents?

These documents are related to the process of setting up the enterprise, such as

  • Founders’ Agreements,
  • Employment Agreements,
  • Confidentiality Agreements, and
  • Scientific Advisory Board Agreements.

All of them specify the interests and obligations of all individuals that are involved in the foundation and development of the enterprise. The Founders/Employment/Scientific Advisory Board Agreements are related to the agreements among founders and between the company and the employees/advisors with regard to their compensation and respective obligations to the company, which usually comes with a vesting clause to require commitment of the founders/employees for a specific time period to the company. Stock Option Grants is also an important part of these agreements. Confidentiality Agreements specify the rules and regulations with regard to safe-keeping of proprietary information of the company so that none of the founders, advisors, employees, consultants will be legally allowed to divulge this information to competitors or the public. These documents will be carefully examined by the investors during due diligence process.

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