In drug development, the “valley of death” is the period when the research funding is running out and venture funding has yet to materialize. In the years ahead, it may also be the place where the drug development dinosaurs get stuck and die. The dinosaurs will be any company that fails to make use of the new model of distributed partnering—the virtually integrated company (VIPCO).

 

Big Pharma is learning to spin off pieces of their operations, without having to own them or control them, while retaining access to the pieces that they need. At the same time, biotech companies and other young healthcare innovation companies have been coalescing around distinct components of the drug development process. They create new capabilities and often make them available for rent. So now, for the startup or smaller company, just as with Big Pharma, you don’t have to raise capital to build these capabilities—you just have to rent what you need.

 

The forces that drove both biotech and pharma, coming from opposite directions, to the same virtual destination, have been taking shape for decades. When I first entered in this business more than 40 years ago, fully integrated pharmaceutical companies (FIPCOs) did their own discovery and their own development and delivered products to market. The research and development culture within these companies was quasi-academic. Managers provided general oversight and reviewed promising discoveries, but the prevailing philosophy was to provide scientific freedom to pursue innovation.

 

By the late 1970s, the MBA, the spreadsheet, and higher valuations on publicly traded companies on Wall Street had led to greater pressure on CEOs to deliver higher returns. “Management by objective” replaced “follow the interesting questions” as the directive, and pharma companies established matrix teams to match scientists with personnel from marketing, operations, and regulatory affairs.

 

During this same period, the revolution in genetic engineering gave rise to something called “the biotech company,” and a new industry was born. Biotech entrepreneurs pursued innovation without access to any specific market, while over at pharma companies, science by committee began to favor incremental improvements of existing products to compete in current, well-defined markets.

 

In 1980, passage of the Bayh-Dole Act reinforced the entrepreneurial mindset among academic scientists. This legislation meant that universities and their faculty members could stake patent claims on inventions resulting from research funded by federal dollars. Many academic research institutions began to focus on technology transfer and translational medicine. The U.S. National Institutes of Health (NIH) lent a hand by often attaching a translational component to government research grants.

 

In gaining access to this newly emboldened academic talent, biotech had a clear advantage. If you were a Nobel laureate at Stanford and Pfizer came along and said, “Come work with us,” you might say, “I have a pretty cushy job here. I get to do what I want to do, and I don’t really want to be an employee of Pfizer.” But the next day, a venture capitalist might walk in and say, “I’m going to build a company around you. And by the way, you’ll have founder’s stock.” You’d be much more likely to come back with, “Sounds good.”