Investing in Biotech Isn't Just for Investors Anymore

No research has emerged to improve drug development in the profound way that cheap cloud computing and broadband has done for high-tech startups. Until that happens, the industry is going to have to get by on channeling creative energy into new biotech business models that are better at sharing risks and rewards. And the good news is that in spite of the challenges with drug development, there are ideas emerging that could keep long-term, committed money flowing into life sciences technology.

Before going too far down this road, it's worth noting that if you look at the usual short-term financial metrics, business as usual looks OK this year. The NASDAQ Biotech Index was up 18 percent in the first quarter, approximately on par with the broader NASDAQ Composite. Total venture capital financing was up 34 percent in the first quarter compared with the same period a year previously, according to BioWorld. A few decent acquisitions have occurred this year, including Amgen's takeover of Micromet, Biogen Idec's buyout of Stromedix, and Celgene's acquisition of Avila Therapeutics. Four biotech IPOs have happened so far, which isn't much to brag about, nevertheless it's better than last year's performance.

The technology ecosystem the way it once did

These types of groups are pooling their resources in new networks in part because they know that venture capital can't support the technology ecosystem the way it once did. The venture capital business is going through a historic shrinkage: there were 1,022 active venture firms in the bubble year of 2000, and just 462 a decade later, according to the National Venture Capital Association. The biotech venture business is in the midst of a major shakeout, as many firms have been unable to deliver the investment returns they need in order to continue raising new funds to back startups.

One of the creative models we've seen was crafted more than a decade ago by San Diego-based Aurora Biosciences and the Cystic Fibrosis Foundation. The CF Foundation put in about $75 million of its money, and harnessed its network of physicians and patients, to help this for-profit company develop a drug for a deadly lung disease that no investor wanted to support. Bob Beall, president of the CF Foundation, "was the only one who believed in us," said John Mendlein, an architect of the deal at Aurora in 1999 and now the CEO of San Diego-based aTyr Pharma.

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