At a time when funding is scarce and it seems like more local life science companies are laying off or moving out of California, there are still opportunities being built for San Diego’s biotech startups through incubators.
Pharmaceutical giant Eli Lilly and Co. announced late last year that it was expanding its presence in San Diego with an 80,000-square-foot facility to support up-and-coming biotechs. In March, Pfizer also announced a local program that will connect startups with its experts and resources.
The goal for these incubators: Find and nurture the next potential blockbuster treatment. And the competition is fierce.
San Diego has always been a hotbed for innovation, where big pharmaceutical companies hunt for their next licensing opportunity or acquisition. But there is more urgency than ever for these giants to tap San Diego’s biotechs at the earliest stages for new ideas.
One driving factor is that many drugmakers face impending patent expirations on revenue-generating drugs, after which similar, generic medicines enter the market. Plus, companies need multiple solutions in their pipeline, because not everything that’s developed will make it to patients.
“Our goal is to work with cutting-edge scientists and if their innovation is aligned with existing Lilly therapeutic areas, that’s great, but it’s not required,” said Julie Gilmore, vice president and global head of Lilly Gateway Labs. “We try to have at least half of our companies working on things outside of Lilly’s core therapeutic areas. We really like to use this model to take some risks.”
The Indianapolis-based company recently launched a temporary Gateway Labs in University City to get the local program up and running for three to four startups. The permanent site at One Alexandria Square in Torrey Pines will launch early next year and house 10 to 12 companies.
For the new San Diego site — which is launching in partnership with Alexandria Real Estate Equities — Lilly will leverage its existing Lilly Biotechnology Center, a local research and development facility, and rotate in their experts based on local companies’ needs. Additionally, Gilmore said Lilly saw San Diego as a prime location for its expansion based on its proximity to research institutes, universities and other biotechs.
“The whole goal is, again, are we doing something together that neither of us could have done as well alone?” Gilmore said.
Building on a legacy of incubators & partnerships in San Diego
Joe Panetta, CEO of life science trade group Biocom California, can trace San Diego’s biotech ecosystem from where it’s been to where it’s going. Traditionally, big pharmaceutical companies entered the area through mergers and acquisitions, then they’d set up a research outpost, he said. Local incubators though have bloomed more in the past decade.
“I used to kind of kid around with people who would ask me about incubators in San Diego. I would say, well, we don’t have incubators because we’re one big concentrated incubator,” Panetta said. “You’ve got all of the research biotechs on the Mesa, you’ve got the big pharma companies, you’ve got the research institutes, you’ve got the universities, the service providers, all concentrated in a very small area.”
But he said having big pharmaceutical companies, like Eli Lilly, committing to building labs for San Diego’s startups creates a massive opportunity for both sides. Biotech startups raise their visibility beyond San Diego and get first-hand access to an established company that can accelerate their work.
And while big companies are always looking for faster and cheaper ways to develop drugs, Panetta explained it’s become more competitive in recent years. Incubators are one way for these drugmakers to get a first look at novel innovations.
“It’s become more and more and more expensive to develop a drug,” Panetta said. “It all boils down to competitiveness in the big pharma landscape … It’s a matter of: Can Lilly be successful in finding companies to move into their incubator in San Diego that are going to give them more in their pipeline and make them more competitive?”
At Gateway Labs, Lilly takes care of the operational details of running a lab so startups can focus on the science. But Lilly does its homework to ensure companies are a good fit and want to be active participants.
“This is not a real estate play for us,” Gilmore said. “It’s not about opening sites and trying to fill them — it really is about scientific engagement.”
It’s a no-strings-attached approach that offers companies wet labs, office space, mentorship and potential financing. The program brings in companies that have garnered that first significant round of funding — Series A — and Lilly typically works with them for four years, Gilmore said.
The company tapped San Diego as its third Gateway Labs site, building on two locations in San Francisco and one forthcoming in Boston. Since its launch in 2019, 20 companies have come through Gateway Labs.
Lilly has direct investments in roughly 60 percent of these alumni companies, inked four research collaborations and bought the rights to three innovations.
The model for breakthrough innovations stemming from big pharma incubators has its roots in San Diego. In 2012, Johnson & Johnson opened its first JLABS in San Diego as a model that sought to mirror the venture capital invigoration and support behind tech startups.
The proof that jumpstarting life science startups pays off can be seen in JLABS’s local success stories.
