The pharmaceutical industry is headed back to school, with a number of large drugmakers announcing partnerships with universities.
Last week, Pfizer
Pfizer isn't the only one. sanofi-aventis
Good for pharma (maybe)
On the surface, these look like good moves. Pharmaceutical companies get early access to new technologies and drug targets. The royalties that universities demand from drugs that result are a small price to pay.
But large pharmaceutical companies haven't been that efficient at bringing drugs into the clinic over the last few years. Pharmaceutical companies have gotten their hands on many of the most promising drugs in their pipelines through licensing deals or outright purchases of smaller drugmakers. Think Bristol-Myers Squibb's
One reason for the difference in productivity between large and small drugmakers likely has to do with the culture. The develop-or-die attitude of small drugmakers that don't know where their next R&D dollar will come from can be highly motivating. Researchers at startups work hard because the alternative isn't really an option.
Promising technologies coming out of universities will be developed by venture capital if large pharma doesn't license it early. I'd suggest that drugmakers might be better off by waiting and licensing the technology once startups have had a chance to do their thing. It'll likely cost more that way, but the development time might be cut down substantially.
Bad for VCs (and maybe you)
Cutting venture capital out of the equation could hurt the funds that finance private early-stage companies, although it might take a lot of these partnerships to really put a major dent in the number of quality startups looking for early-stage funding.
And of course, pharmaceutical companies have venture capital funds of their own, so it seems unlikely that the whole industry is going away anytime soon.
However many potential startups the pharmaceutical industry takes off the market, it will hurt investors. One allure of investing in the drug space is small drugmakers. Find one at the right time, make the right call on the chance for success, and doubles or more are par for the course.
Highly focused early-stage drugmakers make good investments since they are often prime takeout targets. They offer the potential for quick returns from a takeout or for larger longer-term returns if the drug development pans out.
What's a Fool to do?
The trend has already started. There isn't much investors can do but watch it happen, hope it works out for the best, and bail if it doesn't.
For investors in large pharma, look for products coming out of these partnerships in two to five years. Then you're looking at another three to 10 years to get through the clinic. Yep, drug development is a slow process.
Investors in small drugmakers can expect the potential for a subsequent drop in IPOs although, considering how these things come in waves, it might be hard to tell how much the pharmaceutical industry is cutting into the IPO market.
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