Big Pharma is using its venture cash to outsource early R&D to biotech

Analysts at Silicon Valley Bank have been crunching the numbers on biotech investing, and they have found that a group of busy corporate venture arms has fundamentally changed the landscape for startups and the entire field of early-stage drug development--with some big implications for the current crop of industry upstarts.

Over the past two years corporate venture funding for biotech companies has surged back to 2008 levels, the bank's analysts conclude, and it now adds up to a much larger portion of the total amount of investment cash that's available to biotechs. Last year these corporate financing arms accounted for slightly more than a third of all the cash that flowed into biotech, according to SVB. And the corporate VCs have a big appetite for investing in early-stage rounds.

Courtesy of Silicon Valley Bank

"I think we've reached a healthy level of funding in the sector right now," says Jon Norris, the author of the report and managing director at Silicon Valley Bank. He adds that with the IPO window still open to biotechs, a lot of early- or mid-stage companies are now choosing to jump through to the public market rather than make a deal with pharma. The IPO alternative has also made it possible to drive up the value of biotech assets, which now command record payments.

But that's a trend that can't run forever.

"This can't run out too much longer into 2015," says Norris. "I can see it starting to close."

As the window shuts, he adds, you can expect to see the number of M&A deals rise. And the biggest biotech deals will likely be worth more, as big exits--defined as deals with an upfront of $75 million or more--jumped to an average record high of $549 million last year, a 10% spike over 2012.

Courtesy of Silicon Valley Bank

In its analysis, Silicon Valley Bank concludes that the early-stage investment gamble now amounts to a strategic move by the top Big Pharma companies to outsource a considerable portion of their early-stage R&D work, priming the cash pump directly through their own venture arms as well as by investing in many of the new venture funds filling up with risk capital. And the change-up is likely to continue to drive partnering as well as Big Pharma forges a new round of development pacts and M&A deals with their venture colleagues involved in biotech.

"We've all seen over the last few years the pullback in overall R&D spending by pharma and biotech," says Norris. "There's a tendency for these (pharma) folks to outsource their innovation."

Not surprisingly, experimental cancer drugs are attracting the bulk of Big Pharma's attention and corporate cash, followed by platform technologies that generate new leads, metabolics, ophthalmology, cardiovascular, CNS, dermatology, GI and inflammation, says SVB.

The leading corporate venture investors in the industry include Novartis ($NVS), Astellas, Pfizer ($PFE), S.R. One ($GSK), Amgen ($AMGN) and J&J Development Corp. ($JNJ). And nearly 90% of top corporate investment deals are directed at Series A or B rounds. More than half of these new investments, says SVB, were in preclinical or Phase I companies.

You can read the full report here. -- John Carroll (email | Twitter)

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