Bio3 Research: An Entrepreneurial Process in the Market for Patents

1042-2587
1042-2587
C 2014 Baylor University
©V
2014 Baylor University

E T&P

Bio3 Research: An
Entrepreneurial Process
in the Market
for Patents
Alfredo D’Angelo
Mario Benassi

This case concerns Bio3 Research, a small biotechnology company established in Italy in
2001 that focuses on cardiovascular disorders, connective tissue regeneration, and renal
disorders. The case reports on Dr. Pilato, founder and chief executive officer of Bio3
Research, while reflecting with his chief operating officer on the investments required to
finance his patents and products pipeline. The case offers a discussion around the entrepreneurial process of Bio3 Research, from opportunity identification to opportunity development and exploitation. The case then reveals Bio3 Research’s business model and
examines its activities and management practices in the patent market. In a recessive world

economy, Bio3 Research has an exciting portfolio of patents and products in high-growth
markets but must decide between financial options, as the company cannot exploit all of
these opportunities on its own.

Introduction
January 28th 2013, 10am—It was a freezing but sunny morning in Milan (Italy). Dr.
Pilato, the founder and chief executive officer (CEO) of Bio3 Research, could clearly see
snow-covered mountains from his top floor office in the center of the city. The situation he
was facing at work, however, was far from clear. Dr. Pilato met Dr. Gardini, chief
operating officer (COO), to discuss the company’s future development. “Our company’s
future could be more successful if we were able to attract the right funding,” Dr. Pilato said
as he started the meeting, with the knowledge that the company’s limited cash resources
could restrict any prospects of development. Dr. Pilato had invested $3.2 million of his
personal savings over the last 12 years to build his patents and products portfolio. Today,
he could license or sell the entire portfolio and generate almost $20 million, but the real
rewards could yet happen in the future if the company achieved phase IIA of its clinical
studies (see Figure 1).

Please send correspondence to: Alfredo D’Angelo, tel.: +44 (0)141 330 4132; e-mail: Alfredo.D’Angelo@
glasgow.ac.uk, and to Mario Benassi at mario.benassi@unimi.it.

September,
August,
20142015
DOI: 10.1111/etap.12132

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1

2
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Figure 1
The Business Model of Bio3 Research

Target
identification
and validation
(TIV)

Lead identification
and
optimization

Proof of
concept
(PoC)/Animal
Studies

I

II
A

III

REGISTRATION
Application
to FDA/
EMCDDA

(IND)

FDA/EMCDDA
REGULATORY
APPROVAL

POST
APPROVAL
ACTIVITIES

B

$135m

COMMERCIAL
IZATION

Phases

CLINICAL STUDIES

Application
to FDA/
EMCDDA
(IND)

PRODUCT
ION

DISCOVERY/PRECLINICAL TESTING

$500m

ENTREPRENEURSHIP THEORY and PRACTICE

HYPOTHETICAL
PRODUCT
DEVELOPMENT
LINE

$130m

$320m
VALUE†

COSTS
Out-licensing
or
Selling

$44m

$250m

$21m

$50m
EXIT?

$3.2m

Patent extension
Co-development
In-licensing
Out-licensing

First
patenting

$150,000

$20m
$500,000

ENTER

2001
†

2013

2015

2017

2021

2023

Values reflect approximate estimations considering that not all the innovations/applications which the company will develop can be successful. Values also reflect depreciation for all the
possible failures which may occur in the company’s pipeline.

More than an additional $40 million was needed to finance this development, but the
potential reward could exceed $250 million. However, a smaller investment of an additional $18 million to reach at least the end of the preclinical testing and to cover the costs
for the Investigational New Drug (IND) application could potentially more than double
the value of the company’s portfolio and generate almost $50 million. Dr. Pilato knew that
the company’s future was bright as its patents and products pipeline were positioned in
market segments with high growth perspectives. Still, more investment was needed to
capitalize on this growth.
Bio3 Research, with its headquarters in Milan and a research and development (R&D)
subsidiary in Walnut Creek, CA (USA), was operating at the intersection of the pharmaceutical, biotechnology, and nutraceutical/dietary supplement industries. With 17 patents

in its portfolio, the company was active in the areas of cardiovascular disorders, connective tissue regeneration, and renal disorders, all of which were predicted to experience
substantial growth. According to the latest industry reports, the global market for cardiovascular disease treatments was estimated to reach $17 billion by 2017 with an annual
growth rate of 15% (Global Data, 2010), and the global tissue engineering and regenerative medicine industry was projected to grow to $11.8 billion by 2022 (Global Healthcare
Network, 2010). The global market for nutraceuticals1 was also estimated to exceed $243
billion by 2015 (Global Industry Analysts, 2010).
Most of Bio3 Research’s targeted diseases were related to aging—diseases affecting
hundreds of millions of people worldwide every year. The patient base for Bio3 Research’s
applications and treatment methods was likely to expand further, thanks to an aging
population and improvements in the quality of life. Many companies’ patents were expiring
across the pharmaceutical industry, which meant that sales were being diverted to generic
alternatives. Thus, the company’s portfolio of patents and products could have potentially
attracted interested specialized investors and other pharmaceutical and large biotechnology
companies, as Bio3 Research would provide access to the largest segments of the pharmaceutical market. Another positive development was that patients were seeking more
effective and less expensive treatment options and were demanding new products.
Bio3 Research, with its promising patents and products pipeline, received positive
signals from the market, but the company had to face a very critical juncture. Since 2001,
Dr. Pilato had invested a great deal of money from his own pocket, yet the company was
still in the cash burn phase and had very limited revenue (see Table 1).
Bio3 Research’s scarce cash resources put the company’s future development in
question. “What should we do?”, Dr. Gardini asked shivering with apprehension on that

