Nigel Wild comments on ‘Beyond Borders 2011’, Ernst & Young’s global biotechnology update
Ernst & Young’s Beyond Borders, their annual report on biotechnology worldwide, is a highly accurate barometer of the industry. Combining penetrating insight, clear-cut data and comment from movers and shakers across the globe, it cuts through all the anecdotes, rumours and frequent hype to give a clear picture. That in aggregate biotechnology worldwide is in profit for the second year running is good news. But that one statistic belies what is really happening below the surface.
As expected, money is the key element for both biotechs that need to attract funding and those that buy the drugs or therapies being developed, known as the payers. Everyone is now having to eke out funds to do more with the same or less, and the report presages a paradigm shift in the way development, sale and purchase of treatments is handled. The global economy is gradually recovering.
In consequence, venture capital funding has rebounded, growing by 20% during 2010 in the US alone. But more and more of these funds are being directed towards social media and Web 2.0 companies, to such an extent that there are concerns about another dot-com bubble. When the previous bubble exploded in the 2000s, it took biotechnology along with it. In 2010, biotech companies across the US, Europe and Canada raised $25bn (£16bn), much on a par with the ‘easy days’ before the crisis of 2008.
The biotech industry, however, is one of haves and have-nots and there are some troubling indicators. In the US, the Pareto effect is getting worse. The 20% of US companies that were most successful in raising funds garnered 82.6% of capital, up from 78.5% in 2009: conversely, the bottom 20% of companies raised 0.4% of the funds, down from 0.6% the previous year. With interest rates at rock bottom, significant debt funding for mature, cash flow positive companies accounted for a huge 45% of the total, up 150% over 2009.
The financial crisis has strongly and adversely influenced the ability of nascent companies to fund innovation. Looking at ‘innovation capital’ – overall funding minus debt funding – overall funding in the US rose by 15%, but innovation capital declined by 20%. With investors becoming increasingly risk averse, the trend for investing money in tranches against defined milestones is patently on the up.
Once, the whole investment would be paid up front: in the last five years, up front payments have declined 55%. Tranched payments are now so common, the industry has coined a term for them: biobucks. A clear negative that is driving up the costs of R&D, and thus the price of drugs, is the constant problem of the US Food and Drug Administration, the FDA, moving the goalposts of regulatory approval.
With the US far and away the world’s number one drug market, gaining FDA approval is a must. Efficacy and drug safety are vital, but time and again, the FDA is insisting on extra data or changes to agreed trials protocols in an attempt to be absolutely watertight. This in turn pushes up the already substantial expense of clinical trials. David Gollaher of the California Healthcare Institute says that the FDA has effectively discouraged investment in fields like obesity, diabetes and cardiovascular disease.
A sweeping transformation of the health care industry has already begun and brought with it two new mantras: ‘Prove it or lose it’ and ‘Do more with less’. Health care has to become more sustainable and wherever you look, budgets are being squeezed. Payers want not just any treatment, they want the most effective one and at the keenest price. With baby boomers starting to retire, health care has to be provided to an elderly population that is not only expanding, but also has a greater life expectancy.
In future, a drug company’s success will be measured not by the number of doses sold, but rather how well its products are demonstrably improving health outcomes. Proving efficacy and safety to regulators will require not just touching the bottom rung of the standards ladder, but achieving a high point on it. E&Y approached a number of biotechs and VC houses on their ideas on how to meet these new challenges. “Focus on the science by looking at the clinical relevance rather than being obsessed with regulators and payers,” said Riccardo Braglia, CEO of Helsinn. “Redesign clinical trials to be more adaptive rather than the current rigid model,” came from Karen Bernstein, Chairman of BioCentury. Doing more with less revolves around raising, investing, preserving and optimising capital.
Becoming a partner of choice and telling a better story, optimising the value of intellectual property, leaner R&D approaches, these are just some of the ways of ensuring more bangs for your biobuck. When the focus was on science and business followed on, we used to talk about the business of science. The new world makes it imperative to look at business in tandem with the science. Now it is the science of business.
Article published courtesy of the Oxford Times