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potential gains in the creativity our industry achieves from a competitive biotech-phama market.
Biotech has done well on innovation, but fallen short on realizing value for its investors. Pharma and late-stage venture have enjoyed a windfall of cheap new products from companies started in the first half of the last decade. But the innovation pipeline will run dry unless the industry can devise models that enable the sector to attract sufficient capital—and that is a far bigger threat to creativity than a lack of independent thinking.
The Supply-Chain Solution
Instead of a buyer-seller relationship, the supply-chain model creates a partnership to bring the two sides into closer alignment and maximize LargeCo-SmallCo efficiencies. Each side can specialize in its particular strengths. By cooperating rather than competing during development, they can use their resources more efficiently than in a market-driven relationship.
Pharma’s principal problem with innovation is not so much what to do but how to do it. Pharma has plenty of bright creative people; venture capitalists often recruit them. In a true partnership both sides contribute energy and ideas. Together the partners can take on more risk and push deeper into discovery than they could independently. The greater the time and cost to product sales, the greater the need for both sides to share the burden.
Biotech investors make money through timely, efficient exits. Pharma will pay for a work-in-progress, but a half-completed product has to fit not only an acquirer’s strategic goals but detailed requirements like patent protection and data configuration. It is a tremendous advantage to biotech if planning for an efficient hand-off can begin at the starting point of a project, rather than the conclusion. Trying to negotiate terms after the money has been spent may be great for pharma, which gains advantage by seeing the data, but it often eliminates any “walk-away” leverage the biotech investors might have had before committing their capital.
Pre-negotiated deals can’t guarantee a sale—pharma always has the option to step back if the strategy or market conditions change. However, they can improve the probability of an efficient exit. On the other hand, if both sides can’t agree on a deal up-front, the bio-venture managers had better walk away if they expect to live to see another deal, or another day.
Alignment may reduce innovation relative to what biotech could do unconstrained by the realities of the capital markets, but it will increase the creativity of pharma alone. Even if aligning the two sides does reduce the innovation factor, the long-term gains from a sustainable early stage sector would far outweigh the cost to creativity. Over time the partners can learn to move the risk/reward equilibrium further in the direction of innovation. The threat that Ms. Bosely sees in the supply chain model is not nearly as great as that of the failed business model we have now.
The supply-chain model will not be the only approach to early stage investment. The investors who choose to pursue a partnered approach should not diminish the number of traditionalists. The very clever (or lucky) VCs who can make the market-driven model work will continue to use it. However, a supply chain approach can broaden the range of options and offer an alternative should the industry need more new products than market-based model can provide.
Standish Fleming is a 29-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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