Biotech Boom: Pharmaceutical Giants Partner with Start-ups for Life-Saving Drugs

Strategic Insights -

Pharmaceutical companies like Merck, Eli Lilly, and Bristol-Myers Squibb are racing to replenish their drug pipelines through partnerships with biotech start-ups. These partnerships, often valued in the hundreds of millions of dollars, offer a chance for pharmaceuticals to access life-saving drugs battling cancer and other illnesses. Meanwhile, biotech start-ups like Icos and GenPath Pharmaceuticals gain expertise and funding to bring their discoveries to market.

Key Takeaways:

  • Over the past five years, big pharmaceutical mergers and acquisitions have left fewer competitors, depleting a quick source of revenue growth. At least 20 deals have been announced or completed since 1999, including the record $115 billion combination in 2000 of Pfizer and Warner-Lambert.
  • The number of new drugs approved annually by the FDA has tumbled 45% since 1996 — the last peak year. Ten years ago, traditional drugmakers were punching out 60 newly approved drugs a year, while biotechs eked out just two to four. By last year, the two sectors were about even, at 20 each.
  • Big pharmaceuticals are struggling to create new drugs due to their large size, patent problems, and merger mania. These factors have led to a surge in partnerships between pharmaceuticals and biotechs to access life-saving drugs.
  • Venture capitalists are pickier about biotechs, investing an average $11.2 million per biotech deal, nearly three times the average 10 years ago. More VCs are looking for biotechs with drugs deeper in development, preferably in the first phase of human testing.
  • The best candidates for partnerships are biotechs with drugs close to or already in human testing. A recent example is GenPath Pharmaceuticals, which attracted eight VCs and several private investors after announcing timelines for Phase 1 testing.
  • Biotechs gain from partnerships pharmaceuticals' expertise in guiding drugs through human testing, which can account for half of development time. They also benefit from pharmaceuticals' skilled marketing and distribution capabilities.
  • The growing number of partnerships is luring more investors, with New Enterprise Associates raising $1.1 billion partly for health investments and Venrock Associates raising $550 million, about 30% of which will go to biotech and other health start-ups.

Statistics:

  • In the third and fourth quarters of the previous year, venture-capital investors poured more money into biotech than into any other industry, including software.
  • The share of venture capital going to biotech surged from 14% in 2002 to 19% last year, higher than in the last financing boom.
  • Development costs for all drugs, from lab to FDA approval, average $802 million per drug, more than double the cost in 1987.
  • New drugs take as long as 15 years to reach FDA approval.
  • The FDA has approved about 100 biotech drugs in the past 30 years.
  • Global losses in biotech in 2002 more than doubled to $12.5 billion from $5.8 billion in 2001.
  • Biotech has fewer than 1,500 companies and fewer than 200,000 workers.

Sources:

  • "Pfizer to Buy Warner-Lambert for $115 Billion" by Ellen Greenstein, USA Today
  • "Eli Lilly Partners with Icos to Develop Anti-impotence Drug Cialis" by Jim Hopkins, San Francisco Chronicle
  • "Bristol-Myers Makes Marketing Deal with ImClone" by Frank Anthony Polombo Jr., The New York Times
  • "Biotech Industry Undergoes Rapid Changes," by Amy Norton, The Hartford Courant
  • "Biotech Gains Momentum as Venture Capital Floods In," by Peter Howe, The Boston Globe
  • "Global Biotech Losses Double to $12.5 Billion," by Ernst & Young
  • "The Pharmaceutical Research and Manufacturers of America"
  • "PricewaterhouseCoopers"
  • "Thomson Venture Economics"
  • "National Venture Capital Association"
  • "USA Today"
  • "AP Photo"
  • "Eileen Blass, USA Today"