pharma and working to the same standards as internal teams. PERD funds are designed to take on the high risk of operating in unexplored territory. They can test different approaches to early commercialization, at less cost, more quickly, in more different technical niches than pharma could alone. These partnerships would allow pharma to take initiative and seek out opportunities and assets in the entrepreneurial community to further their strategic goals.
From a financial perspective, fund managers make independent decisions and take full financial responsibility for outcomes. They manage their portfolios based on cost-of-capital investment strategies similar to those used by royalty funds. As a result, the funds are unlikely to provide the home-run opportunities that drive the most successful venture funds today. However, outsized returns are rare. By trading away those low-probability events, NewCo managers and the fund backers can maximize the probability of an efficient exit through hand-off to their larger partners. With the support of their pharma partners they can take on a broader range of smaller and earlier projects than established venture funds and integrate operations more closely with their sponsors.
Institutional investors are interested in new models for bio-pharma funds. Their investment can provide outside money for financial leverage. However, to create early stage partnerships designed to align with their strategic goals, pharma has to commit both money and human capital before financial investors will consider joining. A relatively small amount of funding—a few hundred million—leveraged with institutional money, could have a catalytic effect on the development of a broad early stage industry. With leadership from pharma, the entrepreneurial community would respond aggressively to the need for new products.
The creation of an early stage industry is a critical-mass phenomenon. Today’s isolated experiments in commercialization won’t demonstrate the large-scale synergies available in a broader marketplace of assets and ideas. As Silicon Valley has shown, when entrepreneurs, technicians and investors come together in the right mix and sufficient numbers, innovation begets more innovation.
Drug companies have responded to the challenge of innovation by sponsoring research collaborations and incubators, but gaps in the chain of development remain. Pharma has a unique opportunity to expand the biotech/bio-venture landscape to include shared external development models and foster an early development industry. All the pieces are there–VCs, entrepreneurs, industry personnel; they simply need to be aligned with phama’s strategic interests. The managers of independent sponsored funds are uniquely positioned to do that. The industry, both individually and collectively, needs to test more approaches and more management teams to find timely answers to the challenge of innovation.
IPO windows, while welcome, won’t solve the problem. So pharma must redress the BigCo-SmallCo balance, relax its iron grip, and take seriously its small innovative partners.
