U.S. Biotech Clusters Are Losing Their Anchor Tenants, and It Hurts

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grow on trees—they need to learn somewhere. And great people want to work alongside other great people.

“You don’t really learn biopharma at Harvard Business School or Stanford Business School. You probably don’t learn it at Pfizer either,” Salehizadeh says.

Chris Rivera, the president of the Washington Biotechnology & Biomedical Association, built his biotech career learning from Henri Termeer at Genzyme. It paved the way for him to become CEO of a Bay Area biotech company, Hyperion Therapeutics, and now the regional biotech trade association leader in Seattle. One thing he picked up in his years working in all three regions is that a great biotech hub needs an anchor.

“Having a good, stable recognizable brand name company is very, very important to a region,” he says.

While Rivera contends that regional clusters do need an anchor, he also says that stability, training, and human capital can come from branch operations of Big Pharma companies. Seattle, for instance, gets some strength and stability now from having regional R&D operations for Amgen, Bristol-Myers Squibb, Novo Nordisk, and Gilead Sciences.

Chris Rivera, president of the Washington Biotechnology & Biomedical Association

“It’s important to have multinationals set up shop in your backyard,” Rivera says. “They’ll import talent directly into your region, and some of them may spin out and decide to start their own companies later on.” He adds that these stable players help provide a diversified employment base, which is important when a local biotech company recruits someone to the region, and needs to find a place where a trailing spouse can advance his or her career as well.

Fair enough. But as I said to Rivera, it’s easy for some revolving-door Big Pharma CEO a continent away to whack a regional branch as part of some global cost-cutting move. Merck has done that with various West Coast operations in all three major biotech hubs—San Francisco, Seattle, and San Diego—over the last 10 years. I don’t believe these regions should count on Big Pharma, with all its myriad R&D problems and shifting priorities, to be the pillars of local biotech prosperity and innovation.

When you look at what’s happening globally, I get even more worried about the prospects for the regional biotech clusters. The Big Pharma companies are losing billions of dollars in revenues every year as they lose patent protection on their aging blockbusters, and the only way they can come up with enough innovative new products is to acquire more.

As Salehizadeh tallied up recently, Big Pharma is sitting on $350 billion in cash, and it needs to use some of that to buy smaller companies. That might be good for investors, and it can be good at times for a region when it frees up a few talented entrepreneurs to pursue the next exciting thing.

But when you look at these transactions through a regional lens, the story is a lot more grim. Jobs are usually lost when these deals happen. The best emerging biotech companies with growth potential—companies like Onyx, BioMarin, Seattle Genetics, Vertex, Regeneron—these are the next companies in the Big Pharma crosshairs. Will they stay independent and grow into regional anchor tenants? Or will they feel pressure from shareholders to take the Big Pharma money and run?

I hope they all stay independent, even though I know there’s little chance of that happening. As someone who lives in Seattle, I hope Seattle Genetics grows up into a profitable anchor, rewards its shareholders with consistent growth, employs 1,000 people or more, and becomes like our region’s Genzyme.

But I have to admit, one of my nightmares is that I wake up on a Monday morning with a press release in my inbox that says something like “Seattle Genetics has been acquired for $6 billion, a 95 percent premium over its previous day’s closing stock price.” If that happens, all would not be lost for Seattle. We would still have great research. But we’d no longer have an anchor biotech company. It would be a deep and profound loss to the place I live. I hope that day never comes.

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10 responses to “U.S. Biotech Clusters Are Losing Their Anchor Tenants, and It Hurts”

  1. Kevin says:

    Nice article. Ideally, I agree with your desire for more anchor tenants to help build our biotech regions, but the biotech media (including Xconomy) has also been buzzing with excitement about the “new biobusiness model” in play — bioentrepreneurs funded by relatively short-term VCs looking to build incremental value then sell to big pharma. It is difficult to have it both ways in today’s business environment. The Boston/Cambridge region seems to be benefitingin a big way from large pharma setting up research operations there, even if the HQ’s are in other places. I agree with Chris Rivera — sometimes when large(r) pharma closes or downsizes its satellite research operations, opportunities arise. In Seattle for example, Alder is an example of what arose when Celltech closed its regional presence. While not a huge operation, Alder is now employing close to 100 people in the Seattle area – many folks with experience at companies like Zymogenetics, Immunex, Icos and others (as well as some of the Celltech crew).

  2. Luke Timmermanluketimmerman says:

    Kevin—fair point, but I don’t think I’m trying to have it both ways. I recognize that the VC model has changed, entrepreneurs need to be more creative and resourceful to get the financing they can, and it’s extremely difficult to build new companies today that have ‘anchor’ potential. Given those circumstances, I’m more interested in regions doing what they can to hold onto the existing companies they have with potential to be anchors, like SeaGen. Alder is another one that has made a lot of smart moves, and has potential, but is still earlier in development.

