Xconomy’s Luke Timmerman recently suggested that biotechs’ IPO option has shifted the balance of power between Big Pharma and biotech closer to parity, and the big guys have lost (or at least loosened) their iron grip on venture-backed biotech. As he put it,
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.
This relationship is vitally important to the future of drug development—literally life or death for biotech in the short term and sustainability for pharma in the long term. Luke is right to focus on the importance of parity and access to money as the element that determines the balance of power. However, it will take more than an IPO window to redress that imbalance.
By any measure, 2013 was the best IPO market for the life sciences industry in over 25 years, and even that is not enough. IPO windows are too few, too brief, and too unpredictable to sustain an industry that lives hand-to-mouth in the financial markets. Since clinical outcomes and not market cycles drive success, entrepreneurs cannot count on money being available when they need it. As a result biotech will remain dependent on pharma for financial support.
As long as the basis of that relationship is limited to buy-sell transactions, biotech will remain at a disadvantage. In most deals pharma will have the upper (iron) hand in determining how the value is divided. Limited returns for biotech means a limited ability to attract capital, limited size, and ultimately limited ability to contribute to innovation in the pharmaceutical industry.
Pharma needs to broaden its relationship with biotech/bio-venture to include true discovery/development partnerships, and it needs to do it on a scale that exceeds anything contemplated today. Rather than partnering with a biotech only after it demonstrates a clinical proof-of-concept, pharma needs to pursue partnerships from the outset to create more new molecules and help advance them. As true operating partners, rather than adversaries in buy-sell transactions, pharma and biotech can bring to bear their respective strengths and minimize their weaknesses in the pursuit of new drugs.
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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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