cold winter morning. Dr. Pilato foresaw several possibilities for promoting the company’s
development. Financial partners, such as venture capital (VC)/private equity firms could
provide extra cash and expertise, but they could also change the ownership and governance structure of the company. Bio3 Research could also enter into a strategic alliance
for co-development with other pharmaceutical companies that could provide critical
resources such as a capital infusion in addition to R&D expertise for additional testing as
well as marketing resources. Exiting the business and monetizing by licensing or trading
Bio3 Research’s portfolio of patents and products was yet another possibility.
Each available financing and strategic option had its own “pros” and “cons.” The two
men sat down around the table in the Milan office to review previous performance and
discuss their now crucial funding requirements.

1. Nutraceuticals are defined as functional food, beverages, and supplements fortified with bioactive ingredients including fiber, probiotics, protein and peptides, omega, phytochemicals, and vitamins and minerals.

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Table 1
Company’s Financial Projections
Revenues ($ million)

2013

Cardiovascular disorders
HMGB1 fragment in arterial stenosis and restenosis (option)
HMGB1 fragment in atherosclerotic plaque progression (option)
Connective tissue regeneration
HMGB1 in wound healing (option)
HMGB1 in cartilage repair (option)
HMGB1 in bone matrix regeneration (option)
HMGB1 in ligaments and tendons regeneration (option)
HMGB1 fragment in SLE and RA (option)
Renal disorders
BIOCYSAN†
Total

35%

2015

2016

2017

0
0

0
0

0
0

2.5
0

0
2.5

0
0
0
0
0

0
0
0
0
0

0
0
0
0
0

1
0
0
0
0

0
1
1.5
1
1.5

0.07
0.07

0.2
0.2

0.7
0.7

1.3
4.8

2
9.5

Preclinical

IND

Phase I

Phase
IIA

0
0
0
0
0
0
0
0

1.5
1
0.75
0.75
0.5
0.5
0.75
0.25

1.5
1.5
1.5
0.75
1
0.75
1
0.2

0.75
1.5
1.5
0.75
1.5
0.75
0.75
0

1
1
1
0.75
1
0.75
1
0

0.05

1.2

1.7

1.7

1.7

0.1

0.25

0.1

0.1

0.1

0.1
0.25
−0.18
−0.18
−0.18

0.15
7.6
−7.4
−7.4
−7.4

0.2
10.2
−9.5
−9.5
−9.5

0.25
9.55
−4.75
−4.75
−4.75

Operating expenses ($ million)
R&D—HMGB1 fragment in arterial stenosis and restenosis
R&D—HMGB1 fragment in atherosclerotic plaque progression
R&D—HMGB1 in wound healing
R&D—HMGB1 in cartilage repair
R&D—HMGB1 in bone matrix regeneration
R&D—HMGB1 in ligament and tendon regeneration
R&D—HMGB1 fragment in SLE and RA
R&D—BIOCYSAN (clinical trial to upgrade the product to
nutraceutical)
Salary and benefits (CEO, COO, CSO, CMO, CFO, head of lab,
3 associate scientists)
Outside services (excluding R&D—for example, legal,
consultation, etc.)
Other operating costs (rent, BD, travel, etc.)
Total
EBITDA ($ million)
Pre-tax income ($ million)
Net income ($ million)

2014

0.3
8.6
0.9
0.9
0.585

†

BIOCYSAN will be “upgraded” from dietary supplement to nutraceutical (R&D 2013–2014; revenues as dietary supplement until 2014; revenues as nutraceutical as of 2015).
BD, business development; CEO, chief executive officer; CFO, chief financial officer; CMO, chief medical officer; COO,
chief operating officer; CSO, chief scientific officer; HMGB1, high mobility group box 1; RA, rheumatoid arthritis; R&D,
research and development; SLE, systematic lupus erythematosus.

