University-spawned biotechnology startups seeking an infusion of cash to bridge the so-called investment “valley of death” now have another option to turn to in lieu of family, friends, angels, and venture capitalists: big pharma incubators.
Pfizer and Biogen-Idec have each established in-house incubators to nurture the development of university-based startup companies with the hope of garnering a return on their investment in the form of new tools to aid drug discovery and development.
The new model is different from traditional sponsored research or corporate venture arms in that Pfizer and Biogen-Idec plan to provide not only cash, but also laboratory space, personnel, market analyses, and even administrative support to candidate companies in a proposition that, according to some experts, could benefit everyone involved.
“If they’re looking to give [startups] the vision into the company and what they’re trying to do, and then offering some interface with the company, then that is very good,” Tony Stanco, director of the National Council of Entrepreneurial Tech Transfer (NCET2), told BTW this week. “That makes a lot of sense. It’s very good, very new, and very forward-looking.”
Stanco, who is also director of the council of entrepreneurial tech transfer and commercialization at George Washington University, moderated a Congressional Innovation Panel discussion last month on university start-up companies and the role they play in the US economy (see BTW, 4/23/07).
One of the main topics of the panel discussion, which also featured university technology transfer officials and executives of university start-ups, was the idea that university spin-outs are finding it increasingly difficult to secure the type of investment needed to commercialize their technology.
Pfizer and Biogen-Idec hope that they can help bridge that gap with their new incubators – and beef up their product pipelines in the process. Both incubators were established within the last six months, but neither has yet to sign on any residents.
“The incubator is part of a broader strategy that Pfizer is pursuing right now,” Alex Polinsky, CEO of the Pfizer Incubator, told BTW last week. “One important component of this strategy includes reaching out to academia, forming relationships, and supporting innovation there. Pfizer has many mechanisms for doing this, but the incubator is a new mechanism that will allow us to identify very early enabling technologies in academia, pick ones that are relevant to our strategy, and help the scientists build their company and commercialize their technology.”
The Pfizer Incubator, located in a 26,600-square-foot laboratory facility in La Jolla, Calif., contains space for five to eight separate labs and 23 offices. According to Polinsky, Pfizer in general seeks to fund candidate companies for a period of two years with average financial support of $2 million per year, although it will negotiate different funding schemes depending on the circumstances. All in all, the incubator will “realistically be able to take on five to eight companies,” Polinsky said. “I think we are going to be opportunistic, though, and if there are good opportunities, and good companies – it’s much easier to find space.”
Speaking in general terms again, Polisnky also said that Pfizer will ideally seek out “enabling technologies that can be used to produce products.” In particular, he said, Pfizer is very aggressively pursuing biotherapeutics, and “the IP situation is extremely difficult in this area. So we are looking for enabling technologies such as, for example, new ways of making antibodies; or for making something that would act like an antibody but is not encumbered by IP.”
Biogen-Idec’s incubator, called BI3, is located in Cambridge, Mass., adjacent to the company’s headquarters. It is unclear what type of funding terms Biogen-Idec plans to negotiate with individual companies – a spokesperson for the company declined to provide additional information – but according to the BI3 website, the company will mostly seek start-ups “with a milestone-driven research plan that outlines a clear path toward transition into development and can be completed in two to three years for a maximum of $10 million.”
In addition, it appears as if Biogen-Idec, as opposed to Pfizer, is more interested in seeking actual drug leads and candidates instead of drug discovery and development tools. According to the website, the company is particularly interested in lead-stage molecules no more than three to four years away from an Investigational New Drug filing; technologies that are relevant to Biogen-Idec’s major therapeutic areas (neurology, oncology, immunology, and acute cardiovascular diseases); and protein-based therapeutics or small molecules with “well-characterized biology and a rational [structure-activity relationship] strategy.”
The location of the respective incubators is not a coincidence – they are hotbeds of regional biotechnology activity. However, if the incubator idea takes hold, Polinsky said that Pfizer will consider opening additional incubators in other biotech-rich corridors, such as Cambridge and the San Francisco bay area; and overseas in Europe and Israel.
The ROI
Polinsky said that in terms of company ownership and IP retention, the incubator will be very similar to traditional university-based incubators in that resident start-ups will be completely independent of Pfizer, and that original IP on which the company was founded or IP that was generated in the incubator will belong to the company. However, Pfizer will angle to maintain an equity investment in the start-up.
In return for its investment, Polinsky said that Pfizer will mandate that it have “right of first offer” to acquire the company at the end of its tenure in the incubator, which will be closely monitored by Pfizer in terms of milestones and research plans.
“At the end of the incubation period, if the goals of the research plan are met, then at this point the incubator wants to have the rights to buy the company,” Polinsky said. “We want to bring fair market price.”
