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What Technology Can Learn from Big Pharma

Drugmakers have long dealt with proprietary expiration dates tighter than those confronting technology companies. They spend R&D money on acquisitions and strategic investment in startups

With rapid change on the Web amid the information revolution sparked by the Internet, it's easy for the technology industry to think it's unique because it constantly breaks new ground and does things nobody has done. But other sorts of businesses have already undergone some of the same radical shifts, with no less a stake in the future.

Take health care, for instance. We often think of it as a huge, lumbering beast, but in the past 200 years medicine has undergone a series of revolutions that are at least equal to those we see in technology and information.

Modern chemistry and biology were only just beginning to stir in the 19th century. In 1967, however, Dr, Christiaan Barnard started transplanting hearts.And it wasn't until the 1950s that James D.Watson and Francis Crick discovered DNA. Less than 50 years later, the first draft of the human genome was produced. If that's not rapid, world-shattering change, what is?

Big Pharma has faced other challenges that the Web industry is only starting to comprehend. Drugs can take years to design, test, and manufacture. Accordingly, spending to search and develop pharmaceuticals is very high overall: According to the European Union (PDF), five of the world's top 10 companies in R&D spending are in drugs or biotechnology. (Among traditional technology companies, only Microsoft, Nokia, and Samsung feature in the list.) The expenditure amounts to a far greater proportion of total turnover—Pfizer spends around one seventh of revenues on research, while Apple spends about a dollar on R&D for every 13 it brings in.
Generic Windows?

And where the planet's electronics giants spend billions to fight piracy and patent infringement, pharmaceutical companies are rapidly adjusting to the fact that they receive only 12 years before patent protection ends and other companies can introduce generic drugs. Imagine a situation in which Windows 98 were already old enough to be forcibly open-sourced today for an idea of how disruptive that might be.

So what does the pharmaceutical industry have to teach us?

First, be careful. Your property and ideas won't be proprietary for long.

Second, while new discoveries are important, revolutions can be reliably predicted most of the time. From the outside, Barnard's transplants were a radical shift in surgery. From inside the profession, it was an obvious step after previous organ transplants.

Third, the way money is spent will inevitably change. It's already happening, an issue addressed in the latest VC Bulletin from Go4Venture, a London-based advisory group for European entrepreneurs and investors.(You can sign up to receive the monthly here.) The latest dispatch outlines the state of dealmaking in Europe (more frequent but less valuable, as reflected in figures we wrote about last month) and points out that Europe's technology-financing system is undergoing a significant shift:

There is a major structural change in European venture capital financing where corporates will play a more prominent role going forward. Corporates are facing a lasting ex-growth market environment (courtesy of debt-laden Western economies) and realize that internal R&D is rather expensive and just cannot cover the whole front of innovation. For corporates, investing in startups has the additional advantage of encouraging a more entrepreneurial culture inside and creating a stream of acquisition opportunities. Pharma has been there before, in an early move precipitated by proprietary drugs coming off patent, and we are now seeing the pharma model spreading to other IT-driven sectors.

Spending more of the R&D budget on other companies doesn't just mean acquisition, although the startup world is familiar with a process that's clearly the most common option. Just yesterday, Google spent $60 million on the slightly odd purchase of British price-comparison website BeatThatQuote.It could also mean a greater measure of early investment in small companies, such as the $100,000 Microsoft is putting into Moscow-based anti-piracy startup Pirate Pay.

What it ultimately means is faster growth in the number of deals, along with opportunities for innovative startups and smart entrepreneurs. Paired with the aggressive, high-valuation investment strategy of a company such as Russia's Digital Sky Technologies, it seems likely that we'll see things explode in Europe and elsewhere over the next year or two.


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