A recent Wall Street Journal article that raised the possibility of Biogen as the target of another huge pharma buyout cited the lack of productivity as a major driver of M&A in the pharmaceutical industry. The authors made the point that, given the size of companies today, a single garden-variety blockbuster hardly moves the needle.
The increasing need for new drugs is intense. The industry can only go so far with growth through hyper-inflated pricing and mega-M&As. At some point pharma has to figure out how to make more drugs more efficiently, or face major dislocations like business-destroying price controls. It is the hope of new blockbuster drugs that keeps government regulators at bay.
An obvious place to look for help is the venture community—Bruce Booth of Atlas Ventures pointed out in a recent blog that venture capital is doing well, and is positioned to do even better in the future. Yet despite relative plenty in the bio-venture community, pharma suffers from a shortage of drug candidates.
A recent Silicon Valley Bank report noted that large corporations have dramatically increased pre-clinical acquisitions in the last three years under the pressure of limited supply and competition from IPOs. Early acquisitions force pharma to take more risk and spend more of their operating budgets on development over a longer time than buying post-phase II, where they can more efficiently deploy large-scale resources.
What Booth didn’t say explicitly is that providing only a limited supply of drug candidates in the face of increasing demand is a key element in the venture investment model. The quickest way to kill industry profits is to try to put too much money to work. Losses in over-capitalized “vintage years” over the last two decades have left institutional investors (e.g. pension funds) with little appetite for experimentation with new managers and more funds.
With a limited supply of new firms coming into the business, venture’s ability to expand to meet demand is inherently constrained. A 2011 white paper by Kevin Lalande of Santé Ventures explains why the
