"I thought it was an interesting spin on trying to [develop] a drug and see how few people we could do it with"
Joshua Boger Founder of Vertex Pharmaceuticals & member of the MassChallenge Board of Advisors, speaking of his efforts at Alkeus (CROs carry R&D load - Fierce Biotech).
1. The Decline in R&D Productivity
The chart below speaks for itself. With ever-rising R&D costs and a declining number of FDA approvals, something had to give. Various entities have been experimenting with new models for biopharmaceutical drug discovery, and the virtual startup arose out of necessity.
2. The Mass Exodus of R&D Talent from Big Pharma
Between 2000 and 2010, the pharmaceutical industry lost almost 300,000 jobs, according to Challenger, Gray & Christmas. That is more than currently work at the 3 largest US-headquartered drug makers combined: Pfizer (~91,500 employees in 2012), Merck (86,000 in 2011), and Johnson & Johnson (117,900 in 2012).
3. Teamwork: The Outsourcing Trend
Thankfully, many of those people found employment at other large companies, in startups, and in various outsourced R&D/manufacturing entities (CMOs, CROs). It is also true that many scientists returned to their countries of origin, and have founded or joined existing CROs. Most of the U.S. and E.U. CxOs have always been staffed with great people. However, when I first started visiting CROs in China, India and elsewhere, they would compete mostly on cost, and had limited access to top-tier talent. Today, if you visit a CRO in Shanghai, Bangalore, or Eastern Europe, you are equally likely to find Harvard/Stanford/MIT-educated employees with decades of experience at Pfizer/Genentech/GSK.
4. Small/Medium Sized Companies as Engines of Discovery
According to a recent paper that analyzed 121 blockbuster drugs meeting the billion dollar threshold between 1980 and 2010, 87.6% were marketed by a major firm (i.e. big pharma). However, 24.7% were originated by a non-major firm and licensed to big pharma, 37.1% were originated by a non-major firm and acquired/merged into big pharma, and 4.1% were licensed from an academic institution. Thus, 65.9% or 2/3rds of all blockbusters originated outside of big pharma.
5. Big Pharma is Partnering Earlier, with Risk-sharing Deals
For preclinical & early clinical companies, the days of the nine or ten-figure all-cash biopharma acquisition are over. In 2013, we have seen a large number of preclinical companies partnering with big pharma, with a modest up-front payment ($5-50M), a host of milestone payments ($100-400M+) and royalties (8-20%). Also, corporate venture capital (CVC) is becoming increasingly important. The 2000 market meltdown caused a wholesale re-alignment of CVC funds, which is to say that many disappeared or were reorganized. It would seem that CVC is back, which has partially filled the vacuum left by traditional VC funds exiting the healthcare community, according to a recent Nature Biotechnology article.
Bonus: Rise of the LLC
If you wanted to raise capital from institutional investors such as VCs, you needed to start a Delaware C-Corp. That is no longer the case, as new corporate structures have evolved alongside these virtual companies. With due credit to the teams at Nimbus, Adimab andAtlas Ventures Bruce Booth, LLCs are no longer kryptonite to top-tier VCs, such as OrbiMed, Google Ventures, Polaris, and SV Life Sciences. This model seems to optimize financial outcomes for entrepreneurs, investors and other stakeholders. With some minor tweaks, this model works well for platform technology companies or single-asset companies.
So there you have it. Yet, many have not adapted to this new world. To wit, I was inundated by economic development recruiters at a major conference in 2013. I received no less than 15 inquiries from all over the planet, trying to recruit Sensulin with an array of tax incentives, free land and/or lab space, etc. I doubt that we will hire a substantial number of employees, sufficient to justify this sort of activity on behalf of the various geographies. However, it could result in a huge payday for our network of CROs, CMOs, advisors, etc. Perhaps the inquiries are misplaced.
Regardless of your vantage point, virtual startups are here to stay. Prosperity will be the reward of those who think strategically about the implications of this change, and implement creative policies to work with these types of companies. Those who refuse to acknowledge that the world has changed, do so at their own peril.
- Mike Moradi is an accomplished entrepreneur and civic leader. He is CEO and a Co-Founder of Sensulin, LLC, which is developing a 24-hour glucose-responsive insulin for type I/II diabetes. Sensulin could eliminate the need for 4-6 separate basal and prandial injections per day, by providing the patients entire daily dose in one administration.