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DBL%20Hendrix%20small.png College chemistry, 1983

Derek Lowe The 2002 Model

Dbl%20new%20portrait%20B%26W.png After 10 years of blogging. . .

Derek Lowe, an Arkansan by birth, got his BA from Hendrix College and his PhD in organic chemistry from Duke before spending time in Germany on a Humboldt Fellowship on his post-doc. He's worked for several major pharmaceutical companies since 1989 on drug discovery projects against schizophrenia, Alzheimer's, diabetes, osteoporosis and other diseases. To contact Derek email him directly: derekb.lowe@gmail.com Twitter: Dereklowe

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August 29, 2012

How Did the Big Deals of 2007 Work Out?

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Posted by Derek

Startup biopharma companies: they've gotta raise money, right? And the more money, the better, right? Not so right, according to this post by venture capitalist Bruce Booth. Companies need money, for sure, but above a certain threshold there's no correlation with success, either for the company's research portfolio or its early stage investors. (I might add that the same holds true for larger drug companies as well, for somewhat different reasons. Perhaps Pfizer's strategy over the last twenty years has had one (and maybe only one) net positive effect: it's proven that you cannot humungous your way to success in this business. And yes, since you ask, that's the last time I plan to use "humungous" as a verb for a while).

There's also a fascinating look back at FierceBiotech's 2007 "Top Deals", to see what became of the ten largest financing rounds on the list. Some of them have worked out, and some of them most definitely haven't: 4 of the ten were near-total losses. One's around break-even, two are "works in progress" but could come through, and three have provided at least 2x returns. (Read his post to attach names to these!) And as Booth shows, that's pretty much what you'd expect from the distribution over the entire biotech industry, including all the wild-eyed stuff and the riskiest small fry. Going with the biggest, most lucratively financed companies bought you, in this case, no extra security at all.

A note about those returns: one of the winners on the list is described as having paid out "modest 2x returns" to the investors. That's the sort of quote that inspires outrage among the clueless, because (of course) a 100% profit is rather above the market returns for the last five years. But the risk/reward ratio has not been repealed. You could have gotten those market returns by doing nothing, just by parking the cash in a couple of index funds and sitting back. Investing in startup companies requires a lot more work, because you're taking on a lot more risk.

It was not clear which of those ten big deals in 2007 would pay out, to put it mildly. In fact, if you take Booth's figures so far, an equal investment in each of the top seven companies on the list in 2007 would leave you looking at a slight net loss to date, and that includes one company that would have paid you back at about 3x to 4x. Number eight was the big winner on the list (5x, if you got out at the perfect peak, and good luck with that), and number 9 is the 2x return (while #10 is ongoing, but a likely loss). As any venture investor knows, you're looking at a significant risk of losing your entire investment whenever you back a startup, so you'd better (a) back more than one and (b) do an awful lot of thinking about which ones those are. This is a job for the deeply pocketed.

And when you think about it, a very similar situation obtains inside a given drug company. The big difference is that you don't have the option of not playing the game - something always has to be done. There are always projects going, some of which look more promising than others, some of which will cost more to prosecute than others, and some of which are aimed at different markets than others. You might be in a situation where there are several that look like they could be taken on, but your development organization can't handle so many. What to do? Partner something, park something that can wait (if anything can)?Or you might have the reverse problem, of not enough programs that look like they might work. Do you push the best of a bad lot forward and hope for the best? If not, do you still pay your development people even if they have nothing to develop right now, in the hopes that they soon will?

Which of these clinical programs of yours have the most risk? The biggest potential? Have you balanced those properly? You're sure to lose your entire investment on the majority - the great majority - of them, so choose as wisely as you can. The ones that make it through are going to have to pay for all the others, because if they don't, everyone's out of a job.

This whole process, of accumulating capital and risking it on new ventures, is important enough that we've named an entire economic system for it. It's a high-wire act. Too cautious, and you might not keep up enough to survive. Too risky, and you could lose too much. They do focus one's attention, such prospects, and the thought that other companies are out there trying to get a step on you helps keep you moving, too. It's not a pretty system, but it isn't supposed to be. It's supposed to work.

Comments (1) + TrackBacks (0) | Category: Business and Markets | Drug Development | Drug Industry History


COMMENTS

1. petros on August 29, 2012 9:43 AM writes...

A fascinating mix of outcomes. And that is with a selection process that might have been expected to yield a better proportion of good results

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