Big Pharma Pursues Early Stage Opportunities for Direct Investments

10 Dec

By Max Klietmann, VP of Research, Life Science Nation

Increasingly, over the past few years, large pharmaceutical and biotech companies have been slashing in-house basic R&D budgets at a fast clip. But at a time when the industry is performing remarkably well and basic R&D is more critical than ever, this trend may appear confusing to many observers. However, what many do not recognize is that this is not a cost-cutting trend (though it is saving considerable money for many firms). Rather, it is reflective of a novel means by which the R&D pipeline is being approached from the ground up, reflecting major changes in the industry over the past decade. In the past, pipeline gaps were filled with the intent of maintaining market share, and in order for a biotech to be a fit, the product needed to be relatively far down the pipeline. Now, all of that is changing.

The reason is a massive paradigm shift in the collective “big pharma” psyche. The nature of the marketplace has changed in that the best researchers with the best ideas are no longer seeking out positions within big pharma, but are starting their own companies, largely due to the fact that CRO’s and other outsourcing partners in the space have made it possible to do groundbreaking research with minimal investment in infrastructure. Some might see this is a problem, as big pharma seems to be starved of innovation and desperately needs to refill dry pipelines. However, this isn’t necessarily bad news – the opportunity for pharma to selectively buy into independently developed projects on a global basis allows for a geared ROI on the R&D budget and introduces an enormous amount of fresh capital to the marketplace at the early stage (an area that many VC’s have all but abandoned).

Traditionally, big pharma wasn’t even on an emerging biotech’s radar screen until a product was entering later stage clinical trials and required a strategic partner to enter the marketplace. Simultaneously, the large pharma and biotech firms’ search & evaluation teams tended to focus their energy on discovering opportunities to plug existing pipeline gaps closer to market, and not on early stage assets that could form the basis of the forward-looking R&D pipeline. This is changing rapidly and the implications are massive; large pharma is increasingly focusing efforts towards building bins of the pipeline from the ground up by investing in small and emerging biotechs. Sanofi made a major announcement earlier this year that the firm would be reducing its R&D budget by 12% vs. 2008 to reflect efforts to move into this direction, and in April, Merck announced a $250 million biotech fund raised together with Flagship Ventures, one of the handful of remaining venture capital firms that invest in early-stage biotech companies at all. The capital is provided Merck Research Ventures Fund with the specific mandate of investing strategically in early-stage companies.

Eli Lilly and GSK also announced major investments in start-up stage life sciences companies in the last year, in particular therapeutic companies, and the trend is accelerating. This is great news for emerging biotechs, who are struggling to find capital, as traditional sources of financing have all but dried up, however the challenge remains for big pharma to effectively target the most interesting strategic opportunities in a “gray area” of the market.


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