Origins
Dr. Pilato founded Bio3 Research at the end of 2001. Initially, the company was formed
on the basis of a collaboration agreement with Professor Bianchi of the San Raffaele
Research Institute for the development of the protein high mobility group box 1 (HMGB1),
a new, potentially therapeutic agent for cardiovascular disorders and connective tissue
regeneration. The two met one afternoon in the summer of 2001 at the San Raffaele
University in Milan during Professor Bianchi’s presentation of his new discovery.
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At the time of their first meeting, Dr. Pilato was chairman of the board of
Bracco Diagnostics Inc. (Princeton, NJ) and vice president of international affairs at Bracco
Pharmaceutical, an Italian pharmaceutical company with its headquarters in Milan. Professor Bianchi was group leader of the Chromatin Dynamics Unit at the San Raffaele
Research Institute. The two men were introduced during refreshments after Professor
Bianchi’s presentation and animatedly discussed the Institute’s lack of interest in the
potential of this new discovery, the protein HMGB1. The development of applications of
the protein would require legal protection through patenting, but disappointingly, the
Institute did not intend to provide Professor Bianchi with the financial support he needed.
Dr. Pilato considered the San Raffaele Research Institute’s short-term view of Professor Bianchi’s innovation an open door for a promising partnership. Many university
departments in Italy considered patents a financial burden and usually did not invest in
them; contrarily, Dr. Pilato saw them as potential opportunities and an investment. Having
gained extensive commercial experience by working as a top executive for big pharmaceutical companies all around the world for more than 30 years (see Table 2 for Dr. Pilato’s
resume), he immediately recognized the business potential of HMGB1 (Shane, 2000).
Dr. Pilato thought of two possible strategic alternatives for generating and extracting
value from this innovation. The first was to finance the patenting process of HMGB1 and
then use his connections in the industry to reassign the patents while still keeping his
managerial job. The second was to start a new company to manage the development of the
product. These two alternatives kept Dr. Pilato preoccupied for months afterwards. “I felt
the desire and the passion to create new things, and HMGB1 represented a real opportunity. At the end of the summer 2001, I resigned from my previous job and a few months
later I started my own biotech company,” Dr. Pilato remembered.

Table 2
Dr. Pilato, the Entrepreneur
Year
1968
1969–1970
1970–1973
1973–1976
1976–1978
1978–1983
1983–1986
1986–1994

1994
1995
1997

1997–2001

Position
Bachelor degree in chemistry
Medical representative
Resident area manager Middle East
Assistant to the managing director
Marketing Department, responsible for antitumor
drugs
Business development Far East
Vice president for business development
Executive vice president of international business
operations

Managing director
Member of the board of directors
Ë Vice president of international affairs of Bracco
Pharmaceutical SpA
Ë Director of Bracco Research, Inc.
Ë Responsible for the business operations of the
Japanese Joint Venture Bracco–Eisai
Chairman of the board of directors of Bracco
Diagnostics Inc.

August,
20142015
September,

Company

Location

University of Catania
Lederle Labs
Farmitalia Group
Nippon Farmitalia
Farmitalia Group

Catania (Italy)
Florence (Italy)
Milan (Italy)
Tokyo (Japan)
Milan

Recordati
Serono Group
Serono Group

Serono Italy SpA
Menarini Pharmaceutical Group
Bracco Group

Milan
Geneva (Switzerland)
Based for various periods
in Tokyo, Boston (USA),
Toronto (Canada), and
Geneva
Milan
Milan
Milan/Princeton (USA)

Bracco Group

Princeton (USA)

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Dr. Pilato made an initial investment of $150,000 in order to sign a collaboration
agreement with HMGB1’s inventor, start the initial operations activities for the company,
and cover the first patent application costs (refer again to Figure 1). He established Bio3
Research’s headquarters in Milan in order to be close to the most important universities
and R&D centers in Italy, as well as to make the most of the personal networks he had
developed in the biotechnology and pharmaceutical industries during the course of a long
career. He was also able to use his contacts within Assobiotec, a national biotech association of which he was one of the first associate members (Ozgen & Baron, 2007). In
January 2003, Dr. Pilato employed Dr. Gardini, a young and highly dedicated Bocconi
School of Management graduate, to manage the business operations and marketing
activities of his small but ambitious biotechnology company.

The Industry
From the 1970s through the end of the 1990s, large, integrated multinational companies led the innovation process in the pharmaceutical and biotechnology industries
(Gassmann & Reepmeyer, 2005). These vertically integrated companies covered all the
phases of the Drug Development and Approval (DDA) process (see Table 3).
In the late 1990s, however, the integrated model of the DDA process was dramatically
revolutionized. “The innovation process in the pharmaceutical industry proved to be less
effective for several reasons,” Dr. Pilato stated. First, innovation had become very
complex, requiring a level of expertise that a single company could not always provide
internally. Second, the innovation process had become more uncertain, as new scientific
discoveries shifted technological trajectories (Pisano, 2006). Increasing uncertainty suggested that firms share the risks and costs with other companies. As shown in Table 3, an
experimental drug takes more than 15 years on average to develop, from the discovery/
preclinical phase to the commercialization stage and then on to consumers. Only five in
5,000 compounds that enter preclinical testing make it to clinical studies in humans. One
out of these five compounds tested on people is then approved. The success rate in the
preclinical phase that evaluates the drug’s toxic and pharmacological effects through
laboratory animal testing is less than 0.1%. However, of every 100 drugs for which
applications are submitted to the regulatory authorities (Food and Drug Administration
and/or European Monitoring Centre for Drugs and Drug Addiction), about 70 will successfully complete phase 1 trials and go on to phase 2 of the clinical studies,2 about 33 of
the original 100 will complete phase 2 and go to phase 3, and 25–30 of the original 100
will clear phase 3 (DiMasi, 2001).
“Thus, developing a successful new product/drug is a long process that required the
high risks and huge investments that a single company couldn’t always afford,” Dr. Pilato
continued. In the late 1990s, big pharmaceutical companies favored the externalization of
the riskier but less expensive activities of the discovery/preclinical phases to smaller
companies, while keeping the more expensive but less risky activities of the clinical trials
within the internal boundaries of the firm (Pisano, 2006). The costs involved in clinical
studies accounts on average for more than 70% of the total costs occurring throughout
the DDA process (Bigliardi, Nosella, & Verbano, 2005). “These costs still represent an

2. Phase 2 of the clinical studies can be divided in phase 2A and phase 2B. Both aim at evaluating the
effectiveness of a drug and its side effects, as reported in Table 3. They differ in terms of the patient base on
which to test the drug and the relative costs involved.

