Common cathode laser diode pin connections
The photodiode needs to be reverse biased and by my interpretation of events there will be no potential difference at the photodiode left for this biasing after the laser diode?


You need to use a split supply, so that you can apply a negative voltage to the PD anode. 


  Will current not then flow directly into ground removing any current that can flow across the photodiode?


You don't want laser diode current to flow through the photodiode. You want to  the common connection tied to a very good constant voltage (like ground) so that changing laser diode current doesn't affect the PD at all.