Inside the NewCo Model

Drug development is an inherently risky endeavor, a point we explored recently in our Known in New blog post. Only around 10% of drug candidates ultimately progress from Phase 1 to approval, even with compelling science and promising early data.

Large pharmaceutical companies manage that risk through scale, with pipelines spanning 50 or more programs across therapeutic areas and stages of development. Small biotechs must take a different approach, concentrating limited resources around just a handful of assets or a core platform. While this focus can be an advantage, it also creates concentration risk, where the failure of a single asset can materially impact the success of the entire business.

The NewCo model Formation Bio deploys (also known as the Hub-and-Spoke model) offers one way to combine the advantages of both approaches. Under this model, individual assets, or in some cases several assets, are placed into dedicated new companies or “NewCos” with their own leadership, capital, and resources, retaining the focus and accountability of an asset-centric biotech. At the same time, building multiple NewCos under the Formation Bio umbrella creates a broader portfolio of independent programs, providing diversification without requiring each individual company to develop a broad pipeline of its own.

The idea of building focused companies within a broader portfolio has been explored across biotech for more than a decade. Roivant was an early example, building a portfolio of focused NewCos—or “Vants”—around individual medicines and technologies. BridgeBio adopted a similar portfolio approach in genetic disease, creating and investing in focused companies around individual programs while building development capabilities across the broader organization. The approach has gained renewed prominence in recent years as investors and pharmaceutical companies have formed new companies around assets emerging from China's rapidly growing biotech ecosystem. While the precise structures may vary, the underlying principle is to maintain focus and accountability at the asset level while creating diversification across a broader portfolio.

Our approach to the NewCo model

Formation Bio's approach builds on many of the same principles, but starts with a different foundation. Our roots are in TrialSpark, where we initially built technology and clinical operations capabilities as a CRO, to run clinical trials more efficiently for sponsors. Over time, we expanded beyond clinical operations to build the broader capabilities to acquire and develop our own drugs end-to-end. Specifically, Formation has built an experienced R&D team spanning clinical development, regulatory, CMC, biometrics, safety, quality, and clinical operations, supported by advisors with experience across more than 100 approved drugs. Combined with our in-house clinical operations and technology platform, those capabilities give each NewCo access to an established drug development engine without requiring the partner, or the NewCo, to recreate it around every asset. As we’ve discussed in other pieces, our integrated technology platform spans patient intelligence, data surveillance, and a universal data layer. Together, these capabilities form a shared drug development engine that can support programs across our portfolio.

Our NewCo model is designed around putting that engine to work repeatedly. We source and license promising drug candidates from around the world and place each into a dedicated NewCo, supported by a focused operating pod with clear ownership and accountability for the program. Rather than requiring each NewCo to build its own R&D organization, clinical operations infrastructure, technology stack, and other capabilities from scratch, the pod can draw on Formation's existing platform as needed. This allows each program to retain the focus of an asset-centric biotech while benefiting from the capabilities and infrastructure of a much larger drug developer, and allows Formation to add programs without rebuilding a company around each one.

How we structure NewCos and pods

Once we acquire or license a drug, we place it into a dedicated NewCo and assemble an operating pod around it. Each NewCo is capitalized by Formation Bio and can immediately draw on Formation’s drug development infrastructure.

A standalone biotech faces inherent friction when getting a program off the ground – capital needs to be raised, teams assembled, external partners engaged, and operating systems put in place before development can begin. At Formation, because that foundation already exists and is shared across the portfolio, each NewCo can initiate core operations immediately upon formation, accessing shared people, technology, and resources only to the degree required, minimizing costs.

Each NewCo is led by a dedicated General Manager (GM), hired from within Formation, who operates with the ownership and accountability of a standalone biotech CEO while drawing on Formation's shared capabilities. That ownership is designed to begin as soon as a deal is closed, giving the program a "day zero" mindset from the start, with full focus and accountability for the asset's success without the ramp-up of building a standalone company.

The result is a model designed to preserve the focus of building around a single asset without also having to build and finance a standalone company around it. The GM and pod can stay focused on the decisions and execution required to advance the drug, while Formation provides the infrastructure around them.

Why this is beneficial for our partners

For an asset originator, choosing a licensing partner often means choosing between either access to pharma-like capital and capabilities, or participation in uncapped equity upside, but not both. A traditional licensing agreement can provide access to the resources of a large pharmaceutical company, but the originator typically participates in future value through negotiated milestones and royalties. A standalone venture-backed NewCo can offer a different form of alignment, including uncapped upside via equity in the company developing the asset, but such investors typically still need to fully syndicate the deal, spin up a company, and build the team and infrastructure required to execute.

Formation's model combines the advantages of both of those approaches. If appropriate for the asset, our partners can retain equity in a dedicated NewCo, alongside other negotiated economics, giving them the opportunity to participate directly in the value created as the asset advances. And because the drug sits within its own entity, the NewCo remains independently transactable and financeable as the program reaches future value inflection points. At the same time, the NewCo is capitalized from the outset and can draw immediately on Formation's existing development organization, rather than having to assemble one after the transaction closes.

For partners, the result is a dedicated company around their asset with meaningful participation in future value, resources available from day zero, and capital focused on reaching the next development milestone rather than building the infrastructure required to get there.

Why this is beneficial for Formation Bio

Drug development remains probabilistic, and our model isn't built on the assumption that we can eliminate that uncertainty. Instead, we underwrite our portfolio to industry-average probabilities of success and focus on taking more shots. As our founder and CEO Benjamine Liu describes in his blog, Uneven Frontiers, while any individual program may be more likely to fail than succeed, building a portfolio of independent programs significantly increases the likelihood that at least some will succeed.

That portfolio logic is central to Formation's model. By selecting promising assets and supporting them through shared infrastructure, we can pursue more programs without rebuilding an organization around each one. Some will inevitably fail, but successful programs can offset those losses and drive value across the broader portfolio. Diversification doesn't make any individual drug more likely to work, but it makes Formation’s success less dependent on any single outcome.

How the model compounds

Taken together, this points toward a different way to scale drug development. Shared capital and capabilities are common across pharma, but what sets our model apart is the underlying infrastructure of dedicated pods and NewCos that preserve the accountability of a standalone biotech – an infrastructure that doesn’t need to be rebuilt to develop each new asset. This combination is what allows Formation Bio to take more shots on goal while maintaining focus around each individual drug. It also reflects a different operating model altogether, one where a broader pipeline doesn’t require growing headcount and infrastructure at the same rate. Our technology is an important part of that model, but it doesn’t eliminate the inherent uncertainty of drug development. Even as we use software, data, and prediction models to inform which assets we pursue and how we develop them, we continue to underwrite to industry-standard probabilities of success. Our goal is to build a system that can operate effectively within that reality: developing more promising drugs, taking more shots on goal, and ultimately increasing the number of treatments that have the opportunity to reach patients. Learn more about our technology →