04.01.04
Case Study: VRI BioMedical
Business Description: VRI BioMedical Ltd. Pty. (VRI) is a small Australian publicly traded biotechnology company that is developing products targeting three technology platforms: probiotics, diagnostics and vaccines. VRI’s first commercial products are based on its proprietary strain of probiotic bacteria, PCC™, a strain of Lactobacillus fermentum. VRI is poised to enter the probiotics market through several distribution channels in different markets, and will use revenues from dietary supplement probiotics and diagnostics to fuel the development of its biopharmaceutical vaccines and other probiotic R&D.
Theme: Competing as a biotech company that focuses on several markets creates significant challenges. Each business has different capital needs and varying payoff periods, and management must balance strategy, resources and capital to execute an integrated plan that drives growth and manages cash across all businesses.
Background: VRI was incorporated in 1998 and listed on the Australian stock market in 2000. Its mission is “bringing science to wellness.” To fulfill this mission, the company focuses on developing a variety of products for the maintenance of human health, which have relatively short lead times and low regulatory hurdles. VRI’s core competencies are microbiology and immunology R&D, managing clinical trials and product development. The company is just beginning to focus on finding distribution and marketing partners, recently establishing a large global deal for the MLM channel with Pharmanex, which obtained the exclusive global rights to sell and distribute PCC™ in this channel as a dietary supplement under the brand name ProBio PCC™. That said, VRI retains the right to seek partnerships for other distribution channels. A second product, Progastrim™, which also contains PCC™, has been launched in Australia and is sold exclusively through naturopaths.
Situation Assessment: Managing the VRI business requires fairly high levels of cash—clearly more than if it was solely focusing on the dietary supplement market. In July last year, the company closed a round of financing that brought in (AUS) $4.3 million, which will provide cash for approximately 18 months (based upon conservative spending). This effort was time intensive and distracting to management. At the foundation of VRI’s business model is a need to generate cash on an ongoing basis from probiotic product sales. This revenue will help sustain the business and help fund R&D and clinical trials to further develop its biopharmaceutical projects. Ensuring near-term success in marketing PCC™ in a variety of channels and markets is critical to the entire business.
Opportunities: Although the probiotics market is continually referred to as “up and coming,” it is reasonably well-established. There are many players in the market that have varying levels of scientific substantiation and market presence. Since VRI is entering a crowded market, it must find a way to quickly highlight its value proposition and connect with a need in the market. VRI, with its proprietary position in PCC™, has many attractive features, which must be emphasized to prospective partners: (1) The uniqueness of scientific and clinical evidence on both the level of effects and benefit areas over and above intestinal health; (2) VRI’s commitment to ongoing laboratory and clinical research to expand the marketability of PCC™; (3) Partnership opportunities, since VRI has limited restrictive relationships and are open to a variety of possible partnerships; (4) Its success in obtaining Australian government grants supporting its R&D and export initiatives; and (5) VRI’s need and willingness to work with partners to create and market unique products.
Lessons Learned: VRI has chosen a business model that requires strong partnerships and a well executed strategy. Its case highlights the need for a sound financial strategy, forming strong partnerships, segmenting the market and clearly delineating its advantages. The long-term success of VRI’s business will be outside of nutrition, but it needs to fund the business from several sources (i.e., cash flow from operations, investors, partners, grants), which puts pressure on its success in driving products in dietary supplements and functional foods. VRI is a small organization that has a set of highly specialized skills. However, the company must recognize the need to leverage partners in other areas, specifically in distribution and marketing. Distribution of probiotic products is fairly well established and efficient, so VRI needs to create a set of strong, long-term oriented partnerships that cover all distribution channels. However, the challenge will be to create a group of alliances that can effectively co-exist. Finally, VRI has a strong foundation of science and evidence supporting the fact that its strains work in unique ways. Furthermore, its market and business model approach is fairly unique relative to other probiotic players, but it is critical that VRI turn its “story” into a simple, compelling argument for prospective markets and partners.