The end of the rainbow for biotechnology startups has always been getting a product to market. But Agouron Pharmaceuticals Inc.'s decision to be acquired by Warner-Lambert Co. points up what a growing number of maturing biotechs know: as they bring products to market, companies face entirely new challenges that they may conclude can be better met from inside a larger organization.

Pharma companies can't be blamed if they see biotech companies with approved products as attractive targets. Buying an Agouron (AGPH, La Jolla, Calif.) for $2.1 billion in stock or a Neurex Corp. for $661 million in stock or an Athena Neurosciences Inc. for $638 million in stock makes perfect sense - it's a no-risk way of keeping their pipelines filled.

The issue for biotech companies with products is how and whether to stay independent, given the challenge of meeting Wall Street's EPS expectations at the same time they must keep moving new products through their pipelines. It's thus common to see newly profitable biotech companies starting to manage their R&D spending more carefully to meet investors' EPS expectations.

"If they could, everyone in biotech would continue to invest in R&D with no restraints," said Michael Hart, CFO and chairman of the management committee at NeXstar Pharmaceuticals Inc. (NXTR, Boulder, Colo.). "But eventually you must put that spending into a business model and force it into a more conventional plan where revenues drive R&D."

Companies at or near this point must consider the key rate-limiting steps in staying independent. According to Philippe Pouletty, chairman of SangStat Medical Corp. (SANG, Menlo Park, Calif.), there are a few situations where the decision is trivial and easy, such as when a company's drugs are aimed at large, fragmented markets where success depends on a 200-person sales force. "In those cases, you would have to devote all your resources to marketing the product," he said. "You'd be caught between spending money on marketing and spending money on your pipeline. It's also hard to start up a massive sales organization."

Beating the drug development odds a second or third time with the relatively thin pipelines biotech companies are capable of maintaining may begin to look less attractive to management that has been slogging for a decade, especially if a pharma company offers a degree of independence under an umbrella rich in infrastructure and funds. Indeed, it is beginning to look as if pharma companies will maintain their acquisitions as stand-alone entities in an effort to keep the qualities that made the biotech companies successful in the first place.

The issue may become more critical at certain inflection points, since it becomes harder to maintain high percentage growth rates as companies grow larger.

Pipeline is key