Can Biogen’s New Incubator Help Fill the Drug Pipeline?

7/19/07Follow @bbuderi

Back in 1981, a firebrand MIT spinoff named Biogen moved into its first building, not far from campus at 241 Binney Street. Fast-forward a quarter-century, and the pioneering biotech company, today’s Biogen-Idec, is still headquartered in Cambridge. The Binney Street building has been sold, but is now being leased back. And today, Biogen is renovating the space for a new purpose that in a sense goes back to the company’s roots: housing biotech startups.

The Biogen-Idec Innovation Incubator, as the still-unannounced enterprise is called, plans to provide sole funding for the companies under its roof. But Biogen is not looking for today’s version of itself as a startup. Instead, the incubator has a much narrower aim, one critical to just about every major drugmaker today: filling a pipeline that’s growing ever shorter on future blockbuster medicines. The incubator is not a venture arm looking to spawn great new companies. It’s more like a farm system, backing promising ideas that might some day be called up to the big leagues: namely, Biogen. In return, the incubator is offering entrepreneurs one-stop funding without running the VC gauntlet; all the services, including lab space, they need; and (if reality matches the plan) the opportunity to build a biotech company with a lot less risk than usual.

The incubator is the brainchild of Rainer Fuchs, an affable Biogen VP who has previously co-directed discovery research and overseen bioinformatics research. Last summer, he began mulling over new ways for Biogen to tap into ideas outside its own confines. Basically, he explains, big corporations have some standard means to harvest outside ideas. On one end of the spectrum come M&As and licensing of established inventions. A polar-opposite option is supporting basic research in universities. “I tried to come up with something that would home in on that area in the in-between,” says Fuchs.

Here’s how it works. The incubator provides up to $10 million in funding for each start-up. It also furnishes office space, lab space and equipment, business and financial services, and even the expertise of Biogen scientists.

In return, Biogen takes equity in the company—but, unlike with VCs, not more than 50 percent. One twist: Biogen and the entrepreneurs negotiate an exit strategy up front. That is, they agree that if certain milestones are hit, Biogen will buy the company for a set price. It will then bring the potential product in house and take on clinical development.

Fuchs acknowledges that the exit price will likely be less than what a company would garner in an IPO—or if sold at a later stage of its development. But how many companies go public, he asks? What’s more, he points out, nine in 10 drug candidates fail in clinical trials. Biogen will take on that risk and get entrepreneurs to the liquidation point in just two or three years, compared to the six or seven years typically needed for an IPO.

“It’s really this combination of different components that makes this model quite unique,” Fuchs says. Most big drug companies and biotech firms have venture arms, he notes. But these operations function like, well, VCs. That is, they invest in companies with an eye toward taking them public or selling them to the highest bidder, which might or might not be their firm. “Any impact on the pipeline is secondary,” he says.

Biogen’s incubator is all about the pipeline. It’s not looking to create big new companies. Instead, says Fuchs, it seeks to fund startups developing specific drug candidates that mesh well with Biogen’s existing pipeline and portfolio needs, “but are pushing the envelope from a scientific viewpoint into spaces where we don’t have the in-house expertise.” In that way, he adds, “It complements our internal R&D efforts and adds additional product candidates to our pipeline.”

Right now, the incubator consists of Fuchs and two other staffers. This team has already pored over nearly 100 proposals. The goal, Fuchs says, is to fund two firms by year’s end, and another three in 2008. Five will be the steady state, with the incubator adding more as companies grow, drop out, or are acquired. “We’re well on the track to launch the two companies this year,” says Fuchs.

The incubator is not for everyone, Fuchs says, and for some firms venture funding will make more sense. “But there are a lot of opportunities for which I think our model is a much more attractive approach.”

Bob is Xconomy's founder and editor in chief. You can e-mail him at bbuderi@xconomy.com, call him at 617.500.5926. Follow @bbuderi

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  • Anonymous Xconomist

    This concept is intriguing. However, it appears to have much of the downside of a licensing deal (closing off future options and limiting other financing routes) yet most of the risk stays with the start-up company/entrepreneur. For example if something doesn’t move forward to an acquisition by Biogen there could be a taint associated with it. Furthermore, it sounds like one needs to jump through many of the hoops and politics inherent to a big company but doesn’t really have the full commitment of the company. Almost like living with a guy that isn’t sure he wants to marry you… Better to stay independent if you have other options but maybe a good fit for the girls who can’t get a date?

  • Anonymous Xconomist

    One additional thought – the apparent flaws in the model could potentially be addressed and it’s nice to at least see that Biogen is thinking outside the box with Rainer Fuchs as a catalyst.