Editor’s note: A day after this column was distributed, Merck announced it will purchase Schering-Plough for more than $41 billion.

By Tom Still

MADISON – It’s unnoticed by most people outside the industry, but the world’s pharmaceutical companies have begun their own high-stakes version of a “March Madness” tournament. How these games are played can hold promise – and even a little danger – for Wisconsin’s emerging biotech and drug development firms.

“Big Pharma” has a big problem. Its internal development pipelines for new drugs have dried up just as patents are expiring on some of their blockbuster drugs. The industry’s biggest companies need fresh ideas before some of their biggest money-makers can be produced by competitors as cheaper generics.

Industry analysts see two main ways to replenish the pipeline. First, acquire small to medium-sized biotech companies that have innovative ideas in the lab but which lack the cash and the corporate expertise to bring them to market. That trend began a few years ago and accelerated in 2008, even as the economy slipped into recession.

The second is to acquire other pharmaceutical companies with portfolios not due for patent expiration, or with drugs on the verge of hitting the consumer markets. That trend began with a bang in late January when Pfizer and Wyeth pulled off a $68-billion merger, producing the fourth-largest public company in the United States.

Meanwhile, Swiss drug-maker Roche is engaged in a hostile tender offer for the 44 percent of the American biotech giant Genentech that it does not already own. Merck, Sanofi-Aventis and Johnson & Johnson are rumored to be searching for acquisitions – and companies such as Bristol-Myers Squibb and Schering-Plough are thought to be among the hunted. GlaxoSmithKline and Novartis also have enough cash on hand to go shopping, while Eli Lilly and AstraZeneca could be buyers or sellers.

For Wisconsin’s biotech and drug development companies, the free-for-all is two parts opportunity and one part danger. The opportunity comes from being a young drug company with a biotech or chemical compound that can fill a market niche. The danger comes from being forced to sell at fire-sale prices.

If there’s a technology sector that has been hardest hit by the financial crisis, it may be drug development companies. Their capital needs are high due to the rigorous federal approval process, which involves three rounds of expensive clinical trials. Venture capital has financed drug-development companies for years, but many venture firms have pulled back because they’re so reliant on other frozen financial markets to raise their own funds.

That means some drug development companies could be caught in a financial “valley of death.” These are companies that have raised enough money to advance an attractive drug – but not enough money to complete the arduous journey across “the valley.”

Big Pharma will be on the prowl for those cash-thirsty companies. Most pharmaceutical giants have money to invest, and some distressed early stage companies may find they have nowhere else to turn. Then again, other start-ups may like nothing better than a strategic partnership with a major pharmaceutical company.

Wisconsin is showcasing its most promising drug development, biotech and diagnostic companies. About a year ago, representatives of Pfizer met with a number of Wisconsin companies to review their progress. In April, Eli Lilly is expected to kick a few biotech tires of its own. Both exercises have been organized by the state Department of Commerce with the help of key industry groups in Wisconsin.

Although it still produces only a fraction of the world’s drug development start-ups, Wisconsin is moving up Big Pharma’s search-and-screen list. That’s a good thing, because those major companies can provide capital, expertise and sales channels that otherwise aren’t easily found in Wisconsin. The maturing of Wisconsin’s drug-development industry may prompt some fire sales, but it will also keep many of our most promising companies at home.

Still is president of the Wisconsin Technology Council. He is the former associate editor of the Wisconsin State Journal. Companies interested in the Eli Lilly visit should visit http://www.commerce.state.wi.us/BD/BD-SA.html to learn more about a March 11 application deadline.