Fahd Riaz Partner DLA Piper
Lauren Murdza Partner DLA Piper

Start-Ups and Universities Are Redefining Outsourcing

The past several decades have marked a shift in how the pharmaceutical industry innovates.  In the 1980s, R&D labs of the biggest pharmaceutical companies led in the development of new drugs.  But as those pharmaceutical companies have grown over the years through mergers and acquisitions, there has been an inverse effect on such companies’ ability to innovate.  With significant cash reserves, but a corporate structure that is evolving away from large internal research and development budgets, big pharma has been left with no other choice than to outsource the development of innovative technologies to the labs of universities and early-stage companies, with the hope of identifying valuable new drugs and getting them to market more efficiently.

As big pharma continues to grow, there is increased pressure to bring new and innovative products to market.  However, as these companies have grown, they become a victim of their size, with an inability to maintain a nimble and creative infrastructure.  With generic competition entries, and the biologic and biosimilar framework in flux, it is crucial that big pharma gets promising new products into the pipeline.

At the same time innovation among big pharma has seen a slow-down, a burgeoning industry of small pharmaceutical and biotech companies has emerged.  These companies are led by passionate and creative entrepreneurs, but often lack sufficient funding to support their R&D ambitions.  A similar situation exists within universities, where funding from the federal government to support R&D has become increasingly difficult to obtain, at levels necessary to support the development of a new drug.  Venture capital investments are a good fit for certain start-ups and university labs, but such investments tend to be available only to a small subset of pharmaceutical innovations.  These investments tend to focus primarily on healthcare information technology and medical devices where there is an expected return on investment within three to five years.

Who better to fund the research and development of new drugs within start-ups and universities than big pharma companies who have stockpiles of cash and are starving for innovative technologies to put into their product pipelines?  The aligned needs of these parties has led to a flurry of collaboration and teaming agreements between industry and academia and technology spin-outs aimed at bringing new products to market.  These deals range from acquisitions of start-ups, to the funding of early-stage research and development activities in exchange for an exclusive license or options to intellectual property that results from the research and collaboration agreements with various levels of decision making with respect to the project. 

These alternative avenues for obtaining an R&D pipeline also allow big pharma to gain access to the scientists and physicians who are at the cutting edge of research in a specific field and have had decades to concentrate on their field.  There is also downside protection in that funding can be withdrawn from failing projects without big pharma having to deal with winding down the R&D infrastructure put in place for the project.  Additionally, with respect to not-for-profit academia, the interests with respect to the collaborations may be subject to university mandates regarding academic freedom, collaborations and publications.  

Unlike funding from sources like the federal government, investment from big pharma can come at a higher cost to start-ups and universities.  In order to protect their investments, big pharma is likely to insist on more oversight, approval, and involvement in the research and development being performed.  Too much oversight can hinder the very innovation that big pharma is seeking when approaching a start-up or university in the first place.  Where research is sponsored by big pharma, there is also a risk of treatments with large market potential carrying the day over treatment of rare diseases.  Ultimately, it is important that parties receiving funding negotiate sufficient control over the research being conducted. 

A start-up or university may have no choice but to collaborate with a big pharma company in order to progress a research program with enough resources behind it to bring it to market.  However, it is important in doing so that the innovators employ experienced business development professionals with big pharma experience, who can successfully negotiate the important terms of a deal.  In the end, if the terms of the deal are reasonable, all parties can win from the successful development of a drug.  Big pharma is not what it once was, but through outsourced innovation, these companies leverage their resources to remain critical.

Fahd Riaz (fahd.riaz@dlapiper.com) and Lauren Murdza are partners at DLA Piper.