The biotech industry, one of the US economy’s most innovative sectors, continues to confront massive challenges in raising vital capital for growth.  In addition to threatening the United States’ historical leadership in this area, this mounting problem has important near- and long-term implications for big pharmaceutical companies with pinched R&D budgets struggling to create new drugs, the country’s job growth, and the world’s overall well-being.  However, an effective solution can be devised by creating a Biotech Fund that smartly deploys Big Pharma's cash to solve the capital crunch of this critical sector of our economy.

To understand the biotech sector’s capital crisis, consider the wide gulf that exists between the 12–15 year timelines for new drug development and the much shorter time horizons of venture capital, biotech’s most common source of funding.  Exacerbating the issue is the fact that investors have lost their appetite for biotech initial public offerings—only 12 were completed...

At the same time, Big Pharma is struggling to produce drugs to replace blockbusters that are coming off patent.  In the past decade, few drugs have been brought to market from Pharma’s own development efforts.  These companies, while cash rich, are experiencing earnings pressure which is causing significant reductions in R&D efforts, further exasperating already anemic drug pipelines.

That creates a very unique opportunity for collaboration between Big Pharma and biotech. A Biotech Fund, seeded by pharmaceutical companies, could focus on investing in early-stage drugs being developed in smaller biotechs, which could, in return, fuel Big Pharma’s need for innovative drugs. Such a fund would simultaneously solve the biotech industry’s current capital constraints and reduce the threat to Pharma’s pipeline.

To be effective, this fund needs to be capitalized with billions of dollars and focused on unproven preclinical and early-stage clinical drugs.  Big Pharma’s cash position is capable of providing the vast majority of capital to support the fund, which if structured properly will be sufficiently attractive to the investment community as well.

The fund could be managed by a team of seasoned investors in the biotech industry that would identify drugs or companies focused on products and platforms addressing unmet medical needs. There are numerous investment models that the fund could deploy to achieve the intended results beyond simply investing in equity of biotechs, including creating companies to acquire qualifying assets from biotechs that are no longer capable of developing them on their own.

The fund should produce attractive returns especially as prices of publically traded biotech companies continue to be depressed and acquisition trends continue to move toward smaller up-front payments with contingencies paid upon successful advancement of the drugs.  A portfolio of diverse strong programs should mitigate the risk of drug failures. Additionally, the fund would provide sufficient funding to conduct robust drug trials, a stage of drug development that is often shortchanged due to the cash constraints of biotech companies.

A key issue to be addressed at the outset is how to avoid non-participating Big Pharma—the “free riders”—from gaining a potential benefit from the expanding pipeline that the fund would foster. One simple answer may be for the managers of the fund to give a participating Big Phama certain rights to negotiate for drugs that are to be out-licensed by the fund.

Though it may seem a bit unusual, there is strong precedence for this idea.  About 25 years ago, when the US semiconductor industry was facing a crisis, the government and the private sector protected the viability of the industry by funding the creation of SEMATECH, an industry consortium, to strengthen the sector by leveraging resources and sharing risk. While the government is not likely in today’s economic and political environment to shower any additional funds on the biotech sector, it can at least encourage the creation of the fund and make certain that no antitrust or other legal impediments stand in the way of its creation.

Benefits of this fund do not end with the biotech and pharmaceutical companies.  The drugs invented by the biotech sector have been accounting for the vast majority of recently approved treatments, contributing to gains in life expectancy and, in turn, our national wealth.  From 1970 to 2000, life expectancy gains added more than $3 trillion per year, half of which was due to advances against heart disease alone.  Alternatively, the deterioration of the industry would impact national competiveness and job creation.  Direct employment in biotech exceeds 1.3 million and there are an additional 6.2 million employed in related industries, an aggregate about double that of the automotive industry.

Using Big Pharma’s money to fund the biotech sector would support continued innovation, bolster our global competitiveness, and foster job creation.    The bioscience industry is, without a doubt, central to our society’s well-being. It warrants preservation.

Mark Kessel is a senior advisor at Sagent Advisors Inc. and a partner at Symphony Capital LLC.






[1] Some counts differ depending on the definition of “biotech.”



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