Biotech Reinvented - Where Do You Go From Here?

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Pharmaceuticals and Life SciencesBiotech reinventedWhere do you go from here?

Table of contents

Table of contentsIntroduction2How well has Biotech really done?2A business model that’s bust?3Blurring boundaries7Putting up a united front8The size of the prize12Chain links14Making the sums add h Reinvented

Table of contentsIntroductionThe biotechnology industry (Biotech) isnow about 30 years old – a long enoughtime in which to evaluate how it’s done.Unfortunately, despite some notablesuccesses, it hasn’t completely fulfilledits promise.The business model on which Biotechhas historically relied is also breakingdown, as the research base moves eastand raising funds gets harder. And thedistinctions between Biotech and thepharmaceutical industry (Pharma) aredisappearing, with the convergenceof the two sectors. But Biotech can’tturn to Pharma for guidance becausePharma’s business model has otherflaws – as we explained in “Pharma2020: Challenging business models”,the White Paper we published in April2009.1 So what should Biotech do?We believe it should capitalise on theopportunities emerging in the healthcareWhat is Biotech?Biotech isn’t a distinct sector somuch as it’s a collection of disruptivetechnologies for discovering anddeveloping new medicines, anddiagnosing and treating patientsmore effectively. We’re going tofocus here on Biotech’s businessmodel – more specifically, its impacton pharmaceutical productivity, andits sustainability (or otherwise) inthe current economic and scientificenvironment.2arena – and reinvent itself by adoptinga more collaborative approach. Inthe following pages, we’ll look at themain trends dictating the need fora new way of conducting researchand development (R&D), and twoorganisational concepts that would helpbiopharmaceutical companies becomefar more efficient. We’ll also touch onthe implications for other parts of thevalue chain.How well has Biotechreally done?If the birth of modern biotechnologycan be pinned down to any particulardate, it’s probably 1980, when the USSupreme Court ruled in Diamond v.Chakrabarty that a genetically modifiedmicroorganism could be patented.2Amgen was formed the same year, andGenentech (now part of Roche) wasfour years old.3 Since then, Biotechhas profoundly changed the sort ofresearch Pharma conducts and the sortof products it makes (see sidebar, Whatis Biotech?). But how well has Biotechreally done?The good news is that it’s producedsome valuable new platformtechnologies and treatments. RNAinterference has, for example, provideda way of analysing gene activity toidentify novel disease targets. Morethan 100 different recombinantprotein-based drugs and at least 40‘companion’ diagnostics have also beenlaunched, and some of these therapieshave proved very effective in treatingcomplex conditions.4 Five of the 10 topselling medicines in 2009 originated inBiotech’s labs (see Table 1).The bad news is that Biotech hasn’tmade a significant difference toPharma’s productivity, measured interms of the number of new treatmentsreaching the market. Between 1950and 2008, the US Food and DrugAdministration (FDA) approved 1,222therapies (1,103 small molecules and 119large molecules). Given that it takes about10 years to develop a drug, the totalnumber of approvals should have startedrising in about 1990, if Biotech hadsucceeded in improving Pharma’s output.But, as Figure 1 shows, the numberof approvals has remained broadlyconstant.5The reason’s simple: Biotech hasn’treduced the inherent risk in drugdiscovery and development. Averagedevelopment times for the kind ofmolecules on which biotech firmsgenerally focus – i.e., recombinantproteins and monoclonal antibodies – areslightly longer than they are for smallmolecules (97.7 months versus 90.3months). Average development costsare much the same (US 1.24 billionversus US 1.32 billion). And the overallsuccess rate is still only 9.1%, comparedwith 6.7% for a small molecule.6 In otherwords, biotech companies don’t developnew medicines much more quickly oreconomically than pharma companies do.PwC

