[Business Models] The End of Biotech?

I recently individually interviewed 10 biotech CEOs and 10 biotech venture capitalists as part of the data collection portion of an executive coaching engagement. It wasn’t the subject of the interview – which was to collect feedback data regarding my coaching client – but everyone to a person brought up the subject of venture capital and biotech.

Everyone talked about the model of investment and development that’s been in existence since Genentech (1976) and Amgen (1980) were founded.

Everyone independently offered that the “old” biotech investment model was broken, and it wasn’t going to be fixed anytime soon. [Updated: And see Kevin Lawton’s post in VentureBeat – The New Face of Venture Capital – on the same subject here.]

No one had a clear idea of what’s next.

Here’s one  (idea).

Start with what we think we know, what’s broken, and what seems to work:

  • The manner in which biotech companies have frequently raised money – both public and would-be-IPOs, which is to go out to the public markets and get cash – is highly constrained. With the crash of the equities market during the Great Recession and continuing challenges in the money raising department, the future for companies without successful products in the market is daunting. There are no rich uncles, public equity markets, or eager lenders sitting around with funding lust.
  • Unlike something like software start-up Hunch, biologics have a high cost structure. People talk about lean start-ups with a low cost structures –  that is generally not biotech. While a guide and recommendation site like Hunch can be started by some guys and gals in a garage, (or loft as the case is), anything you’re going to put in your body has elements of manufacturing, manufacturing quality, clinical trials, biostatistics, IP registration and surveillance, and if you’re really going hog wild, full research and development structures. Even when you outsource stuff and do so to the very cheapest bidder, cost is high in comparison to the other venture backed start-up sectors such as medical devices, software, or general hardware.
  • Risk in biotech is very high: Iain Cockburn and Josh Lerner reported 44% of the biotech investments tracked by Cambridge Associates in a study of biotech start-ups from 1989 – 2008 were at full or partial loss.
  • Apart from the pre-Roche acquired Genentech [Disclosure: Genentech is a client] , you could make a pretty good case that many – if not most – biotech companies should stay away from diversified basic research and stick to the the exploration of a very few compounds or technologies. Scientists are notorious for being curious, and having many different things they can find interesting: the rap for bright mind and Chiron co-founder Bill Rutter was that he could never say no to an interesting idea. (When my then-boss Magnus Lundberg picked up responsibility for the Vaccines portion of Chiron we attended a meeting where folks walked us through “the key 17” projects in process: big opportunities were being starved to feed other areas of interest. A dollar spent on research is estimated to cost from between $7-15 in development.  Last month’s lay-offs at Exelixis – where 270 employees representing 40% of the company were fired – is one of many examples that are easy to find where find biotech companies trying to do to much with too little and end up cutting back on early research to fund later stage development.
  • Biotech companies – when they have a focused approach – are unusually nimble, creative, and successful in bringing new ideas forward in comparison to large pharmaceutical companies (aka “Big Pharma”). As Richard Ramko, an Ernst & Young partner specializing in biotech and life science notes in this video, biotech is staggering successful in comparison to big pharma when you look at product approvals by the Food & Drug Administration (FDA) as a factor of dollars spent toward research & development.
  • With a very few exceptions (Gilead Sciences or Genentech, who are clients, or Onyx Pharmaceuticals, come to mind), biotech companies must also learn how to be effective commercial entities. Unless they partner with big pharma, sales and marketing operations must be developed, grown, and maintained. Because product families are frequently limited there are fewer opportunities for do-it-yourself biotech companies to gain any efficiencies. The result is more resources (time, money, attention) directed away from the things that biotech seems to do well (applied research and directed development) toward the build-up of something new that may stray away from core competencies.
  • Big pharma, even with Novartis’ surprise (mine) inclusion on Fast Company’s 2010 Innovative Companies list, are notorious for being poor innovators or nimble organizations. They appear to be very good at manufacturing, sales, marketing and product distribution. Research and early stage development (as noted above) are not their shining lights. Big phara tendencies plays to the point made recently by management guru Tom Peters: “If I were running economy, I’d let big corps stew in their juices-and work 24/7 to maximize supply of startups, 1% of whom change the world.” Pfizer CEO Jeffrey Kindler’s comment – “speed and decisiveness” are crucial to the company’s ability to rebound – should make investors run for the hills: big pharma, like many big companies (think General Motors, as one easy example) are not usually associated with quick or nimble.
  • Great basic research seems to come out of research universities (e.g. UCSF ) or places funded to do basic research such as SRI International headquartered in Menlo Park, California. When you look at where innovation occurs in early stage research you can point a big and bright arrow to those two types of institutions.

So what’s the takeaway?

  1. Biotech is high risk, with a long time horizon.
  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).
  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.
  4. Big Pharma is not so hot at translating basic research into commercial products.
  5. Big Pharma is effective due to resources and experience in later stage development and commercialization.

What are solutions?

With the old biotech model clearly broken (invest money, build it, and they will come), what are other more viable options?

Two colleagues from my days at Chiron, Johanna Holldack, the CEO at Telormedix, and Robert Johnson, former CEO at Kosan Biosciences (acquired by Bristol-Meyers Squibb ) have both independently suggested outlines of a different model – a new paradigm if you will – that works.

Here’s that outline:

  • Basic and early stage research gets refocused it the places where it is has historically been done best: research universities and institutes as well as places like SRI, Inc. Funding will need to come from the places with cash: public funding (NIH, as one example) and perhaps Big Pharma since they money the are spending today on research produces primarily suboptimal results. As one little data point, a former colleague of mine recently noted that 40% of their time as a scientist in research in Big Pharma was spent on project justification meetings and activities, not directly advancing research or patient care. The reward for Pharma for it’s investment? Perhaps some sort of royalty sharing-arrangement for products developed with their funding.
  • Development-like new biotech companies funded by investments from venture and / or pharma companies take what they view as promising research findings and see if there’s a product to be had. Royalties get paid to researchers for any successful products, and investors take an appropriate payday, either in the form of cash compensation or in the firm of first commercialization rights. I would argue that one of the best things that biotech companies have traditionally done is to see the unseeable: figure out a way to develop promising compounds. One difference for these companies is that instead of one compound, one company, they manage a portfolio of several compounds and potential products.
  • Phase III trials, and full commercialization are left to the province of larger drug companies, who have both cash and infrastructure to take promising products and manufacture, market, distribute and sell them. On the heals of the health care reform, it’s apparent that adding new cost by replicating existing infrastructure is a fool’s chase.

The biotech industry is one of some bright light commercial products and much outstanding promise. Only if the model used to structure, fund, and develop products is reworked will that promise be realized in today’s markedly changed environment.

Life Back West is an occasional set of writings focused on ways people, teams and organizations can be both more effective (doing the right thing) and more efficient (doing the right thing well). More about executive and team coaching services can be found at the “About J. Mike Smith and Back West, Inc.” sidebar or the “Hire Me” tab above.

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