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Table 3
The Drug Development and Approval Process

†

II
Application
to FDA/
EMCDDA†
(IND)

I

A

B
100–500
patients

Years

6.5

1.5

2

Test
population

Laboratory and animal studies

20–100
volunteers

20–100
patients

Purpose

Assess biological (pharmacology, toxicology,
etc.) activities and formulations

Determine
safety and
dosage

Evaluate effectiveness,
look for side effects

Success rate

5,000 compounds evaluated

Five enter trials

III
3.5

Application
to FDA/
EMCDDA†
(IND)

FDA/
EMCDDA
regulatory
approval

Post-approval
activities

1.5

1,000–5,000 patients
(Contingent upon
the pathology)
Confirm effectiveness,
monitor adverse
reactions from
long-term use,
comparison with
reference drugs

Registration
Regulatory
approval

Additional
post-marketing
testing required
by FDA/EMCDDA

Commercialization

Proof of
concept
(PoC)/
animal
Studies

Production

Lead
identification
and
optimization

Registration

Clinical studies

Discovery/preclinical testing
Target
identification
and
validation
(TIV)

One approved

The Food and Drug Administration (FDA) is the branch of the U.S. Department of Health and Human Services responsible for, among other things, granting drug approvals. The European Monitoring Centre for Drugs and Drug Addiction (EMCDDA)
is the reference point for drug approvals in Europe. They represent the regulatory authorities in the United States and Europe, respectively. Adapted from Pharma New Medicine (October 2004), page 43.
IND, Investigational New Drug.

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extremely high entry barrier for micro and small biopharmaceutical companies that want
to complete the entire DDA process from the discovery/preclinical phases up to the
commercialization stage,” Dr. Pilato noted.
In recent years, there has been a proliferation of small biotech companies despite
the presence of established big pharmaceutical companies that still undertake the entire
innovation process (Nosella, Petroni, & Verbano, 2005). These companies are highly
specialized in specific scientific and technological areas within the DDA process. For
example, drug agent companies operate in the preclinical phases intending to discover and
develop new compounds to patent and out-license. Product biotech companies are
involved in the R&D (preclinical and/or clinical) stages. Platform companies or contract
research organizations provide complementary services and infrastructure throughout all
stages of the DDA process.
“The revolution within the pharmaceutical industry opened up a window of opportunity for new companies and business models to emerge,” Dr. Gardini agreed while pouring
hot coffees.

The Company’s Business Model
“We couldn’t think of becoming a fully integrated pharmaceutical company as the
costs to complete the entire DDA process are simply too high,” Dr. Pilato reminded Dr.
Gardini while writing the words “Funding alternatives for Bio3 Research” on the blackboard in the Milan office.
Bio3 Research’s initial strategy, Dr. Pilato recalled, was “. . . to identify commercially
promising innovations/patents, to acquire exclusive rights over innovations/patents, to
extend the protection of the original innovation/patents throughout the world, and to add
value to the patent portfolio by means of pre-clinical testing.”
Bio3 Research was, to a large extent, different from the highly specialized biotech
companies populating the industry. The company was not involved in the initial R&D
activities of the discovery phase the way that drug agent companies are. Instead, Bio3
Research was originally built around a particular innovation. In 2001, Dr. Pilato started his
business by identifying the protein HMGB1 as a promising innovation with potential
applications in the pharmaceutical and biotechnology industries. He offered financial
support for the initial patenting and signed an agreement with Professor Bianchi for
the further development of the protein. He leveraged a knowledge-based innovation to
create a patent-oriented business (Arora, Fosfuri, & Gambardella, 2001; Gassmann &
Reepmeyer, 2005; Hargadon, 1998). The arrangement with Professor Bianchi was based
on 50/50 ownership of the first patent, once granted, but exclusive usage rights were given
to Dr. Pilato on the remaining 50% owned by Professor Bianchi. When Dr. Pilato obtained
the exclusive usage right for HMGB1, he did not limit the patent’s coverage to Italy, but
took steps to achieve global protection. During the period 2001–2013, the extension
procedures for worldwide coverage took place. In the meantime, Bio3 Research secured
the remaining 50% of the intellectual property (IP) rights for the use of HMGB1 from
Professor Bianchi, who was not interested in the commercial side of the innovation and
was fully dedicated to applied research in academia. Bio3 Research’s coverage, including
patent applications and patents granted, were located not only in Europe, the United
States, and Japan, but also in Canada, China, and Australia (see Table 4).
Building a robust international patent portfolio was a strategic choice for Bio3
Research. Patenting could give the company a temporary monopoly and increase the
potential for future revenues. Bio3 Research adopted a very proactive patenting strategy
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September,

