Before the advent of the biotech firm business model, pharmaceutical companies relied on their internal R&D to deliver new drugs.
By the 1980s this became untenable; new drug discovery and development technologies were exploding onto the scene and the large, slow-moving Big Pharma companies could not keep up with the rapidly moving cutting edge.
Biotech firms appeared to fill the gap. The first of these was Genentech, born in 1976 by the serendipitous meeting of science and venture capital.
Genentech changed the game
The seed was a simple collaboration between molecular geneticist Herbert Boyer and Stanford professor Stanley Cohen. who together developed a means of splicing DNA and then inserting it into bacteria to make them produce human proteins.
Their research held promise for creating genetically-engineered proteins.
But it wasn’t until January 1976, when 28-year-old venture capitalist Robert Swanson entered the picture that the seed germinated.
A successful cold call by Swanson at Boyer’s lab led to a couple of beers and an agreement to start a new company.
With just $500 apiece, they formed a new business, called Genentech, with the mission to seek practical uses for Boyer and Cohen’s engineered proteins.
Swanson raised money for staff and labs, and after a tireless two-year effort, Genentech had its first breakthrough – recombinant (synthetically-created) human insulin that overcame the allergy and other problems with animal-derived insulin.
Two years later, Genentech executed a landmark licensing deal with Eli Lilly that gave the Big Pharma company the marketing rights to the new human insulin.
And so the biotech star was born, along with an entirely new business model – the biotech firm – that through licensing deals like Genentech’s, would feed Big Pharma’s depleting pipelines for decades to come.
Genentech went on to develop a string of blockbuster drugs and the company became the hallmark of biotech success.
As other biotech firms followed in its footsteps, VCs flooded into the new sector to provide the needed capital to drive the R&D engines of the new startups and push them into lucrative Big Pharma licensing deals, just like Genentech.
The new world order
Today, virtually all new drug discovery and early-stage drug development happens in small biotech firms, with Big Pharma hungrily waiting for the new drugs to boost their shrinking sales as the patents on their existing drugs inevitably expire.
The roles of biotech and pharma in this virtuous cycle are now firmly cemented and global conferences, like the annual BIO Convention, are dedicated to hosting the courtship between biotech drug developers and Big Pharma customers.
But the virtuous cycle stalls without venture capital. In the US, VCs play the vital role of not only funding drug development R&D but also curating and managing the small biotechs so they can become the belle of the ball on the pharma licensing dance card.
Without the vision of Robert Swanson, the US biotech industry would have never started. In Swanson’s footsteps and buoyed by endless success stories and massive returns for investors, the venture capitalists of today provide the fuel for the US biotech engine that dominates the global biotech industry.
More than that, they provide quality control, ensuring that only the best drug candidates and the best firms survive and succeed.
On the one hand, this leaves a lot of bridesmaids that don’t make the VC cut. These struggle for funding and despite promising programs, may never succeed.
Are new funding models the answer?
As funding models continue to adapt to a rapidly changing world, it’s worth posing the question: will venture capital continue to play such a dominant role in biotechs?
Or will we see a shift towards alternative funding methods?
If the cryptocurrency market has taught us anything, it is that the new world no longer adheres to conventional funding rules.
Money can be raised from a global pool of investors, and quickly. Potentially, biotech startups can bypass the hard-nosed and high-hurdled VC gatekeepers of finance.
Only time will tell how the relationship between biotechs and venture capital will evolve.
For the time being though, how they raise money may be a somewhat irrelevant question.
Money will always flow towards businesses that have the potential to make a difference and when that involves saving or improving the lives of millions of people, the money will find a way.
With this in mind, the future of biotech appears a very bright one.
1. Who made America Who Made America? | Innovators | Herbert Boyer (pbs.org)
Dr Peter Molloy is the co-founder and Executive Chairman of Australian pharmaceutical company, Firebrick Pharma. He trained as a microbiologist and biochemist, then built a successful career in the pharmaceutical industry.