Monday, December 24, 2007

Yule Blog: The Virtual Are Only Virtuous Thanks to the Substantial

It’s time once again to sing the great Christmas Paradox—the annual carol that venerates the Immaterial in the temples of the Material.

And as everyone knows, it’s just fine that we do. Our economy’s fortune ebbs and flows with the CPI – the Christmas Paradox Index. That’s why – as some significant fraction of us proclaim that the only present we want is you or family or world peace -- the news we evidently want to hear is about the health of retail sales.

We are not, however, going to babble on about this particular holiday cliché. Instead, we want to point out that our industry has a parallel Paradox – the Infrastructure/Anti-Infrastructure theme now playing in the drug business almost as insistently as Deck the Halls in shopping malls.

At Windhover’s Bio/Pharma Partnerships conference, for example, Randy Woods noted that his old biotech company, Corvas, needed plenty of scientists just to get to the clinical-stage deal its investors wanted. Now, given the gap in Pharma’s late-stage pipeline, VCs want to fund the development themselves, entirely without partner money -- but with only enough infrastructure to manage the CROs and consultants they hire to do the work. Investors want all their dollars to go into development – not offices and certainly not salaries.

That’s exactly what happened with Woods’s more recent employer—NovaCardia (12 people; two products; sold with just one of the products to Merck for $350 million) and what will likely happen with current company Sequel (which inherited the same people, NovaCardia’s second product, and its investors).

Or Bristol-Myers Squibb. Senior BD director Lynne Croucher spoke about its “selective integration” strategy (and discussed at greater length here, here, and here) which, along with risk reduction, effectively reduces requisite infrastructure – off-loading costs and responsibilities onto primary-care partners. That’s why Bristol can without significant business pain cut some 4800 jobs.

And now Peter Corr, the former R&D boss at Pfizer, the industry’s most fully infrastructured business, has ended up at Pfizer’s philosophical opposite, the anti-infrastructuralist private-equity player Celtic Therapeutics (here’s the savvy assessment by the WSJ’s Health Blog).

The fund (an outfit we first wrote about in late 2005) is an ambitious follow-on to private-equity pioneer Celtic Pharma, which has deployed nearly all its $250 million in capital (plus an additional $151 million in debt) in buying up nine development-stage programs, whose development it funds using a network of CROs. It then wants to sell the successful programs to the highest bidders (so far it’s sold one and lost one). The new fund apparently hopes to do the same thing but on a much larger scale--according to the Financial Times, it’s aiming to raise $1.5 billion. Corr expects the first close of the fund this January.

Big Pharma’s infrastructure “isn’t meeting its needs,” he says. In fact, despite billions spent on R&D, drug companiest don’t even “have the flexibility to fund new projects, or more from one project to another based on science” because they’re funding infrastructure instead. Celtic Therapeutics will employ maybe 65 people managing 20 projects.

You see the paradox, no doubt. It’s not that the infrastructure doesn’t exist. It’s still there—in CROs, for example. And it’s still there in the companies that ultimately fund Celtic’s returns. If it weren’t, Celtic would have neither advantage nor customers (low-infrastructure Big Pharmas could presumably license the same programs Celtic can).

In sum, most of those caroling along about the virtues of a virtual industry know that without the infrastructure someone else is paying for they wouldn’t have much to sing about at all.

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