Table 4
Bio3 Research’s Patents Coverage
Patent class

WO02074337†‡

Application

Patent application in Italy

2005
2006
2007
2008
2009
2010

Granted in Italy

2012

†

WO2006077614¶

WO02074337†,††
Connective tissue
regeneration

Cardiovascular disorders

2001
2004

2011

WO2005074984§

Patent application in Italy

Patent application to extend the coverage of
WO02074337 to proliferation factors

Granted in Australia

WO2005058305‡‡

WO2007116428§§

Renal disorders

Patent application in Italy

Patent application in Italy

Granted in Australia
Granted in Italy, Europe, Mexico
Granted in Italy

Granted in Europe, Mexico, Japan,
the United States (1st divisional
application)
Granted in the United States, China
Granted in Hong Kong
Patent pending in: Canada,
the United States (2nd
divisional applications),
China (1st divisional
application)

Granted in Italy
Granted in Europe, Mexico and Japan

Granted in China, the United States
(2nd divisional application)
Granted in Hong Kong
Patent pending in: Canada,
and China (1st divisional
application)

Granted in Italy

Granted in the United States and
Canada
Patent pending in Japan

Patent pending in Mexico
and Argentina

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The patent class WO02074337 is the “mother patent” that covers both (a) the use of inhibitors/antagonists (such as Abs, Abs fragments, high mobility group box 1 [HMGB1] fragments, small molecules) in cardiovascular disorders related to HMGB1
overexpression, and (b) the use of HMGB1 and its fragments in connective tissue regeneration.
‡ Patent that claims the use of inhibitors/antagonists (such as Abs, Abs fragments, HMGB1 fragments, small molecules) in cardiovascular disorders related to HMGB1 overexpression.
§ Patent that claims the proliferation of inhibitors/antagonists (such as Abs, Abs fragments, HMGB1 fragments, small molecules) in cardiovascular disorders related to HMGB1 overexpression.
¶
Patent that claims the use of HMGB1 inhibitors/antagonists to block atherosclerotic plaque progression.
†† Patent that claims the use of HMGB1 and its fragments in connective tissue regeneration.
‡‡ Patent covering oral use of Cysteine/Cystina (BIOCYSAN) in end-stage renal disease.
§§ Patent covering oral use of Cysteine/Cystina + Glutathione (BIOCYSAN Plus) in end-stage renal disease.

to protect its innovations, but extending patent coverage turned out to be more than a
simple administrative issue (Somaya, 2012). Bio3 Research had to leverage additional
resources and rely on patent consultants who had legal as well as scientific competencies.
The drafting process in patent applications required a complex interplay among scientific,
business, and juridical expertise, as IP rights carried both scientific and technical obligations that were likely to affect future patent licensing contracts. Securing the services of
patent attorneys, who combine expertise in law with other specialized areas of technology,
had the potential to have a financial impact on the patenting output of firms equal to R&D
spending. As such, these professionals were an important resource for Bio3 Research’s
patenting strategy (Somaya, Williamson, & Zhang, 2007).
In Bio3 Research’s business model, patenting was a way to generate and potentially
extract value from innovation. However, Dr. Pilato knew that in order to add value to the
IP, Bio3 Research had to develop R&D activities in the preclinical trials up to the proof
of concept (PoC) stage. Bio3 Research worked closely with national and international
university departments, research institutions, and individual scientists in the preclinical
phases, enabling the development and exploitation of the specific business opportunity
(Ardichvili, Cardozo, & Ray, 2003; George & Bock, 2011) offered by the protein
HMGB1. These included co-development activities, licensing-out to leverage third-party
resources, licensing-in other companies’ IP, and signing up ownership and usage agreements with other innovators to complement its own patent portfolio (Arora et al., 2001).
Over the period of 2001–2013, the company had spent $3.2 million ($500,000 in patenting activities alone) in order to create its portfolio of patents and products worth $20
million in 2013 according to Dr. Pilato’s and Dr. Gardini’s estimates (refer again to
Figure 1).
The economic logic (Magretta, 2002) behind Bio3 Research’s business model was “to
build a portfolio of patents and products in segments of the market where treatment
methods and applications did not adequately meet patient needs in terms of efficacy, cost
and safety,” Dr. Pilato emphasized. “This could generate interest from outside third
parties, such as pharmaceutical and biotechnology corporations for future licensing agreements in the areas of cardiovascular disorders, connective tissue regeneration and renal
disorders,” he concluded.

