Small Biotech and Innovation

¶ … Big Thing I disagree with the argument, in large because of the wording in which it is presented. The argument put forth is as follows: "Some industry analysts now believe that much of the future market growth in drug development will come from small biotech start-up companies." The problem with that statement is that it ties drug development to market growth. Start-up companies may well lead the way in development, but they are ill-equipped to lead in market growth.

They simply do not have the reach, and there are a variety of business models that highlight the mutually beneficial role that start-ups and large pharmaceutical companies play in bringing drugs to market. A start-up company in biotech will typically consist of a small team of researchers, and maybe a few business people. Often, start-ups have no viable products on the market, and limited capital.

This is almost by the very definition of a start-up company as one that just started -- no products, not much money, but a good idea. Audretsch (2001) explains the role of biotech start-ups in a paper about clustering in the biotech industry. Industry clusters occur where multiple firms exist in an industry in a small geographic area. In biotech, North Carolina is a good example. In North Carolina, there are good universities that create the talent pool from which companies can draw.

There are government and private sector incubators, such as the North Carolina Biotechnology Center. There are college and university programs to promote students entering the field and to help them find jobs when they graduate. There are employers of all sizes, leading to tremendous job growth. And there is capital. There are venture capitalists and other firms engaged in financing small biotech companies. Employees can therefore leave a big firm, start a small one, and get some seed capital to make this happen.

That is how a cluster forms, and within that cluster each entity has its own role. Small biotech companies has the capability of innovating. They are started by people with good ideas. The biggest obstacle that any small biotech firm faces is the cost of bringing a new drug to market. Regulatory costs are very high, and the time frame is long. Most new drug ideas never pass final regulatory approval.

Those that do require years, and over $1 billion on average -- which does not include the cost associated with the drugs that do not get to market. The high failure rate of new drug ideas means that start-ups cannot raise sufficient capital -- it is too risky an investment for anybody to get $1 billion for their idea, no matter how promising it may seem in the early stages. One of the best sources of capital -- arguably the best source -- remains the big pharmaceutical companies.

They have money start-ups need. And unlike venture capitalists, they have the industry expertise needed to get a product over the finish line with final FDA approval. After that, only large companies can get a product to market, across the U.S. and around the world. The leading eight companies controlled 53% of all shipments in 2002, before the recent spate of industry mergers increased industry concentration (Comanor & Scherer, 2011).

Today, it is nearly impossible for a biotech start-up to get anywhere near FDA approval, much less take a product to market themselves. The pathway for the innovators, therefore, is more like they receive seed capital, mezzanine financing and venture capital. After this last stage, which may not occur until well into clinical trials, the.