Drugmakers Build to Buy

Biogen Idec, Gelgene, and GlaxoSmithKine have signed deals with venture capitalists to develop startups that they can purchase later. Johnson & Johnson has taken a different approach to helping startups.

Brian Orelli
Brian Orelli
Apr 3, 2014 at 5:15PM
Health Care

If you build it, they will buy it (especially if they told you what to build to begin with).

Quite a few big biotechs and pharmaceutical companies have called on venture capital firms to help them develop companies and compounds that they can turnaround and purchase once the drugs are developed further..

Biogen Idec (NASDAQ:BIIB) recently hooked up with Atlas Ventures, contributing $17 million to help fund the VC's development of Ataxion with an option to purchase the company after phase one work is complete.

Celgene (NASDAQ:CELG) teamed up with Versant Ventures on a biotech incubator called Blueline Biosciences to develop compounds coming out of academic research in Ontario, Canada.

GlaxoSmithKline (NYSE:GSK) signed a deal last year with Avalon Ventures to fund as many as 10 biotech start-ups with as much as $465 million. In exchange, Glaxo has first rights on buying the new companies.

Not every large company is building with the expressed intent to buy the start-up though. Johnson & Johnson's (NYSE:JNJ) Jansen Pharmaceuticals has a no-strings-attached incubator where start-ups pay rent and use shared equipment. While the incubator start-ups don't have to sign a deal to be purchased later, Johnson & Johnson hopes that being familiar with the companies working on its campus will help the health-care giant offer a fair price for the biotechs should they chose to sell.

In the video below, Fool contributor Brian Orelli and health-care bureau chief Max Macaluso discuss the trend and how it might be good for large drug companies, but bad for investors who prefer to invest in smaller biotechs.