IP Portfolio Management
Cardiovascular Disorders
Cardiovascular disease treatment provided a key market for Bio3 Research, as the
global market for cardiovascular disease treatment therapies was estimated to be worth
$17 billion by 2017 (Global Data, 2010). An estimated 17 million people die worldwide
annually from cardiovascular diseases, primarily through heart attacks and strokes (World
Health Organization, 2004). Atherosclerosis, which was the primary factor contributing to
cardiovascular disease, was treated mainly through the use of statins. Worldwide sales of
statins exceeded $25 billion in 2009, with the most popular drug, Lipitor (Pfizer, New
York, USA), contributing over $11 billion (Alazraki, 2010). However, the patents on two
major drugs were approaching expiration. The patent for Lipitor had already expired in
2012, and the patent for Crestor (AstraZeneca, London, UK) would expire in 2016.
Generic versions of most statins were already available in the marketplace. The replacement of brand name drugs by generics, as well as the introduction of new drugs and
therapies for the treatment of cardiovascular disorders, represented an imminent loss in
sales to the large pharmaceutical companies. At the same time, the increase in the number
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of patients due to an aging population represented a promising outlook for companies with
new patents.
Bio3 Research had been active in the area of cardiovascular diseases since 2005, when
the company entered into a cross-license agreement with Creabilis Therapeutics, an Italian
drug discovery and development company, to develop the protein HMGB1. In the same
year, Bio3 Research and Creabilis Therapeutics signed a research agreement with
Cephalon Inc. (Frazer, PA, USA), a U.S. biopharmaceutical company, to develop a
research compound designed to meet specific milestones for new cardiovascular disease
treatments. Under the agreement, Cephalon had an exclusive option to develop and
commercialize any products resulting from research performed by Creabilis Therapeutics
and Bio3 Research. However, Cephalon decided after initial analysis not to proceed
further with the research on the specific compound HMGB1, and the agreement between
Bio3 Research and Creabilis Therapeutics was ended (Pisano, 2006). Dr. Pilato and Dr.
Gardini committed the company further into this market segment by entering into strategic
alliances with two U.S. biotech companies: Syngen Inc. in California in 2007 and Protelix
Inc. (also California) in 2008. Under a nonexclusive research licensing agreement, they
agreed to engineer, through their proprietary technological platform, a new family of
HMGB1 inhibitors/antagonists in the cardiovascular field and in atherosclerotic plaque
progression inhibition. Bio3 Research reserved the option to negotiate an exclusive
licensing-in agreement on these compounds under already-agreed terms. Although the
initial research was promising, Bio3 Research, Protelix, and Syngen decided not to
continue with their collaboration. The alliance failed for two main reasons. First, the
companies discovered that their strategic visions of the business were different. Second,
they realized that cooperation was difficult to achieve because of a personality clash
among the three CEOs (Forrest & Martin, 1992).
In the area of cardiovascular diseases, Bio3 Research was able to achieve two applications in the preclinical stage (see Table 5). According to Edwards (2008), a financial
deal for only one application at this stage of development was worth between $3 and $10
million.

Connective Tissue Regeneration
Bio3 Research’s patent portfolio also covered connective tissue regeneration. The
company was particularly active in the segments of chronic wounds and cartilage regeneration. The total global wound care market was projected to reach $20 billion by 2015
(PharmaLive, 2010). Wound care treatments range from traditional wound management,
which involves supplies such as gauze and tape, to more advanced and active wound
management, which incorporates tissue-engineered skin. The traditional wound care
product market was worth approximately $14 billion globally, and the advanced and
active segments were estimated at $6 billion. Several artificial skin products were already
available on the more advanced wound management market, such as Dermagraft,
Apligraf, TheraSkin, TransCyte, Laserskin, Epicel, OrCel, and Hyalograft. Experts estimated, however, that approximately 15% of patients with chronic wounds would be
willing to pay for more advanced treatment if the treatment produced superior results
(Hüsing, Bührlen, & Gaisser, 2003).
The global worldwide market for advanced orthopedic technologies, implants, and
regenerative products was estimated to be $27.7 billion and was predicted to grow to $32.4
billion by 2015, with an average annual growth of 2.7% (BCC Research, 2011). Within
that market, the bone repair and regenerative product segment was estimated to be $3.1
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Table 5
Bio3 Research Pipeline
Discovery/preclinical testing

Patent

WO02074337

Area

Lead compound
(application)

Phase

Target
identification
and validation
(TIV)

Lead
identification
and
optimization

Clinical studies
II

PoCAnimal
studies

IND

Cardiovascular
disorders

ENTREPRENEURSHIP THEORY and PRACTICE

FRAG A—HMGB1
fragment (arterial
stenosis)
FRAG A—HMGB1
fragment
(artherosclerosis)
WO02074337

Connective tissue
regeneration
CTR-1 (HMGB1 in
cartilage repair)
CTR-2 (HMGB1 in
wound healing)
CTR-3 (HMGB1 in
bone matrix)
CTR-4 (HMGB1 in
ligaments and
tendons)
FRAG A—HMGB1
fragment (SLE—RA)

WO2005058305

Renal disorders
BIOCYSAN® (oral use
of Cysteine)†

†

Registration

Free sale certificate—dietary supplement.
Source: http://www.bio3research.com/
HMGB1, high mobility group box 1; IND, Investigational New Drug; PoC, proof of concept; RA, rheumatoid arthritis; SLE, systematic lupus erythematosus.

I

A

B

III

IND

Regulatory
approval

Post-approval
activities

billion, and the joint replacement, implant, and regenerative product segment at
$23.2 billion (Business Insights, 2010).
Bio3 Research had been operating in this area since 2006 via a collaboration agreement with the Veterinary Faculty of the University of Milan. This collaboration was
intended to perform a pilot animal pharmacological study for the project in cartilage repair
(CTR-1). Bio3 Research had also been working since 2009 on a project on wound healing
(CTR-2) with Bio-Quant Inc. (La Jolla, CA, USA) to perform another pilot animal
pharmacological study (refer again to Table 5).
In the connective tissue regeneration area, Bio3 Research achieved two applications at
an advanced stage of the preclinical phase, while also retaining three other applications
under development, such as the CTR-3 and CTR-4 projects and FRAG A–HMGB1
fragment (systematic lupus erythematosus [SLE]–rheumatoid arthritis [RA]). In the area
of cardiovascular diseases, a financial deal for even one patent at this stage of development
could be worth $3–10 million.

