Thinking about Life Sciences
Wednesday, November 15, 2006
So Far, Venture Capital Relatively Unsuccessful in Biopharma Market
There has been increasing concern that current models for financing innovation in biopharma – and byextension medical technologyin general – are “broken”. A recent
article (“From bench to bedside”on Nov. 4, 2006) summarizes some of these difficulties and highlights a new book -
comingout on Tuesday byHarvard Business School professor Gary Pisano. This is a hot topic and one that thiscolumn has referenced several times in recent postings.In summary, there are two models – based on either large or small companies - that drive innovation in thelife sciences industry.
The large-company model
Large pharmaceutical companies have traditionally developed and financed sizeable, in-house researchlabs. However, the paucity of new drugs in the pipeline have not generated sufficient fruit from theseefforts and a number of factors (generic drugs, extensive red tape, inertia and a focus on blockbusters)have been blamed for this innovation drought. To an extent, this is not unexpected as it has long beenunderstood that there is generally an inverse relationship between the size of an organization and itscapacity for innovation. The public certainly seems to have realized this as pharmaceutical share pricesgrosslyunderperformed over the past five years. The DowJones U.S. pharmaceutical index has gone downapproximately20 percent while during the same period the overall Dow Jones index has gone up about 25percent.Industrial behemoth IBM realized this during the late 1970s, and in order to break out of the mainframemode, the company implemented a radical innovation: a new business model. Big Blue sent 12 engineersto Boca Raton, gave them near-complete independence, and within a year, they created the first personalcomputer using entirely off-the-shelf components. From this,the modern PC was born. While nothingnew was invented, it was a radical innovation that nearlybrought down its parent company. New businessmodels or their consequences can be as disruptive (and even more so) than individual technologies.
The small-company model and its challenges
In general terms, the other model for innovation revolves around venture capital firms and smaller biotechcompanies. While on the surface the creation of small and nimble biotech firms would seem to solve theproblem of size, there are two major problems that have stymied real business development around thismodel.The first – identified in the
article – is that venture capital has “shriveled up” in America. Thatbegs this question: How could venture funding be so sparse in a capital market that is relatively awash incapital?In reality, most of that capital is going to private equityand hedge funds that have “exit windows”substantiallyshorter than most venture capital expectations for the life sciences. To put moneydown andnot expect an exit for at least five years is not a game that most investors – even far-thinking venturecapitalists – are willing to play. To be fair, the venture capital model works extraordinarily well in thesoftware and IT markets. Silicon Valleyis rightlyenvied and envied models are often emulated.Time to market (Microsoft’s new Vista operating system notwithstanding) for software products is nearly
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