A Biotech Innovation Supply Chain: Reality or Fantasy?

4/22/13Follow @xconomy

Biotech has always been a bit like an open-air market bazaar. Now the industry needs to become a little more stable, more predictable. It ought to be part of something you could call an “innovation supply chain.”

At least, that’s the view of Noubar Afeyan, the managing partner of Cambridge, MA-based Flagship Ventures.

Biotech is like a souk, Afeyan says. It’s the Arabic term for an open-air marketplace. For centuries, merchants went there to hawk their wares for the highest price possible, and buyers sought to haggle for deals. It’s capitalism in its most raw form. It happens in rural American flea markets, and it happens in Istanbul.

Buyer beware.

This is basically how biotech works: It starts when an entrepreneur or researcher is inspired to create a new drug or medical technology. It’s immensely daunting and risky to create. So, he or she goes on a quest to raise money from adventurous investors to develop the widget over many years.

Once the idea passes a tough series of tests, the little biotech company, usually running low on cash and energy, heads to the souk. There, it finds Big Pharma companies, and hopes to entice them to pay the highest price possible for whatever it’s selling.

Ideally, the entrepreneur and VC can get rewarded for the risk they took, and the value they will provide to patients. Pharma companies, despite the ineptitude of their own R&D labs, know they can always head over to the souk and find good new products to keep their businesses humming.

Noubar Afeyan, managing partner, Flagship Ventures

But cracks have emerged in this system for life science innovation. Biotech VCs are reeling after a decade of investments that sounded good at the time, but which nobody in Big Pharma wanted to buy, or pay much for. Returns for most firms are nowhere near high enough to justify the risk, and so they are struggling to convince pensions and endowments to keep backing their wild biotech ideas.

Big Pharma companies, for their part, often feel like they’ve been snookered a few too many times by overpaying for biotech companies that didn’t deliver on their promise. (Ask Merck about San Francisco-based Sirna Therapeutics, or Bristol-Myers Squibb about Alpharetta, GA-based Inhibitex).

The result is that very few VCs are still strong enough to invest in early stage biotech innovation. Many Big Pharma companies have grown wary of the souk, or have noticed that there aren’t as many things to buy there anymore. Pharma has been scrambling to figure out how to keep the entrepreneurial ecosystem strong enough—cutting deals with academic institutions for example—in the hope that it will still have some good drugs to buy 10 years from today.

This is where Afeyan enters the picture, with his idea of the “innovation supply chain.” Flagship, a firm he co-founded in 2000, is one of the few still investing in truly disruptive biotech ideas. Like every firm, it has made its share of bad bets. But it has had a few hits lately, with companies like Agios Pharmaceuticals, Moderna Therapeutics, and Tetraphase Pharmaceuticals.

But instead of just dreaming up companies, building them, and hoping for the best, Afeyan says there has to be a more orderly … Next Page »

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  • http://twitter.com/Nanostring Nanostring Founder

    Honest account, but somewhat troubling.
    “VC firms feel intense pressure to milk a tenfold return from their one half-decent portfolio company left standing, when it’s worth less.”
    This sounds bad; volatilization of the sale of a “half-decent” company for a fair price – in order to get the fund above water – carries asymmetrical risks to the LPs relative to the GPs. If they are not in “carry-land”, the GPs do not care if the fund returns 0.9x or 0.2x, but they still have fiduciary duty to return max value to LPs. Flagship LPs who read this may want to discuss the fund practices with the GP.

    Unfortunately, these incentives for volatilisation (“if WE win, I win; if WE lose, I still win my mgmt fees) permeate the financial management industry. Credit Mr.Afeyan for at least being upfront about it.

  • Stefano Picone

    I imagine that pharma LPs would negotiate a right of first refusal/negotiation with the portfolio companies as part of their investment, resulting in a trade-off between more exits and lower exit multiples. Personally, I think the long-term sustainability of the industry depends on “solid singles” as opposed to “hacking for home runs.”

  • http://twitter.com/JAggERnauTs juSTin

    I like that you mentioned that “maturity” of the business brings out a stable supply chain. One thing to remember is that for a SC to be truly efficient, there must be a level of trust and information sharing taking place. When dealing with VC’s and the “next big thing”, secrecy tends to be paramount to ensure payoff of investment. Good article!

