Biotech bounce

That's where biotech startups and their venture capital backers can lend a high-priced hand. Funds, noting Big Pharma's healthy appetite, are putting money to work fast. The average quarterly level of biotech venture investingjumped to nearly $1.5bn in the first half of this year from an average of $1.1bn in 2005 and 2006, according to VentureOne.

Johnson & Johnson, Eli Lilly and Wyeth (NYSE:WYE) each generate a quarter to a third of their revenue from biologics, and Roche around double that. But Pfizer, Merck and GlaxoSmithKline have little exposure, making it easy to anticipate where interest may be strongest. AstraZeneca's $15.6bn MedImmune purchase started this year's feeding frenzy. Smaller deals have included Bristol-Myers Squibb's takeover of Adnexus, Schering-Plough's purchase of Organon, and Glaxo's acquisition of Domantis. Pfizer, facing patent losses on Lipitor and, later, Viagra, is focusing particularly hard on biotech.

Big Pharma companies would prefer to buy products that are in the later stages of testing. But those assets are rare, so prices are rising even for businesses with drugs at earlier stages of development. Biologics have a somewhat better success rate than small molecule drugs, but they remain far from a sure bet. That means buyers are paying higher premiums and more cash up front for assets that remain very risky. Startup investors aren't complaining. But if pricing and risk move too far out of sync, partnerships may again become the preferred route to new drugs.