Table 1: The best sellers of 2009RankProductTherapeutic SubcategoryTechnologyWorldwide Sales ( m)1LipitorAnti-hyperlipidaemicsChiral chemistry2PlavixPlatelet aggregation inhibitorsSmall molecule chemistry12,5119,4923Seretide/AdvairOther bronchodilatorsSmall molecule chemistry7,7914EnbrelOther anti-rheumaticsRecombinant product6,2955DiovanAngiotensin II antagonistsSmall molecule chemistry6,0136RemicadeOther anti-rheumaticsMonoclonal antibody5,9247AvastinAnti-neoplastic MAbsMonoclonal antibody5,7448RituxanAnti-neoplastic MAbsMonoclonal antibody5,6209HumiraOther anti-rheumaticsMonoclonal antibody5,55910SeroquelAnti-psychoticsSmall molecule chemistry5,121Source: EvaluatePharmaFigure 1: A flat performanceNumber of NMEs or NBEsa 60Impact of faster moreproductive biotechshould have startedhere. An increase inproductivity has notbeen observedSmall molecules (NMEs)Biopharmaceuticals (NBEs)Total50Increase due toPDUFA clearingbacklog 7019681966196419621960195819561954195219500Source: Bernard Munos, “Lessons from 60 years of pharmaceutical innovation”Biotech reinvented3

A business model that’sbust?Worse still, the business model onwhich Biotech has relied for the past30 years is now breaking down.This model is based on externalinvestment – typically, venture capital– in an innovative idea arising from anentrepreneurial source, often a group ofacademics (see Figure 2). It assumesthat investors can realise value throughone of two routes: flotation on the publicmarkets or, more frequently, a trade saleto an established pharma company.And it carries a very high risk of failure.In one recent study of 1,606 biotechinvestments that were realised between1986 and 2008, 704 investmentsresulted in a full or partial loss, while 16only covered their costs.7The same study shows that the grossrate of return on these 1,606 biotechinvestments was 25.7%, comparedwith a pooled average return of 17%on all venture capital invested overthe same period. But costs and the‘overhang’ from unrealised investmentsreduced the net rate of return to about15.7%, and there were huge variationsin the cash multiples earned by the886 investments that made a profit(see Figure 3).8 Ten-year returns havealso deteriorated dramatically since2008. The average return on a 10-yearinvestment ending in December 2008was 35%, thanks to the lingering effectsof the technology bubble. In March2010, it had plummeted to -3.7%.9So what distinguishes the successesfrom the failures? Our analysis of thecompanies behind some of the topselling biologics on the market shows4Figure 2: Biotech’s business modelVenture Capital Enterpreneurial SourcexStart-upxStart-upxStart-upSecondary /IPO / Trade salexStart-upStart-upSmall BiotechPharmaBig BiotechMarketSource: PricewaterhouseCoopersBig BiotechFigure 3: Big variations in cash 1x Cost1-2x Cost2-3x Cost3-4x Cost4-5x Cost5 or x CostSource: Iain Cockburn & Josh Lerner, “The Cost of Capital for Early-Stage Biotechnology Ventures” (2009)Note: Figures include all exited biotech deals as of December 31, 2008PwC

t1162-3x Cost883-4x Cost4-5x Cost5 or x Costthey have several common features.Most of them started up in the US in thelate 1970s and 1980s, floated very earlyin their history and raised a substantialamount of funds in the process. Theywere all subsequently acquired by bigpharma companies, and the productsthey make are now marketed by one ormore such firms (see Table 2).Figure 4: Asia’s higher degrees of changeHowever, many of the externalconditions that enabled these biotechcompanies to thrive are rapidlyvanishing. The research base is shiftinggeographically, the emerging economiesare competing more aggressively andfinancial investors are getting 98Source: US National Science FoundationNote: Data are for 1999-2006 in the case of France and 1998-2005 in the case of IndiaEastward ho!The research base is moving East, asAsia’s emerging economies invest morein higher education and the ‘reversebrain drain’ picks up pace. Between1998 and 2006, the number of studentsgraduating with doctorates in thephysical and biological sciences soared43% in India and a staggering 222%in China, far outstripping the rate ofincrease in the West (see Figure 4).10The ‘returnee’ trend has been equallyTable 2: Winning waysProductOriginator CompanyFoundedProductLaunchOrigins inUSInitial PublicOfferingWellFinancedBig PharmaAcquisitionMarketed by BigPharma2009 worldwidesales ( PPPRoche/ Biogen Idec5,620Humira19892002PPPAbbott5,559Sources: PricewaterhouseCoopers and EvaluatePharmaBiotech reinvented5

