Incubators are nothing new in biotech. They've long helped address the funding gap between basic and clinical research by providing the facilities, leadership and money needed to translate ideas into product candidates.
Often led by universities and economic development groups, incubators traditionally have sought to grow companies to a self-sustainable level. But a new player is poised to enter the game, and the rules may be about to change. Pfizer Inc. and Biogen Idec Inc. are launching the first incubators wholly owned and fully funded by industry, with the end goal of building their pipelines.
Pfizer announced last week that it officially incorporated The Pfizer Incubator LLC (TPI), a wholly owned, fully funded biotechnology incubator located on its La Jolla, Calif. research and development campus.
Since unveiling the idea at a late 2006 analyst briefing, Pfizer has been busy hammering out the incubator's business model and setting up the 26,600-square-foot facility, which contains eight laboratories and sufficient office space to house between five and eight start-ups. Catherine Mackey, senior vice president of global research and development at New York-based Pfizer, said her company will fund the project with a commitment of $12.5 million per year for the next five years, to be divided among the facility's nascent biotech occupants.
On the East Coast, Biogen Idec is hatching a similar plan. Although the project has yet to be formally announced, director of public affairs Jose Juves told BioWorld Today that his company has identified a facility within its Cambridge, Mass. headquarters to house the Biogen Idec Innovation Incubator. Many details, including the funding commitment, have not been finalized, but Juves said the innovator will be designed to house "a steady rate of four to five companies at any given time."
The notion of industry incubators makes sense on many levels. Researchers need funding to get from the lab to the clinic. Pharmaceutical companies with thinning pipelines are seeking ever earlier access to compounds. Historically, the two groups have joined through licensing deals, or more recently though corporate venture arms such as those offered by pharmas like Eli Lilly and Co., of Indianapolis, and Novartis AG, of Basel, Switzerland, or biotechs like Amgen Inc., of Thousand Oaks, Calif., and MedImmune Inc., of Gaithersburg, Md.
"Incubators are another tool," like licensing and venture arms, Juves said.
But while venture arms tend to be focused on return on investment, industry incubators are purely pipeline driven.
"We're interested in funding emerging technologies that, if successful, could have a significant impact on our portfolio," Mackey said. Juves, too, said the incubator is a way to "supplement the pipeline."
Both companies view acquisition as a possible exit strategy for incubated entities but plan to evaluate them on a case-by-case basis. Another option would be to spin out companies that need more funding than the incubator could provide, while potentially retaining the right to acquire the company or its products later in the game.
That aspect has some venture capitalists concerned.
At a recent conference, Drew Senyei, managing partner with Enterprise Partners, called Pfizer's incubator idea "exciting and useful," but pointed to a need to "understand the economics." He noted that buy-back options could cap the future value of the company or its products and hamper venture capital interest.
Mackey countered that Pfizer's first right of refusal to acquire would be based on fair market value at the time of the acquisition as determined by a pre-specified, neutral third-party.
But that's easier said than done, according to James Garvey, managing partner with venture firm SV Life Sciences. Companies might want to hold onto their products longer to get a higher market value for them. And the right of first refusal, even at fair-market value, would rule out the bidding wars that have generated so much additional upside for biotechs of late. "The end game for venture capitalists and pharmaceutical companies is essentially in direct conflict at the exit stage," Garvey said.
Regardless of the exit, Mackey and Juves both pointed out that their incubators would appeal to scientists on the front end by allowing them to focus on science.
"When you start a company, there are 10 million things you need to do that are everything but hardcore, pure science," Mackey said. Pfizer's incubator will have an on-site concierge to address the scientists' needs, providing support with purchasing, shipping and receiving, cleaning, security and regulatory issues.
Management guidance will be available through entrepreneurs in residence, and companies will have access to the incubator's scientific advisory board for help with more technical issues.
Both Pfizer and Biogen Idec are talking actively to start-ups and reviewing proposals from companies interested in a spot on the premises. Both also plan to launch incubator websites - Pfizer later this month and Biogen Idec within the first half of the year.
Pfizer will be looking for companies that fit into one of its 11 areas of therapeutic interest or that have compelling platform technologies. Mackey said she expects the majority of the proposals to come from San Diego research institutes like The Burnham Institute for Medical Research, The Salk Institute for Biological Studies, The Scripps Research Institute and the University of California in San Diego.
Biogen Idec will choose to incubate companies that focus on its core areas of oncology, neurology and immunology as well as other areas of high unmet need served by specialists. Thus far, it has identified potential start-ups predominantly through its network of scientists.
The companies' plan to draw ideas from a broad base of universities and research institutes gives the industry incubators an advantage over university-affiliated incubator programs, which can get "tunnel vision" by focusing only on their own science, Garvey said. A narrowly focused incubator that doesn't filter out the best projects can run into problems given the high failure rate of the industry, he said, adding that industry incubators will be limited by their sponsors' areas of interest.
Both Pfizer and Biogen Idec hope to expand their incubator programs - if they prove successful, Biogen Idec to its San Diego campus and Pfizer to New York, Boston and perhaps the United Kingdom.