The role of bio-incubators in addressing big pharma’s productivity problems

John Breen

14 November 2019

Drug Approval Process

The cost of getting a drug through the approval process and on to the market has spiralled relentlessly upwards over time.  In the 1950’s a drug would require an average R&D investment of less than $50 million to make it to market.  By the year 2000 the average spend had risen to $1 billion and is now estimated to be in the region of $2.6 billion.

Return on Investment

The result of cost inflation in drug development is a miserly return on investment (ROI) for the big pharma companies (1.9% in 2018).

The root causes of this low ROI are manifold and include increasing regulatory hurdles, financial pressures on healthcare services, the ever growing back catalogue of cheap generic drugs and dis-economies of scale.

Dis-economies of scale

The economies of scale expected to arise from the merger and acquisition activity in the pharmaceutical industry since the start of the 2000s has done nothing to arrest the decline in R&D productivity.  Small pharma companies are much more productive than the pharma giants.  Back of the envelope calculations suggest that pharma start-ups get 4.5 drug approvals per billion dollars of research spend compared to less than one for big pharma.

36 of the new molecular entities approved in 2018 were initially developed by smaller pharma companies.  This compared to 9 for the top 10 pharma companies.  Smaller companies now dominate the early development of new medicines.

Productivity of pharma start-ups

Why are start-ups and small pharma companies more intrinsically productive than big pharma?  It can be partly explained by the tendency of start-ups to have healthier attitudes to risk and an ability to adapt and take advantage of emerging technologies.  The increased productivity of pharma start-ups may also be attributable to the ability of venture capitalist funders to judge better than big pharma when to kill projects.

The rise of the bio-incubator

Pharma start-ups need access to facilities and business supports in order to flourish and grow.  This has led to a dramatic rise in the number of bio-incubators, accelerators and innovation hubs.  Many incubators are supported and located within third level colleges and universities while others are set up as self-sustaining business ventures.  At state level, governments funding bodies have realised that bio-incubators are a vital piece of infrastructure and have been increasingly willing to support them financially.

Number of bio-incubators USA and Europe

Year of opening of a subsection of bio-incubators in Europe and USA. Source:

A global network of big pharma backed innovation centres

Big pharma have also been keeping a watchful eye on the start-up sector and some have decided to take it a step further by setting up their own incubators.  Johnson & Johnson (J&J) have set up a global network of open innovation centres (JLABS) focusing on pharmaceuticals, medical devices and the consumer and health tech sectors.  Astrazeneca run their own incubator (Boston BioHub), Bayer have set up one in Berlin, Merck have Accelerators in Germany and China.  It will be interesting to see whether this model of supporting biotech start-ups will reap dividends for big pharma.

The budding entrepreneur will need to decide the merits of joining a big pharma backed bio-incubator or one of the many independent ones.  However, one thing is certain, there has never been a better time for would be bio-entrepreneurs to get started.

Kinetic Labs – an incubator for biotech start-ups located in the South East of Ireland will be open for business in 2020.