The Ghosts of Biopharma Present: Biopharma’s Innovation Outsourcing

The holiday season has always been a time for reflection on the closing year and hope for the new one. In this spirit, today I’ll explore the Ghosts of Biopharma Present, and how startups in the Biopharma space may be the Tiny Tims that herald a brighter future.

As its cash cow patents expire, many biopharmaceutical companies are experiencing significant decreases in revenue [1]. Meanwhile, the cost of bringing a drug to market has soared in the past decade [2], creating a decreasing tolerance for risk, and thus for innovation. As a result, Big Pharma is increasingly slashing its R&D departments to appease investors and maintain their bottom line [3].

The last quarter alone has seen a wave of layoffs at many heavy hitter companies. This month, GlaxoSmithKline announced its plan to cut 900 R&D jobs at its Research Triangle Park in North Carolina, a decision prompted by the decline in sales of its star product Advair as cheaper inhalers gain market share [4]. In October, Southern California-based Amgen caved to pressures from activist hedge fund investors and announced that it would lay off up to 1,100 people [5]. While these cuts may buoy the next few quarters’ balance sheets, the LA Times wonders “whether such high-stakes face-offs result in short-term benefits to shareholders at the expense of a company’s ability to invest in its operations and thrive long term.” In other words, if companies continue to act like Scrooge, they, their investors, and their patients may face a bleak Ghost of Biopharma Future.

So how does Scrooge change course? He engages with the outside world. For biopharmaceutical companies, that means embracing the paradigm of external innovation. External innovation can take many forms: partnerships with academia, collaboration and risk sharing across two or more companies, and even crowd-sourcing problems through open competitions [6]. But some of the greatest potential for rapid innovation may lie in “Biopharma co-creation”: the funding and acquisition of Biopharma startups.

This approach combines the flexibility, efficiency, and innovation of small companies with the expertise and resources of Big Pharma, which gets to access new research while limiting and externalizing their risk.  A recent report from the Silicon Valley Bank on healthcare venture fundraising indicates that this approach is on the rise, and that large Biopharma companies are pointing their investment arms toward early series funding of preclinical and Phase I-stage research companies [7].

Different Biopharma giants have approached external innovation in different ways. Some have formed partnerships with venture capital firms to jointly fund new companies. For example, in 2013 GlaxoSmithKline created a $495 M fund with Avalon Ventures to launch 10 companies. While this investment is substantial, it is a fraction of the estimated cost of bringing a single drug to market [2], and fosters a diverse portfolio of innovation.

Other approaches include supporting therapeutic research companies in more physical ways. Johnson & Johnson, which has funded external innovation since 1973 [8], has more recently opened a network of bio incubators and innovation centers in California, Massachusetts, London, and Singapore [9]. Diego Miralles, head of the California Innovation Center, affirms, “At the end of the day, we’re going to live or die by the success of the biotech startups… Unless that space of entrepreneurs in biotech is robust, we are all in trouble, both as an industry and a society. Therefore our approach is to support the entrepreneur in any way possible.”

As startups are increasingly recognized as a major locus for bio-innovation, even Google is getting in on the action. In the last year, health and life sciences startups grew from 9% of Google Venture’s investments to 36% [10].  In particular, Google Ventures has focused on data-driven biopharma startups, such as Flatiron Health. Its CEO Nat Turner points out that “Google is trying to buy into technology that’s changing older industries and suits its big data expertise.”

Indeed, several Big Pharma companies are also investing in startups that develop “Target Generating Platforms” [7]. Thus, the synergy of data science, startup innovation, Biopharma expertise, and venture funding may create a viable alternative to traditional R&D that will “bless us, every one.”


[1] Levine D. (2014), Transforming health care. Burrill Media LLC.

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