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Economic Darwinism
01-24-2006
by Chris Anderson  |  Email the author
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I was reading a bed-time story to my son the other night about a husband and wife who adopt a stray dog named McDuff. The setting for the story, by my guess, is sometime in the 1940s or early 1950s. At one point in the tale, the man of the house receives a Christmas gift of galoshes. My dad had galoshes. I remember them black as the tires on our car, waiting for a rainy day when he would stretch these rubber overshoes over his dress work shoes to protect them from the water outside.
 
I'd venture a guess that 50 or 60 years ago you could find galoshes in millions upon millions of homes. I imagine companies whose main business was selling galoshes complete with assembly lines filled with workers whose job every day was to crank them out. For some, making galoshes was a darned good business.
 
But not anymore. I think my dad was the last person I ever saw with galoshes on and that was nearly 40 years ago. Sure, you can find galoshes online to buy and I even believe they made a fleeting trendy comeback a few years ago. But the market for galoshes these days is a mere shadow of what it once was.
 
So what does this have to do with drug discovery and the pharmaceutical industry? Well, nothing and everything.
 
It has everything to do with this industry because it is a stark reminder of the harsh reality of survival of the fittest in the business world. Bellwether products one moment can soon become the anchor that drags you to the bottom of the sea. That means companies need continuously to make decisions about what the environment for their company and products will be. A look at happenings in this industry provides ample cases of companies altering their corporate DNA in the hopes of maintained health and survival.
 
An example of adaptation this past year has been how biotech and life science companies, especially younger companies, funded their operations. It was only five or six years ago that a couple of people with a promising new technology could raise buckets of cash through an IPO to fund their operations for years. Not anymore.
 
But just because IPOs continue to decline, it doesn't mean that there is any less a need for these companies to find sources of cash. According to life sciences consulting and venture capital firm Burrill & Company, life science companies were able to raise more than $32 billion in funds during the year, $15 billion of it—or nearly half—via partnerships with other (presumably larger and richer) companies. In short, there was money available, companies just needed to know how to adapt in a different environment to get their hands on it.
 
Two items in this month's issue also suggest the forces of business evolution at work. One story involves Discovery Partners International and the expiration of a long-time collaborative agreement the company had with pharma giant Pfizer. This change in the business was significant enough for DPI to announce the closing of its facility in South San Francisco, Calif.—not surprising considering the collaboration with Pfizer had pumped $92 million in revenue into the company since 2002. Now, faced with the reality that it may not be able to compete with offshore companies in the chemistry services arena, the board and new CEO of DPI will instead refocus the company to one that develops more partnerships with pharma to aid in discovery and potentially develop more robust and long-lasting revenue streams down the road.
 
And that is a view shared by Mark Gessler, CEO of Gene Logic. Gessler says the management at the 9-year-old company realized roughly five years ago that its original business model of genomic and non-clinical services "was not the best model for us going forward."
 
With that understanding, the company recently launched a drug repositioning division aimed at pharmaceutical companies whose compounds have stalled in clinical trials. Pharma needs a way to squeeze some money out of these compounds after spending hundreds of millions of dollars only to see them fail. Gene Logic understands that some pharma companies might not be willing to part with even more cash in the hopes one or two compounds can be repositioned. Gene Logic takes on some risk to work on the compounds, pharma doesn't have to spend a lot of extra cash, and in the process Gene Logic has evolved.
 
Two companies, two different needs to adapt and both wind up in virtually the same place: a blend of service and partnering is the healthiest revenue mix. In other words,  both DPI and Gene Logic management teams made the determination that operating primarily under a fee-for-services model is really just a big pile of galoshes.

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