Last week there was a blog post by J. Mike Smith titled “[Business Models] The End of Biotech?”. The post, based on interviews with CEOs and VCs in the industry, opined on what we know about the industry and suggested new approaches that could refocus the industry.
Any time the idea is postured that biotech is dead it is all about money and not the science or pace of discovery. It has been largely accepted that the “old” biotech investment model is broken and unlikely to be fixed anytime soon. But what is meant by the “old” model?
Largely predicated on the early industry success stories of Genentech and Amgen it involved breakthrough technologies and drugs creating multi-billion dollar companies and stratospheric returns for investors. It evolved over time to include more risky companies with me-too products for niche indications that carried significant valuations based on the promise of new therapies.
Eventually clinical disappointments and the choppy market began to erode confidence in the sector. However, you don’t have to go back too far to see the returns were still there. Myogen (2006) and Pharmion (2007) and were both sold for over $2.5 billion. Both deals were good enough at the time to validate the “old” biotech model.
The market crash of 2008 changed all that. It hammered venture portfolios and subsequent fund raising efforts and the IPO market disappeared. Until the IPO market returns with reasonable vigor venture investment will continue to be scarce and the “old” model will remain preserved for the chosen few.
But if we exclude money from the conversation do the fundamentals of the biotech industry point to a paradigm shift in how drugs are developed?
Let’s look at what we know as suggested by Mike’s post.
1. Biotech is high risk, with a long time horizon. True. Risk is inherent in biotech and always will be. Drug development times are stretching out regardless of resources. More knowledge begets more data and FDA review times are not improving.
2. Biotech companies appear to be good at applied research (taking compounds and ideas that have come out of basic research labs) and development (where they are nimble, focused, creative). Still true. Small, better focused teams are more productive and creative. Direct access to senior management and time-efficient decision making helps biotech.
3. Biotech companies are not so effective due to a lack of resources or core competency expertise in the areas of later stage development and further commercialization. Generally true. More companies are turning to clinical research organizations (CRO) earlier to perform Phase 2 and 3 clinical trials making the core competency argument less of an issue. The decision to build a proprietary sales force is a legitimate competency question, however, many biotech drugs address smaller markets and can be sold through small concentrated sales teams. This was historically a key component of the ‘old” model particularly in oncology and for orphan drugs. You can’t make money on development, but you can on commercialization.
4. Big Pharma is not so hot at translating basic research into commercial products. Big Pharma invests billions in basic research and one could argue that the return on that investment in terms of the number of new products has been inadequate. However, from pre-clinical development through commercialization they are very good, in part, because of their comprehensive check-the-box approach.
5. Big Pharma is effective due to resources and experience in later stage development and commercialization. True. Big Pharma has comprehensive manufacturing and clinical and regulatory affairs groups that know how to navigate the product approval process. Rarely does a New Drug Application or Biologics License Application from Big Pharma get rejected by the FDA. Reimbursement processes, sales and distribution channels and relationships with physicians are well established in advance of a new product approval.
The fundamental relationship between biotech and Big Pharma remains relatively unchanged. The big difference today is availability of capital for biotech. Have the market dynamics forever changed such that the overall biotech model will be altered? I’ll look at that in my next post.