Friday, May 18, 2007

Welcome to the Pfincubator

Should VCs be just a teensy bit worried about what’s going on at Torrey Pines?

For those who missed it, The San Diego Union-Tribune reported that Pfizer is opening up 26,600 square feet of lab, office and meeting space on its Torrey Pines campus to researchers and entrepreneurs looking to explore business ideas. Moreover, the pharma company will commit $10 million per year to roughly six to eight companies to help them grow up big and strong.

In short, Pfizer is offering entrepreneurs: capital, resources and access to its best and brightest—the folks who know how to make and sell drugs.

Sounds a little bit like the job of a VC, no?

Well, at least the job VCs used to have. Pfizer says they’re looking at projects today's VCs wouldn’t touch with a 10-foot-term sheet—early, pre-clinical ideas that just need a little TLC and nurturing to see if they amount to anything. Indeed, the two major hometown VCs in the area—Enterprise Partners and Forward Ventures—say they see this incubator as a positive thing for the area.

Who would you rather have as your landlord?

And maybe it is. But really what does this say about the pharma-VC relationship? By offering budding entrepreneurs capital, resources and the benefit of many years of experience in the pharmaceutical industry, Pfizer isn’t merely taking on the role of landlord. It’s acting like a VC.

We’re not talking about the kind of corporate VC, the liaison between corporate and outside venture capitalists who relies upon working through the latter to find young companies that might fit the former’s long-term strategy. No, Pfizer already does that and does that quite well.

Even the recent steps by Novartis outlined in our recent post "At Novartis, competing venture funds aim to avoid the high cost of biotech innovation," as unorthodox as they might be, pretty much stuck to the script of pharma finding innovation with some help of venture funds.

But Pfizer is writing itself a new role by moving to cut out the middle man. Why partner with VCs to identify promising new technologies when you can deal with the entrepreneurs themselves?

Indeed why. As laid out in the article, Pfizer would appear to have these entrepreneurs over a barrel. In exchange for the space and resources tenants will have to agree to an “up-front equity-share agreement” with Pfizer.

When research is done, Pfizer will have an option to acquire rights at a fair market price. Or the incubator could spin out the company as an independent business.

Hmmm. Either scenario sounds great for Pfizer, not so good for the entrepreneur. Who will determine what a “fair market price” is for a venture that hasn’t obtained term sheets and bids from outside investors. Pfizer, most likely. What possible leverage could these companies have in negotiations? Will they threaten to have a huge party and trash the place before moving out?

What if Pfizer declines and pursues the spin out? Sounds fair, but again, I wonder how much leverage a start-up will have in negotiating terms with outside investors when Pfizer already told you, “No thanks.” VCs generally prefer to invest in companies that pharmaceutical companies might actually want to buy. Any spin outs will be branded as “unwanted by Pfizer.”

Finally, Pfizer isn’t simply willing to let companies move in and go unwatched. According to the article:

Tenants will receive space and funding for two years, provided they meet milestones along the way. Funding won't necessarily be cut off after two years, because Pfizer realizes scientific discovery can have unexpected twists and turns.

So basically, Pfizer will have some degree of access to their tenants’ progress. It must if it’s going to ensure they’re meeting the milestones necessary to continue to use the labs. This is intriguing but curious. CEOs and VCs aren’t always comfortable with their pharma partners attending board meetings or having access to private information. Now, these partners will have keys to the filing cabinet. (Heck, they’ll own the filing cabinet.)

Look, we know we’re skeptical by nature but we’re not alone. (See comments from Pharmalot blog.) Clearly, these are smart folks. There is no doubt these issues will be addressed, and there is a strong likelihood that this program will be a success, which means Pfizer would open other centers across the country giving researchers and entrepreneurs someplace to go other than local VCs.

So what’s all this mean? For Pfizer, the idea sounds like a good one. They’ll identify extremely early stage enterprises that might bolster internal innovation. For VCs, probably won’t mean much at first but if the idea catches fire they’ll have more competition for the top-tier technology plays.

Finally, what’s this mean for the entrepreneurs? Well, Pfizer is billing this space as a “Ritz-Carlton” for start-ups. Entrepreneurs, however, need to be careful with the terms of the agreements if they don’t want to get stuck in a roach motel.

1 comment:

Anonymous said...

VCs have not been relevant for some time now. If they don't fund the whole spectrum of progression - and only focus on late stage - then they have lost their relevance. Everyone wants late-stage assets, and VCs do not have the cash and urgency needed to compete for the good ones.

Pfizer and others cannot feed themselves. The lack of broad VC investing is forcing them to do this. It's a good thing because there's nothing more sad than a pile of fallow research with no path to the clinic.