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What Lies Ahead for San Diego Life Sciences

Opinion

Xconomy San Diego — 

We’re at the end of one of the most challenging years in recent memory for life sciences companies. However, a broad transformation is under way in the industry, and profitable new opportunities are on the near-term horizon. From my perspective, there are three major trends worth considering and focusing on as the new year unfolds.

—Big Pharma Reaches Out to Biotech for Pipeline-and Deals

For strategic reasons, large pharmaceuticals continue to look outside their walls for much-needed new pipelines-largely because their own are drying up and generics are making increasing inroads. I noted this trend last spring, but now it’s really playing out, with serious and significant ramifications.

In an effort to expand product portfolios, bring new products to market sooner, and hasten a return on investment, big pharma is aggressively looking to collaborate with biotech on a number of levels in the hope that this will provide them access to innovative technologies. Eli Lilly, for example, recently joined with technology companies and universities and opened up a large R&D center in San Diego to identify and capture innovative biologics that have commercial promise.

The major thrust, however, will likely be big pharma’s acquisition of cutting-edge biotech companies. Indeed, we believe 2010 will be a big deal year in life sciences. Unfortunately for big pharma, however, biotech valuations are rising, and strong state-of-the-art innovators won’t come cheap.

When it comes to capital-raising in the biotech sector, we’re also seeing a good amount of activity in the private and public markets.

But there’s also an interesting dynamic that’s worth mentioning. We’ve seen some IPO filings that are followed a short time later by a big M&A deal; we’re watching a host of M&A transactions close these days in biotech, yet not all IPOs presage a deal. A number of biotech companies appear to be filing for IPOs as a way to strategically validate a higher valuation. To put it simply: They want to be acquired, and they really don’t want to go public and have to navigate excessive red tape and regulatory hurdles from legislative measures like Sarbanes-Oxley. What’s more, the cost of raising capital to get to the next level in the valuation cycle is daunting.

I’ve also noticed how many of the best biotech companies are increasing their focus on innovative technologies and raising plenty of venture capital money in the process. A good example is San Diego’s Fate Therapeutics, which has made rapid progress in advancing its pipeline of stem cell modulators and in establishing a leading industrialized platform for induced pluripotent stem cell technology. Thanks to its fairly strong track record, Fate recently completed a $30 million Series B financing led by OVP Venture Partners. Joining OVP in the financing was a syndicate of corporate investors, including Astellas Venture Management, Genzyme Ventures, and an undisclosed corporate investor. The three co-leaders of the company’s Series A financing—ARCH Venture Partners, Polaris Venture Partners, and Venrock-also participated in the latest round of financing.

—China’s Emerging Role As a Biotech Competitor

Even though their intellectual property in biotech isn’t that strong right now, the Chinese have indicated that they’ll spend well into the billions to spur R&D. The question in the end is whether they’ll ultimately be able to challenge the United States for biotech supremacy.

If enough U.S.-trained Chinese return home, this is a possibility. And if U.S. VCs continue to set up in China and invest in fledgling biotech start-ups there, it could become more than a possibility.

Despite the hurdles to doing business in China, including the uneasy accommodation of private investment and concerns regarding intellectual property protection, Novartis and several other large pharmas already have opened up R&D operations there. This type of move reinforces our view that China’s biotech efforts will be slow, gradual, and strategic; but there’s little doubt that the Chinese will eventually be a competitive force in biotech.

—President Obama’s Health Care Reforms Will Ultimately Drive Growth

Experts forecast that health care reform will take away from the life sciences industry’s top line for two or three years-until 2013. But by 2020 these new initiatives will be driving growth for big pharma and biotech because more Americans will be accessing health care.

In addition, the FDA is showing signs of greater accommodation on the regulatory side—more good news for big pharma and biotech as they seek to reduce approval times, which enables expansion and enhancement of pipelines.

For life sciences companies, the plan of action is fairly straightforward: continue to focus on key drug candidates that can make a difference—both financially and in people’s lives—ratchet up strategic business development activity, deal making, collaboration, and take advantage of what appear to be improving capital markets.

Jim Pope is a partner in the San Diego office of the Moss Adams accounting firm, which he joined in 2002 after 26 years with a Big 4 public accounting firm assisting fast-growth, dynamic, multi-national companies. A specialist in the life sciences industry, his areas of expertise include mergers and acquisitions, strategic tax planning, international tax planning, and corporate restructurings. Follow @

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