  • http://twitter.com/theraltweet Theral Timpson

    I thought Biopontis Alliance had a pretty good idea when they got going: one organization shepherds “assets” through the chain from early academic research on to a deal with Big Pharma. What is gained from focusing on “assets” rather than “companies” is the big question here, and I’m not sure how far they’ve come. I would think a lot of waste could be eliminated. However, are some soft factors (motivation, incentive, pride) lost in giving up on the idea of individual companies?

  • Kyle Serikawa

    I agree with the point that the technical difficulty of creating a drug is still too great to think about new drugs as amenable to a supply chain. Brake pads and jet engines are, ultimately, the expression of engineering while drugs are still somewhere between art and innovation. When we still can’t reliably predict what a drug will do the first time it’s put into humans, it’s premature to think about a supply chain analogy. Add to that the hurdles of creating better medicines, not just different medicines, and the bar is incredibly high for small biotechs to come up with a reliable stream of high-probability, high value targets.

    It may be that democratization and public acccess to large scale datasets a la what Sage Bionetworks wants to do will provide the bootstrapping to allow biotechs to start from a targeted/personalized medicine approach, which might give them a greater probability of success, even at the expense of some potential market–the “singles not home runs” analogy previously posted. Hard to say for sure.
    It might be that instead there needs to be a quiescent period of drug development, in which VCs don’t invest very much in startups, the large pharma consolidate and diversify to create reliable revenue streams rather than relying on large blockbusters, and the community waits for the next advances in basic biomedical research to turn the art of understanding drug effects to something more predictable. If Pharma and the VCs want to hurry that along, maybe they become a kind of NIH-lite, funding academic research centers that focus on understanding complexity.

  • http://twitter.com/haiping85 haiping choo

    Sounds like VCs and their start-ups themselves are also being more “lean” – to identify and focus on what is truly perceived to be of value/what actually matters; and to shorten the iterative cycle so as not to wander off too far on the wrong track…

  • Geoff Lawton

    We have argued (Nature Rev. Drug Discov. 8, 435 (2009)) that the complete process of drug discovery, development and commercialisation does not fit well into a single vertically integrated business but each phase is best handled in a
    different business structure. In this way each business can easily access
    multiple providers of inputs and multiple potential customers, and can flexibly
    tailor its portfolio and operational strategy to prevailing market conditions.
    The supply chain concept implies that there is a ‘controller’ of the system. There is now increasing recognition that partnerships between different stakeholders are essential in the new landscape of Biopharma 2.0. At present the partnerships are usually formed and controlled by large pharma companies. It is likely that the drivers of future partnerships will include a wider spectrum of stakeholders. These will include venture philanthropists, medical insurance companies and governments. We are already seeing the emergence of eg Bill and Melinda Gates Foundation, Michael J Fox, Cystic Fibrosis Foundation using their power to bring together the components of the supply chain. The members of the partnerships (supply chain) will be drawn from biopharma companies (pharma companies, biotechs, generic drug companies), academic institutes and their varied forms of technology transfer operations, other not-for-profit drug discovery units/consortia, contract research organisations, patient advocacy groups and other medical charities, various types of financial institution, and
    increasingly ‘the crowd’ (through a variety of crowd-sourcing engines).
    The presence of multiple stakeholder types within each of these partnerships will help to ensure that all of the value of all assets produced within the group will be effectively exploited. In Biopharma 1.0 it is commonplace to discard
    potentially valuable projects because they fail to fit the strategy (often newly defined) of the single current owner.

    • Roger Ramjet

      Interesting that the “members of the partnerships” does not include the entrepreneur, the one essential element.

  • http://carboxyl.com/ robertdesideri

    Luke, I agree there will be a new model. Supply-chain ain’t it, it’s not even a good interim measure. Clearly shows there’s too much money sloshing around. Sure everyone expected more value to be created, but that’s the nature of where we are along the knowledge curve. The good news is silicon is now essentially free, we’re nearing the threshold for handling big analytics. Good times are coming. These new knowledge companies will surprise, true value will be produced this time around. Skeptic VCs on the sidelines will miss it. Time to be raising a specialty fund. Several good paths to pursue the new discovery play. #excitingtimes

  • chcc

    Sounds like a middleman trying to validate his existence to me. that, and someone frustrated by his exit-ratio. if pharma is going to throw money at the Vc’s, they are really better served by doing these partnerships themselves. Not sure public pharma shareholders are signing up for this type of risk capital being deployed, but hey, r&d is risk-capital any way you slice it.