However, he added, it may be difficult to determine what the fair market price is because in most cases a market may not exist. To navigate this, Pfizer will either consult an independent third party during negotiations; or, “if we can not agree still, the company [founders] can go to the market, test the market, and if they find a party that is interested in buying them at a higher price, then they can just go and sell the company to that entity,” Polinsky said.
But if the start-up can’t find an offer that matches Pfizer’s, “then we’ll have to sit down and negotiate again,” he added. “It’s a very standard formula that is used. Pfizer wants rights since we invested in the technology, and we want to benefit from that. The deal terms are, I think, very fair, and we’ll pay a mix of cash, milestones, and royalties that may come out of the technology, and this is negotiable. But if we cannot agree, then the company can get a fair market price, and then Pfizer will just remain passive investors.”
Biogen-Idec, according to its website, will supply “the financial resources necessary to convert ‘drug prototypes’ into development candidates that can quickly enter the clinic in return for pre-negotiated option rights for Biogen-Idec.”
Invaluable Resources
In both cases, the incubators plan to provide more than just funding. “There is a lot of value we can provide in the form of a package of services,” Polinsky said. “The founders don’t need worry about rent, or connecting computers to the Internet, or where reagents are coming from, or payroll. We think this kind of logistical help will have a lot of value for young entrepreneurs.”
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“It’s not the couple of million dollars, and it’s not the space, it’s the ability to hook up and get inside the corporate organization to see what they’re looking for in the way of products, and then using these entrepreneurial, incentivized people to deliver that instead of employees.” |
The BI3 website states that incubated companies “will have access to Biogen-Idec’s drug-discovery expertise, core facilities, scientific services … and all the business and administrative support required to manage day-to-day company operations.”
According to NCET2’s Stanco, this is a key point that differentiates what Pfizer and Biogen-Idec are proposing as compared to traditional pharma investments in early-stage technologies or start-ups by their venture capital arms.
“It’s not the couple of million dollars, and it’s not the space; it’s the ability to hook up and get inside the corporate organization to see what they’re looking for in the way of products, and then using these entrepreneurial, incentivized people to deliver that instead of employees,” said Stanco. “Also, from an R&D perspective, it’s a much better way to do it, to put the money into startups rather than hiring 20 people for your own company.”
At the same time, Stanco said that it is important that the right individuals at the pharma companies are making decisions about the direction of incubated technologies and start-ups, and where to apply available funds – especially since those funds are not as substantial as traditional VC funds.
“Who are these people making the decisions? Are they experienced VCs, or are they just internal people?” Stanco asked. “The best strategy is to have very experienced people making these choices, so you’re at least getting rid of the [candidates] you know are going to clearly fail early on. But even then, you need a portfolio, because the larger the pool, the more likely you’ll catch one that succeeds. And even if you get experienced people, a $20 million or even $50 million fund is generally going to fail.”
Another potential perk to residents of the Pfizer incubator is that its technology may find use in multiple application areas immediately once the technology has proven itself in the incubator labs.
“That is very different from what usually happens at a small biotech company,” Polinsky said. “They often have a nice, new, novel technology, but they’ll apply it to one company, license to a couple more, and that’s it. In our case, we have a huge portfolio of therapeutic areas, and hundreds of targets that we are working on. So if the technology is working we can bring it in and apply it to the entire portfolio.”
Polinsky added that such a scenario could reap big rewards for the entrepreneur because the terms under which Pfizer would bring in a technology will include milestones and royalties for any products that come out of it. “So if it’s applied to 20 products, and five of them work, it could be a very good reward in the end,” he said.
So far, neither Biogen-Idec nor Pfizer have secured any occupants for the incubators, but negotiations are underway in earnest. A Biogen-Idec spokesperson said the company hopes to have a resident “within the year,” while Pfizer’s Polinsky said that if everything breaks right, the Pfizer Incubator could have a resident in six to eight weeks.
Although Pfizer is keeping an open mind regarding candidate companies, all of the proposals so far have been university-spawned biotechnologies. He added that companies can still apply by visiting the Pfizer Incubator website or by contacting Polinsky directly.
“In general, we will never say never, and consider all situations,” Polinsky said. “But most of the researchers we are talking to now are in the pre-company phase, when they are just thinking about it, or they have already formed a company but it hasn’t been capitalized.
“We’re talking about early technologies, and to really give it proper attention you need to fund it, and to have people who are dedicated to developing it,” he added. “I don’t know of any better form of doing this than at a small company where people really are focusing just on these technologies. It is the most efficient way to move this technology forward. We will continue to do things like fund research at universities, but the development goes much slower.”