I find myself siding more with Flagship’s Noubar Afeyan than with Katrine Bosley in the intriguing conversation emerging in Xconomy in recent weeks over the supply chain model for early stage biotech.
Today neither biotech nor pharma are producing a sufficient supply of new products. If we can’t figure out a way to profitably finance early development, this industry will implode. I believe the supply chain model is an important advance, and needs careful, thoughtful consideration.
Ms. Bosley makes the point that many independent groups pursuing their own ideas within the life sciences community can be more creative than a few large corporations dictating the direction and details of exploration for the industry. She warns that the supply chain model, which enables a biotech to “prewire” its program with a future acquirer, limits the creativity and initiative of the smaller partner and subjects it to the conventional prejudices of big pharma, which are valid concerns.
Unfortunately, her market-based model of totally independent bio-venture companies that relies on a buy-sell interface (what we have today) is not sustainable from a commercial point of view. Neither side is making returns in discovery and early development sufficient to sustain investment in the space.
People like Flagship Ventures’ Noubar Afeyan and Avalon Ventures’ Jay Lichter are exploring alternative strategies like the supply chain model precisely because the market-based model is not working. The institutional investors upon whom venture depends have largely turned their backs on the industry; both pharma and venture have shifted resources and capital out of research and early development to lower risk and improve returns. Investment in innovation is declining at a time when science-driven opportunity, demand by pharma, and patient needs are exploding.
Biotech-Big Pharma: The Problem
The problem lies in the market-driven relationship between biotech and pharma. The best way to explore outside the established frontier of knowledge is to run many small experiments, rather than pharma’s traditional approach of a few gold-plated studies designed not to end someone’s career. Small biotech is good at doing small projects. But, no matter how efficient their virtual managers, investors cannot chase creative ideas unless they can count on selling the products of successful experiments for an adequate return.
The earlier the stage of development that investors target, the less efficient the market becomes, because the quality of information diminishes the further we move upstream, away from the end-user. Buyer and seller don’t have reliable feedback, like revenues and profits, on which to value the asset. So one sees risk; the other sees potential. Transactions are hard to get done. Without a deal, the early stage investor is forced to carry on until his biotech venture exhausts its resources. The timeframes are so long and the failure rates so high in early R&D, that investors cannot justify supporting multiple projects for only a few successes. The costs are overwhelming any … Next Page »
Standish Fleming is a co-founder of San Diego’s Forward Ventures, and a 24-year veteran of early-stage, life sciences investing. He has helped raise and manage six venture funds totaling more than $500 million and served on the boards of 19 venture-backed companies, including Nereus Pharmaceuticals, Ambit Biosciences, Triangle Pharmaceuticals (acquired by Gilead Sciences) and Actigen/Corixa (now part of GSK).
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