Since then, the San Diego program has supported 181 companies with $44.4 billion in investments and strategic partnerships. JLABS San Diego also boasts success stories of 16 publicly traded companies and 15 acquired companies.
One of those local alums, Arcturus Therapeutics, started at JLABS with two expert founders, but no hard data to prove their innovation would work. They were working on messenger-RNA, or mRNA, delivered medicines and vaccines long before the coronavirus pandemic. They used JLABS as a springboard for what is now a multi-million dollar public company delivering novel drugs and a COVID-19 vaccine.
Nick Mourlas, head of JLABS San Diego, said that Johnson & Johnson recognized over a decade ago that “a great idea can come from anywhere.” As such, the company has expanded its no-strings-attached incubator model globally to foster an innovation ecosystem in each location.
“J&J has an agnostic approach to innovation and we anticipate that over the next 10 years, 50 percent of the medicines we deliver to patients will originate from external sources and the other 50 percent coming from internal R&D,” Mourlas said.
Why does big pharma need incubators right now?
Big pharmaceutical companies inking partnerships with local biotech companies is nothing new. In fact, “partnering has been the lifeblood of the pharma industry for many years,” said Rachel Craig, senior vice president and managing director of life sciences strategy at research firm Clarivate.
“What has changed and what’s newer is that the rate of innovation has continued to increase year over year,” Craig said. “So it’s roughly two (times) the rate of innovation in the biotech space year over year for the last five plus years and the complexity of the innovation is massively up.”
As scientists have gained a greater understanding of the biology underpinning diseases and embraced more complex tools, like gene sequencing — the demand for new solutions has also increased. For example, the prevalence of immuno-oncology has risen in the past decade as a pathway for more precise cancer treatments.
“Pharma is paying attention at the earliest stages of development … and actually there’s more competition than there used to be even five years ago for deals at their earliest discovery stages,” she said. “So that’s another reason they’re looking to be in hubs and kind of see and get early access not just to the trends but to ownership of the innovation.”
Historically, a lot of big pharma’s top-selling drugs on the market started their life in the biotech space, explains Mike Ward, an industry analyst with Clarivate. But as many of these companies stare down patent expiration cliffs for revenue-generating drugs, he said there’s a “land grab” for the next generation of promising technology and drug discovery platforms.
“Nobody necessarily has the sort of magic bullet. It sometimes requires you to have different components,” Ward said. “Which is one of the advantages of having hubs,” he continued, “because some of these innovation hubs end up having expertise in particular areas.”
That’s what Pfizer is doing in its collaboration with Breakthrough Properties’ StudioLabs San Diego, which offers turnkey private labs for startups. The Pfizer Ignite program is an “end-to-end offering for biotech partners that leverages Pfizer’s resources, scale, and expertise to amplify and accelerate biotech innovation from preclinical R&D through the development lifecycle,” a company spokesperson said.
Pfizer wants to bring in startups — at any stage of development — that are working in an area of expertise, related to its existing San Diego research site. Some of these therapeutic areas include oncology, inflammation, immunology, internal medicine, infectious disease, vaccines and non-malignant hematology.
The pharmaceutical giant is looking to work with companies of anywhere from 10 to 80 people on flexible terms between two to five years.
The incubator is located on the Torrey View campus — a 520,000-square-foot research and development complex — where Pfizer recently inked a massive lease for its oncology business.
The Pfizer Ignite model also offers flexible mentoring and research services for a fee to help companies advance their products. There isn’t a promise of investment, but the company said its goal for any Ignite partnership is to potentially get them to a point where clinical data supports a deal with them.
These biopharma incubators are also an avenue for mitigating business risks during research and development. Only about one in 10 drugs being developed will get to the finish line, Ward said, even after billions of dollars are spent on research, development and clinical trials.
An analysis published in Drug Discovery Today of big pharmaceutical companies’ spending on research and development over the past 20 years found that on average, it cost $6.16 billion in expenditures per new drug.
Plus, startups can make decisions and move faster than giant pharmaceutical companies, making a partnership via an incubator more cost-effective.
“It’s not a simple process and the way that the sort of pharmaceutical company works is lots and lots of shots on goal,” Ward said.
By mentoring startups early on, pharma companies can see if a discovery “really does have legs” or if they need to change course, Ward said. And those relationships can be built over time in an incubator environment.
“And what is critical for biotech and biopharma partnerships to succeed is trust,” Ward said. “The way to build that is to actually have worked hand-in-hand with these individuals.”