Renal Disorders
Initially, Bio3 Research was not active in the treatment of renal disorders. The protein
HMGB1 only covered cardiovascular disorders and connective tissue regeneration. In
2004, the company signed an ownership and exclusive usage agreement for two more
patents with another independent scientist to operate in this area (refer again to Table 4).
Renal disorders, better known as chronic kidney disease (CKD), cause serious complications for millions of patients. An estimated 500 million people in the world, or about 10%
of the adult population, have CKD (National Kidney Foundation, 2010). The majority of
CKD patients had been treated with three drugs: Epogen, Aranesp, and Procrit. In 2009,
these drugs had combined sales of $6.3 billion (Perrone, 2010).
The strategic thinking behind Bio3 Research’s investment in the area of renal disorders was the company’s decision not to focus exclusively on patents, IP management,
and R&D activities. In 2010, Bio3 Research was granted a free sale certificate for
BIOCYSAN by the Italian Ministry of Health that allowed the company the right to
market the product as a dietary supplement.3 Bio3 Research entered into a manufacturing agreement with the Italian company S.I.I.T. for the production of BIOCYSAN.
BIOCYSAN had been marketed worldwide via e-commerce, and exclusive local distributors were used in Greece, Bulgaria, Cyprus, and Lebanon. Bio3 Research also engaged in
extensive discussions with European distributors in order to expand the geographic scope
of BIOCYSAN to other European countries while also scouting for partners in the United
States and Japan.

What Next?
Bio3 Research had progressed from one innovation—HMGB1—to multiple patents,
then to R&D collaboration activities, and finally to a saleable product—BIOCYSAN—
over a period of 12 years. During this time, the company strengthened its interorganizational network and enhanced its reputation and confidence (Pisano, 2006; Teece,
2010). In 2008, the company also opened its own fully owned R&D subsidiary, Bio3
3. Dietary supplements are vitamins that do not require the same approval process by regulatory agencies
(FDA and/or EMCDDA) as drugs.

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Research Inc., within a biotechnology cluster in the San Francisco Bay Area just north of
Silicon Valley. There were several reasons for opening a U.S. subsidiary (Florida, 1997).
First, Bio3 Research wanted to have a team of qualified researchers to carry out in-house
R&D activities and better manage R&D results. Second, the company wanted to
strengthen its ongoing strategic alliances in the United States. Third, having a U.S.-based
company allowed Bio3 Research access to the American capital market. Bio3 Research
Inc. received a Qualifying Therapeutics Discovery Project Grant from the U.S. Treasury
to fund 50% of the company’s R&D investments in the United States during the period of
2009–2010 as a result of opening a U.S.-based operation.
The two friends and colleagues agreed that Bio3 Research had come a long way over
the years. The company, with nine employees (including the founder), 17 granted patents,
and one R&D subsidiary in the United States, had successfully survived the start-up stage
(Nosella et al., 2005). “Credit for these extraordinary results has to be shared by all the
team members and the Advisory Board,” Dr. Pilato noted (see Tables 6 and 7).
However, Bio3 Research was still in the phase of cash burn and very limited revenue
(refer again to Table 1). This put into question the company’s future development. Dr.
Pilato added two columns labeled “Pros” and “Cons” under the “Funding Alternatives for
Bio3 Research” title he had written on the blackboard a few hours before.
The first option for Dr. Pilato and Dr. Gardini to finance Bio3 Research’s R&D
pipeline was to get investment from VC firms or other investors, thus relinquishing partial
control of the company (Spinelli & Adams, 2012). In the biotech field, investors tend to
finance companies where PoC (i.e., the end of the preclinical phase) has already been
achieved, meaning that the company had demonstrated in preliminary experiments that
the compound was effective, at least on animals (Pisano, 2006). The positive results on
PoC should encourage financial investors to make realistic predictions of success in
subsequent human trials which, in turn, would increase the potential return on investment.
“We are not quite there yet,” Dr. Pilato said, adding that “if we sell an equity stake to a VC,
Bio3 Research would still need to hire a third company to get the compounds through the
DDA process, as the company cannot conduct these activities alone from its own US R&D
laboratory.”

Table 6
The Team†
Name

Position

Dr. Francesco Pilato
Dr. Federico Gardini

CEO
COO

Dr. Gabriella Messina

Head of Special Projects
and Logistics
Scientific officer

Dr. Domenico Criscuolo

Degree and duties
Graduated in chemistry, he is the founder of Bio3 Research
Graduated in business administration, he also acts as general operations
manager of the Californian R&D subsidiary
Graduated in modern literature, she is in charge of the administrative and
HR department of the company
PhD in hematology from the University of Rome and a PhD in clinical
oncology from the University of Pavia. Prior to his involvement with
Bio3 Research, he worked for several companies as clinical researcher.
In 2008, he founded Genovax, a biotech company spin-off from the
University of Genova

†

The team also includes five other members employed on a collaborative basis (including the CFO and those based in the
U.S. R&D subsidiary).
CEO, chief executive officer; COO, chief operating officer; HR, human resource; R&D, research and development.

