Could Big Pharma’s appetite for local biotechs hurt independents?
Those sounds you hear reverberating through the local biotech industry are the heavy footsteps of Big Pharma.
Uncorking its plan to buy Lexington’s Cubist Pharmaceuticals Inc. for $9.5 billion last week, New Jersey-based Merck & Co. became the latest drug giant to expand its presence here. Global players such as Pfizer Inc., Novartis AG, Sanofi SA, Takeda Pharmaceutical Co., and Shire PLC have all planted a stake in the Boston area, mostly by gobbling up strong homegrown biotechs.
Many industry insiders welcome the stampede of marquee drug makers, saying it confirms the state’s status as the white-hot center of the biopharmaceutical universe. Timothy Rowe, chief executive of Cambridge Innovation Center, which houses startups, said the sector was reaching an important critical mass.
“Nobody has built a life sciences megalopolis where all the players are present,” said Rowe, citing the proximity of research labs, early-stage biotechs, and venture capital firms, as well as drug companies. “Once that happens, you get a Hollywood effect. If you want to be in film, you’ve got to be in Hollywood. You’re starting to see that in life sciences here.”
But with the biopharma scale now tipping toward the world’s largest drug companies, the question for a local business sector long defined by science, innovation, and entrepreneurs is whether independents can stay that way.
“Are we just becoming New Jersey north?” Harvard business professor Gary Pisano asked rhetorically, referring to a state dotted with Big Pharma campuses. “The big guys can be a draw for young companies, but you can get some crowding out. If the big guys come in and hire 5,000 people, smaller companies are going to have a harder time finding employees and affording space. And mid-sized companies become attractive targets.”
Even before the Cubist deal, independent biotechs such as Genzyme Corp., Millennium Pharmaceuticals Inc., and Transkaryotic Therapies Inc. were swallowed by Big Pharma.
“Some companies will survive, many won’t,” said Pisano, who added that this may be the next stage of a life sciences business cycle that could create a new, but still viable, industry structure. “You think of a Figure 8 — lots of big companies and startups and the middle diminishing.”
Many biotech startups are backed by venture capital investors looking for a return, so being bought by a deep-pocketed company is often key to the business plan. Big Pharma has the cash to fund costly clinical trials and the sales forces to pitch drugs worldwide.
“They bring resources,” said Massachusetts Biotechnology Council President Robert Coughlin. “Cubist will have the resources to invest in new antibiotics.”
But other startups can raise money through initial public offerings, enabling early investors to cash out. Some companies that have gone public are committed to staying independent.
Ironwood Pharmaceuticals Inc., a Cambridge biotech that won approval in 2012 for a drug to treat irritable bowel syndrome and chronic constipation, set up a dual-stock structure when it went public in 2010. The setup was designed to fend off unwanted bids from corporate raiders. Under the structure, pre-IPO investors were given “super-voting” rights over any decision that would affect who controlled the company.
“We believe that we have the potential to create very substantial shareholder value by doing the hard thing — creating new drugs,” said Ironwood chief executive Peter Hecht. He said sales from the company’s drug Linzess, which recently became profitable, will help bankroll other treatments in its pipeline. “And to do that, you have to take the long view.”
Many startups embrace the prospect of close collaboration with established pharmaceutical companies, even when their compounds are in the research and development stage.
“It’s a huge plus,” said Kevin Starr, co-founder of Third Rock Ventures, which forms and funds early-stage biotechs. “Having a critical mass in this new innovation model is a win-win for biotech and pharma. It speeds up the cross-talk, the cross-pollination of ideas. The large companies are getting more comfortable with this concept of outsourcing innovation.”
One reason is that patents on many of Big Pharma’s top-selling drugs are expiring, exposing them to competition from lower-priced generics. Meanwhile, there have been relatively few successes coming from drug-discovery efforts at traditional pharmaceutical campuses in New Jersey, Connecticut, and Pennsylvania.
The migration to the Boston area is being driven by the belief that innovation — and profitable drugs — can be found by striking partnerships with nimble startups and academic researchers at the region’s universities and hospitals.
“We’re here to meet with them, and from that to find the right individuals we should be spending time with,” said Robert Urban, who was recruited by health care giant Johnson & Johnson last year to head its new Boston Innovation Center. “Our job is to change people’s perceptions of what it might be like to work with a big company like ours.”
But the arrival of Big Pharma has priced many smaller biomedical players out of Cambridge, pushing them into Watertown, Somerville, and Boston’s Allston-Brighton neighborhood. Other biopharma pockets can be found in Boston’s Seaport and Longwood neighborhoods.
“Space is getting tight, and prices are going up,” Starr said. “We haven’t seen this kind of competition for space in 15 or 20 years. There’s a supply-demand imbalance.”
The price of commercial real estate leases in the life sciences hub of Cambridge’s Kendall Square have increased more than 50 percent over the past three years to more than $70 a square foot for office and lab space, among the highest prices in the Northeast.
“Kendall Square is the most densely populated urban technology cluster in the world,” said Steve Purpura, managing partner and Northeast market leader for real estate brokerage firm Transwestern RBJ.
Life sciences companies moved into 516,000 square feet of lab space during the July to September period, pushing the Boston area’s vacancy rate down from 11.6 percent to 9.5 percent, according to Transwestern RBJ. The largest deals were in Cambridge, where Baxter International Inc. leased 200,000 square feet on Kendall Street for a research center, and Pfizer leased 144,000 square feet near Technology Square.
In addition to increasing prices and the competition for talent, the newcomers are creating opportunities for collaboration.
“They’re just another player in the local pond,” said life sciences adviser Leora Schiff, principal at Altius Strategy Consulting in Somerville. “It’s going to be a matter of coexistence.”