Big Pharma Eyeing Startups –

With too few new drugs headed to market and patent expirations shrinking their drug portfolios, big pharmaceutical companies are starting to seek more investment deals and partnership opportunities with emerging companies.

This push to put more product in the pipeline three, four and five years away is prompting an increase in deals and collaborations, says Nicola Campbell, partner at Sofinnova Ventures in San Francisco.

The large pharmaceuticals “are more prone to enter into a deal with a small company to access new products with strong patent protections,” she says. “This is good news for smaller companies as it provides a strong commercialization partner, and also gives the smaller company much needed cash.”

Campbell points to a number of so-called “Big Brother’ pairings that have been announced so far in 2004 that highlight the trend, including France-based Aventis’s $200 million deal with Miami’s Kos Pharmaceuticals for global rights to an inhalation product to treat asthmatics. Also, U.K.-based GlaxoSmithKline PLC announced a $130 million deal with Theravance Inc. to license drugs in development to treat various diseases.

Meanwhile, big pharma is also investing more and more in funds as a limited partner. In the summer, Advent International closed its Health Care & Life Sciences III fund with $125 million, attracting more than half of the capital from pharmaceutical company AstraZeneca, which invested $75 million. Advent’s fund focuses on early stage investments in biotechnology, pharmaceuticals and medical technology.

Ashish Singh, a partner in the Boston office of consulting firm Bain & Co., notes that big pharma companies are starting to invest further down the development curve to younger and younger companies that are a long ways away from product commercialization.

“There is a desire and need to put more product in the pipeline, and the pharmaceutical companies are indifferent to where they get those products from,” says Singh. “They are looking to bring in product at an earlier stage where the risks are higher but the valuations are lower.”

He said the pharmaceutical companies have become as active as the big medical device companies, such as Medtronic Inc. and Boston Scientific Corp., which invest frequently in startups.

Dan Janney, managing director of Alta Partners in San Francisco, says Big Pharma’s hunger for more product is helping to satisfy the capital needs of many young private life sciences companies that often go beyond the wherewithal of a typical VC fund.

“We tend to do a lot of partnering with pharma, because our companies have new technologies they don’t have,” says Janney, who notes that his portfolio of companies did $1.5 billion in deals in 2003 and will do about the same in 2004. “The ideal candidate (for partnering) has a discovery, a product in clinical development or a medical device picking up some steam.”

Venture-backed companies are often eager to license, partner or sell their discoveries to the large pharmaceutical firms because of the exorbitant costs involved in marketing a new drug.

But the demand for new drugs may change the dynamics of both sides of the deal.

Jim Golden, senior vice president for research at industry research firm Life Science Insights, says that in the not too distant future, the private side of the pharmaceutical industry will start to look a bit like Hollywood.

Startups will mirror movie production companies, which come together for making a single movie then shut down, he explains.

“You’ll go out and create a company, then disband the company and walk away” after developing and selling the product to a bigger player, Golden says.

That may benefit Big Pharma, but it doesn’t say much for the traditional mission of venture investing.

In fact, Golden thinks the venture industry has wandered away from its “roots” by pumping hundreds of millions of capital into companies “with late stage compounds about to go into trials” at the expense of early stage companies.

“It’s more of an investing banking activity than a VC activity,” says Golden, even though it’s a low-risk, high-return strategy. “It’s certainly not like it used to be.”