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Table 7
The Scientific Advisory Board
Name
Prof. Emilio Bizzi

Prof. Edoardo Boncinelli
Dr. Maurizio Denaro

Position
Ë Eugene McDermott Professor in Brain Sciences and Human Behavior at the Massachusetts Institute of
Technology (MIT) in Cambridge (USA)
Ë Former chairman of the Department of Brain and Cognitive Sciences at MIT
Ë Professor of biology and genetics at Vita-Salute San Raffaele University in Milan
Ë Former director of the International School for Advanced Studies (ISAS/SISSA) in Trieste (Italy)
Ë Executive vice president of drug development at OSI Pharmaceuticals
Ë Executive vice president and chief technical officer at Amylin Pharmaceuticals Inc.
Ë Vice president and center director at Hoechst Marion Roussel Inc.
Ë Former group vice president in research and development and head of Global Business
Unit-Ultrasound at the Bracco Group

In any case, Dr. Pilato was reluctant to relinquish the control of the company. In
addition, VC firms might have a different time horizon than Dr. Pilato for their calculations of expected return on investment. However, this option could secure enough capital
to develop R&D activities at least until the end of the preclinical phase, so as to potentially
generate higher rewards in return in case of exit (sale). Indeed, the potential reward could
exceed $50 million if Bio3 Research developed the pipeline to the end of the preclinical
phase and reached the application to the regulatory authorities (IND) (refer again to
Figure 1). The reward could be greater, even exceeding $250 million, if Bio3 Research
developed the pipeline to phase IIA of the DDA. “We would need an additional $18
million to reach the end of the preclinical phase and to cover the costs of application to the
regulatory authorities, and more than $40 million to develop the pipeline until phase IIA
of the DDA,” Dr. Pilato said, looking at the total costs row of the company’s financial
prospects (refer again to Table 1).
The second option was to enter a strategic alliance for co-development with a large
biotech or pharmaceutical company that could possibly provide a capital injection and
other critical R&D resources in return for an equity stake or a share of the profit or
licensing. The expiration of patents and the corresponding growth in sales of generic
substitutes was driving the industry toward consolidation, forcing pharmaceutical companies with expiring patents to look for alternative ways to compensate for lost sales, such
as acquisitions or licensing agreements (Deloitte, 2008). “Large biotech and pharmaceutical companies heavily rely on licensing agreements and acquisitions to develop their
product pipelines nowadays,” Dr. Gardini said. “They tend to work with small partners
that perform initial testing and do preliminary analyses before more expensive trials in the
clinical phase. They usually start out with a licensing agreement for a compound and end
up by acquiring part or all of the smaller biotech companies,” he explained. However, the
patent “cliff,” combined with the current financial crisis, was pushing pharmaceutical
companies to prefer later-stage compounds (i.e., in the clinical phases) in both mergers
and acquisitions and pharmaceutical–biotech strategic alliances (Deloitte, 2008). “Bio3
Research could sign a strategic R&D agreement for the co-development process. This
could completely change our business model and transform our company into a product
biotech company,” Dr. Pilato concluded. Moreover, this option would still require a large
financial commitment by Bio3 Research, but the company had little cash and few R&D
structures to co-sustain the innovations throughout the DDA process.
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The third option for Dr. Pilato and Dr. Gardini could be to sell or license the entire
portfolio of patents to a large biotech or pharmaceutical company against license fees and
royalties. Bio3 Research, with a very promising pipeline of patents and products, could
potentially generate high returns on its investment as BIOCYSAN had already earned
governmental approval in Italy. The markets for the other applications in the areas of
cardiovascular disorders and connective tissue regeneration also presented favorable perspectives. According to the estimates of an external consultant (Edwards, 2008), a financial
deal for each application in Bio3 Research’s portfolio at its current stage of development
was worth between $3 and $10 million. The company had seven applications in the pipeline
in the areas of cardiovascular disorder and connective tissue regeneration (refer again to
Table 5), and Dr. Pilato and Dr. Gardini cautiously estimated their value to be around $20
million (refer again to Figure 1). By selling or licensing the entire portfolio, the company
could avoid additional R&D costs and risks, recover the money spent in recent years, and
hopefully generate a very good return on investment for Dr. Pilato and his team. However,
this option presented the same issues as option two because pharmaceutical companies
tended to prefer later-stage compounds (i.e., already in the clinical phases) for acquisition.
Alternatively, Dr. Pilato and Dr. Gardini could liquidate each individual specific
segment/application in the company’s pipeline. This option would allow the company to
break even by selling one or two applications (refer again to Table 5) and potentially
generate a good return on investment for Dr. Pilato, who could continue the business
activity of Bio3 Research in nutraceuticals, which is a less regulated sector. “We have
recently upgraded BIOCYSAN from a dietary supplement to a nutraceutical,” Dr. Pilato
announced, adding that “the company is expecting to generate up to $2 million in revenues
from this update by 2017” (refer again to Table 1).
In Dr. Pilato’s view, all the available alternatives involved clear trade-offs. “These
alternatives have to be considered contingent upon a projected realistic return,” he added.
The duo was just back from the New England Venture Summit in Boston where they had
presented Bio3 Research’s pipeline of patents and products to an exclusive audience of
venture capitalists, investors, and strategic partners in the United States. Dr. Pilato and his
team were at a crucial stage, but the situation was still evolving as a number of meetings
with other investors and scientific partners were about to follow in the coming months on
this side of the ocean. It was already 2pm, and Dr. Pilato had spent the entire morning
discussing these options with his COO. Dr. Pilato stared for a few seconds at the blackboard with the “pros” and “cons” starkly listed. He turned to Dr. Gardini: “Let’s go for
lunch, then continue.”

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