The Big Guys Have Lost Their Iron Grip, and It’s All Good
Thinking about Big Pharma’s relationship with the biotech industry last week at the JP Morgan Healthcare Conference in San Francisco reminded me of an old physical education teacher I had in 7th grade.
This guy was feared for his patented “pinch.” He would grab misbehaving teenage boys by the clavicle, and squeeze so hard that his thumb and index finger almost completely wrapped around the bone. He would then drag the pimply, 100-pound punk to his office for a scolding.
That’s an imbalance of power.
The reason I bring this up is that it reminds me of the power imbalance that used to exist between the big guys and the little guys in pharmaceuticals. For at least 10 years, the big guys (Big Pharma and Big Biotech) had the dominant upper hand in negotiations with small innovators. That’s no longer true. The little guy with a promising new drug candidate can walk away from a low-ball bid and go public now. The rising tide of the stock market has roughly doubled the group of companies that have the cash to buy innovative new drugs. The group of potential buyers is about twice as big as it was 3-5 years ago, according to a couple of venture capitalists I spoke with at JP Morgan.
What it means, essentially, is that the little guy in biotech that develops most of the innovative products suddenly has options. The big guy with the money needs to respect that. The power dynamic between the two parties is the closest it’s been to an equilibrium in many years. More people will now be encouraged to start new biotech companies, to invest in them, and they will be fairly rewarded when successful.
It’s the healthiest environment for innovation that I’ve seen in years.
“We went through 12 years of famine, and we ate our young as an industry,” said Isaac Ciechanover, the CEO of Brisbane, CA-based Atara Biotherapeutics, and a former venture capitalist at Kleiner Perkins Caufield & Byers and business development executive at Celgene.
How far out of balance did it get?
It was common to hear about biotech companies that went from a whiteboard concept to validating results in clinical trials after 8-10 years and $75 million, and got nothing but an offer for, say, $80 million (with half of that upfront). It got so bad for a while that venture capitalist Kevin Kinsella memorably called out pharma in these pages for “bad behavior” that was suffocating the innovation ecosystem.
Then along came the great biotech bull market of 2013. It was the second-biggest year on record for biotech IPOs, with 52 companies going public by my count. The Nasdaq Biotech Index rose 66 percent last year, compared with the broader Nasdaq Composite Index, which saw a 39 percent gain.
If you walked around the JP Morgan Healthcare Conference in San Francisco last week, you’d notice little companies had a little extra swagger. So did their venture backers, at least the ones still left in business. There was also little more mumbling and grumbling from the big guys who are used to getting their way.
George Scangos, the CEO of Biogen Idec and a veteran negotiator for both small and big companies, tried to pooh-pooh the changing dynamics when we met. When I suggested the power dynamics have shifted to help give the little guy more leverage, he disagreed. The valuation models are still the same and allow for both sides to get to a “ballpark valuation” they can agree on, he said.
“No one is going to pay more than that. We’re not in the business of doing net-present-value negative or cash-flow negative deals,” Scangos said.
OK, so Scangos doesn’t want Biogen to get in some kind of funny-money bidding war for an unproven asset, like it’s 1999. I get it. He has every reason to let his shareholders know he’s a careful steward of their money.
Still, there’s no denying that the pool of credible bidders against Big Pharma in licensing deals or acquisitions is now larger than it used to be. Big biotech companies like Celgene (NASDAQ: CELG) and Gilead Sciences (NASDAQ: GILD) didn’t always have the loot to compete in … Next Page »