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BioPharm Executive: Smaller is Smarter

3/27/2012 9:36:29 AM

Smaller is Smarter

The Wall Street Journal recently noted that biotech funding is getting harder to find -- something that won't come as news to many struggling young companies and entrepreneurs. Biotech venture finding that peaked at almost $6.2 billion in 2007 fell to $3.9 billion in 2011, according to VentureSource. And the article goes on to note that "Big Pharma companies, whose deals with biotechs provide another major source of funding, are driving harder bargains, increasingly tying their investments to proof of success."

Certainly times are tough -- times are always tough -- for biotech entrepreneurs trying to raise the millions necessary to get a concept off the ground. But despite the tone of this article, there are reasons to be optimistic.

1: There is an appetite for IPOs.

2007 was a magical year, at least as viewed through the rearview mirror. Many in the industry look back on it wistfully as the pinnacle of a now bygone era. It did indeed produce some great IPOs--companies that were either acquired for nice premiums (Genoptix, Sirtris, Pharmasset); companies that have fared well (Jazz Pharmaceuticals, Optimer Pharmaceuticals); and companies that are at least holding their own stock-wise and making significant progress (3SBio, Wuxi PharmaTech). And, of course, that year also had its fair share of disasters.

But after virtually shutting down in 2008 and 2009, the IPO market hasn't come back strong. A couple IPOs from 2010 have done okay, but there are several high-profile meltdowns and no real runaway successes. The class of 2011 hasn't fared any better.

Given four years of drought or disappointment, it's pretty encouraging that investors are still receptive to IPOs. And it's downright surprising that a company like Verastem managed to go public without even a product in the clinic, and pursuing a very high-risk therapeutic strategy.

2: Lots of funds are forming.

Indeed, given the track record of the past few years, it's reasonable to wonder if the problem isn't so much a shortage of money as a shortage of good ideas. Accurately predicting the fruition of a long-term vision from the barest of beginnings is no easy matter, so I won't second guess the kinds of companies that venture capitalists are backing. But it seems that recent concepts aren't finding much traction with investors--even the many late-stage, supposedly risk-mitigated companies.

But interest in new start-ups is running high. It's notable how many new biotech venture funds are being formed (see Money Talk). More interesting still is the prominent role being played by Big Pharma in backing some funds. GlaxoSmithKline and Johnson & Johnson have just paired up with Index Ventures to fund early stage biotech. In a different twist, Merck is looking even earlier with the creation of CALIBR (the California Institute for Biomedical Research), which will fund academic work, with Merck keeping an option on any therapeutics to emerge. (Or might they eventually spin them out into venture-backed start-ups and let them further mature?). Sanofi has gotten into the venture game, too, partnering with Greylock Partners and Third Rock Ventures to form Warp Drive Bio earlier this year.

Here's the money quote from Sanofi CEO Chris Viehbacher on the subject: "The reality is the best people who have great ideas in science don’t want to work for a big company. They want to create their own company. So, in other words, if you want to work with the best people, you’re going to have go outside your own company and work with those people."

What a great morale boost for Sanofi's remaining R&D staff, eh? Still, it's an indication of how far the needle has moved toward biotech in the R&D process, and funding and deals are increasingly structured toward nurturing early-stage work in small companies.

Hybrid funds between Big Pharma and VC firms are actually a win for the VCs, too, because start-up funding can be structured in such a way to provide an exit for VCs even if there's no IPO. It can be sort of the flipside of the option deal, with the pharma partner forced to make an acquisition if certain conditions are met.

3: New pharma licensing is aimed at long term success.

So is Big Pharma driving harder bargains with biotech? Or just better ones? It's certainly true that the last few years have seen a shift toward option-based license agreements. They surged, in fact, in 2009 just as the financial crisis was taking hold. The point of these is to avoid taking huge upfront risk. The advantage is that they allow pharma to make bets on earlier stage products--and thus fund younger, less mature companies. Start-ups should simply work to use this new reality to their best advantage.

-Karl Thiel

Read the BioPharm Executive online newsletter March 28, 2012.

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