    • Kevin says:

      Understood, Luke. Not sure what regions can do to hold on to current anchors in the face of free-market M&A, but interested if anyone has any thoughts on that topic.

  3. Carl Weissman says:

    Luke and I have gone around and around about this, but I think the reality is far simpler today than maybe ever before: there is currently almost no IPO market for emerging biotech companies. That creates a pressure that is almost insurmountable. Biotech startups have, in reality, only one real place to turn for the incredible capital needed in this industry to move forward into clinical trials, let alone to generate a human proof of concept (usually in phase II). That is venture capital. But venture capital survives on investment from limited partners like endowments and pension funds. Those investors only have so much patience. The average biotech company now takes 8+ years from inception to exit. That is very near the limit that any venture investor can justify, let alone withstand. Without the public markets, acquisition is the only place for these companies to turn. That does not generate new candidates to be anchor tenants. But it does, in my opinion, represent the returns that can provide critical mass to a biotech cluster and enable that cluster, in a very agile way, to develop and import talent, technology, and capital.

    Genentech, Amgen, nor even Seattle Genetics ever faced anything like what is being faced in the public markets for emerging biotech companies today. Unless that dynamic changes, and the IPO market re-emerges as a viable exit option for venture investors, there simply is nowhere else to turn. We are in an era of extreme selection pressure where adaptability will define successful biotech clusters. We had better adapt if we want to survive.

  4. steve says:

    Hi Luke – I don’t agree. I’m in the DC area and there are a number of companies that were started by ex-MedImmune employees after it was bought by AZ. Similarly, there will be a number of startups from HGS employees who leave after the GSK purchase. Having large pharma come to the area increases the stability of these companies, allows for easier partnering with local biotech and spurs development of new companies by execs that leave with enough money and security to begin startups. All together I think it’s a big plus for the region.

  5. Luke Timmermanluketimmerman says:

    Steve makes a good point here about some of the regional benefits that can come from a Big Pharma acquisition. It tends to free up the entrepreneurial talent to start the next big thing, repeating a virtuous cycle. The problem, though, is what Carl describes. Today’s VCs can’t realistically expect good returns from an IPO, which makes it much tougher for new startups to get a decent return in a reasonable amount of time. There are some great new companies being started today, but they only make up part of a regional biotech cluster., They can’t really replace all the intangibles that an anchor provides. I hope the boards of the few remaining biotech anchors consider the community fallout of their actions when Big Pharma and its investment banker friends come calling.

  6. interesting article and great discussion below. The concept of anchor business is also true to fields outside of biotech. One can think of RIM in Waterloo or Nokia in Finland as example of an anchor technology companies. I share the optimism of some of the commenters such as @985bf84785f8f28f90a5020d27177d91:disqus about the new class of entreprenerus and founders that arise after M&A of an anchor. However, it will become a worry if no anchor biotech is waiting to emerge. Obviously, this will hit smaller regions harder than bigger ones. For example, the Boston area is so rich with biotech and talent that they don’t necessary need an anchor talent to continue developing biotech companies.

  7. Bottom line: The demand for investor ROI exceeds the speed at which new technologies, devices and drugs can be discovered, tested and approved.

  8. steve says:

    Luke, I’m not sure I understand your response. The anchor isn’t gone, it’s just under new ownership. MedImmune is still MedImmune only they are directed by AZ. People in the area still interact with them, still do deals with them and they still support the local economy. MedImmune had 1,700 employees on its payroll at the time of the 2007 acquisition and today it has 2,600. David Mott is now a partner at NEA so that gives local biotech a possible entre into those VC’s. Other execs started Amplimmune and Zyngenia. Zyngenia got $10MM in its Series A in part from NEA; they also got large grants from the state of MD, undoubtedly because of their executive team. So from where I sit as an observer of the MedImmune purchase, it’s been an overall win for Maryland biotech. We’ll see if the same follows from HGS but our experience here runs counter to the thesis of your article.

  9. Smoke says:

    The new anchor tenants in the next ten years may not be that big. In fact it sounds like they may just be names on paper with assets and can reside anywhere. The LLC revolution, obviously it could be just a fad, but with the margins these companies are pulling in for milestones, it’s hard to see them disappear. http://www.fiercebiotech.com/story/biotechs-reinvent-ground-build-value/2012-08-13 I think there will always be anchor tenants, but it seems without the need to house 2600 employees, the definition of anchor tenants should be defined differently. And is it really the big drug dev companies or is it the funds, which are the only ones that can currently keep up with the investor ROI expectations. My only problem with a true anchor tenant is that they become too large to adapt to the new marketplace.