pronounced. In the past two decadesabout 100,000 highly skilled Indian andChinese expatriates have left the US fortheir native countries. Another 100,000are expected to follow them in the nextfive years, as the opportunities at homeimprove.11Hotter competitionSome of the emerging countries arealso actively building domestic biotechindustries. Singapore launched itsBiomedical Sciences Initiative in 2000and has already created a powerfulbiopharmaceutical nexus. South Koreaset up a similar scheme in the late1990s, and has earmarked 14.3 billionfor its ‘BioVision 2016’ programme.12China has invested 9.2 billion intechnological R&D, including biotech,in the last 18 months alone.13 And Indiais currently exploring plans to becomeone of the world’s top five biosimilarsproducers by 2020.14What’s more, many of the companiesbased in the emerging economiesaren’t just imitating the West; they’relearning from its mistakes. They’redispensing with the costly infrastructurethat burdens companies in developedcountries to create new businessmodels that are leaner and moreeconomical, as well as pioneeringinnovative products and processes.So the US is gradually losing its preeminence as a centre of biomedicalresearch. It still leads the way and islikely to do so for at least another fiveyears. But it’s no longer the only gorillaon the block.6Capital constraintsventure capitalists – particularlyEuropean venture capitalists – frominvesting in the sector. In 2009, theamount of venture capital raised bybiotech companies based in Europewas just 800 million ( 1.1 billion), lessthan at any time since 2003.17 Andmoney’s likely to remain very tight, asmost biotech executives recognise;84% of the participants at a recentbiopharmaceutical conference thoughtfunding was the industry’s singlebiggest challenge.18The recession has also made it muchmore difficult for biotech companiesin the developed economies to raisecapital. In 2008, Biotech raised just 16.3 billion in the US, Europe andCanada – 45% less than the previousyear. The situation improved in 2009,but the total amount raised fell wellshort of historical levels, and nearly halfof it went to a handful of establishedpublic companies in follow-on offerings(see Table 3).15There are plenty of other signs of thetoll the past two years have exacted.In 2009, for example, 10 biotech firms(including the highly regarded deCODEgenetics) filed for bankruptcy in the US,while another nine firms closed up shopwithout being officially bankrupt.16 Andthough financing conditions have nowstarted easing, most industry observersbelieve the window for initial publicofferings won’t open again anytime soon.This has inevitably deterred manyThey’ve got good reason to worry.According to one estimate, 207 ofthe 266 private and public Europeanbiotech companies with products orplatform technologies in the clinic oralready on the market urgently needto raise funds – and they need a good 4.8 billion between them.19 Given thatthe total amount of European venturecapital invested in the sector was just 501 million ( 666.6 million) in the firsthalf of 2010, it’s very doubtful they’ll allsucceed.20Table 3: Fundraising below pre-recession normsInitial Public OfferingsFollow-on 116,33229,93228,55320,252Source: Ernst & Young, Beyond Borders: Global Biotechnology Report, 2010Note: Numbers may appear inconsistent because of roundingPwC

Blurring boundaries– up from a third in 2000-2002 – andthe industry leaders have piled in evenmore heavily over the past year.23 InNovember 2009, for example, Pfizerlicensed the rights to a new treatmentfor Gaucher disease, a condition fewerthan 6,000 Americans suffer from.24In February 2010, GlaxoSmithKlinelaunched a standalone business unit fororphan drugs, and Pfizer did likewise afew months later.25However, yet another change istaking place: the boundaries betweenBiotech and Pharma are blurring. Onesign of the change is the fact thatseveral large pharma companies haveestablished corporate venture capitalarms specifically to make strategic,as opposed to financial, investmentsin Biotech. Novartis has created anoption fund with the right to in-licenseinnovative products or technologiesfrom the companies it backs, forexample.21 Similarly, Merck Seronohas set up a fund ‘to support scientificexcellence in [its] core fields of interestand provide start-up companies withthe opportunity to interact’ with it.22Many pharma companies are alsofocusing on developing biologics andspecialist therapies for orphan diseases,because they offer a faster and morefocused route to market. In 2006-2008,Big Pharma produced more than halfthe orphan drugs approved by the FDASome of the oldest biotech companiesare simultaneously repositioningthemselves as biopharmaceuticalcompanies, and several phar