Pharmaceuticals have figured that out that if they can't be as innovative or nimble as biotechs, the next best option is to pay for their good ideas with licensing deals and acquisitions.
And what better way to identify those potential deals than to cozy up to the biotechs?
Invite them into your homes
Earlier this year, Johnson & Johnson
Even if there isn't a formal tie-up, having the startups in close proximity will certainly be helpful in identifying the potential targets and figuring out the best time to engage in talks.
And the incubator format, with shared equipment and common areas, lowers the cost for the startups, which should help them survive longer, resulting in more products being developed and more licensing and acquisition options for pharmas.
Bayer also announced plans to house three to four startups at its research center in San Francisco earlier this year. The program, called CoLaborator, is a little more hands-on, with Bayer expecting preferred access to partner with the startups.
Feed them dinner
Last week, GlaxoSmithKline
Like Johnson & Johnson's incubator, the fund doesn't give Glaxo or J&J any entitlement to the products developed by the startups they fund; they'll have to bid just like everyone else. But being on the advisory board of the company funding the startups should give them an advantage in correctly valuing the products. And if someone outbids them, they'll make more money on their venture investment.
Similarly, Eli Lilly
Get married -- someday.
Make no mistake -- these are long-term plays. Preclinical startups being funded by pharmas now won't have products through proof of concept for a few years. Pharmas could license the products earlier and pay less, but I think leaving the risk in the hands of the innovators through phase two development is a good strategy for balancing risk and reward.
Whether pharmas should try to get an exclusive deal (call it a "long engagement") or fund without strings attached, while keeping an eye on them (a "protracted dating period") probably doesn't matter that much, since there are advantages to both. The lack of strings results in a larger pool of potential investments, which could increase quality. What's most important is that there's funding going to these startups, which will benefit pharmas down the line.
Might it be a waste of money? Biogen Idec
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Fool contributor Brian Orelli holds no position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of Johnson & Johnson. Motley Fool newsletter services have recommended buying shares of Johnson & Johnson and GlaxoSmithKline. Motley Fool newsletter services have recommended creating a diagonal call position in Johnson & Johnson. The Motley Fool has a disclosure policy.
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