Biotech Industry Faces R&D Funding Crisis
The global biotech industry is facing scarcity in funding despite solid top- and bottom-line growth in 2010 and achieving aggregate profitability for the second year in a row, according to Ernst & Young.
Affected companies tend to be pre-commercial stage firms that depend on years of funding to support drug development. This has placed new pressure on the traditional biotech business model, and may reshape how companies pursue R&D in the future, according to Ernst & Young’s 25th annual report on the biotech industry.
“While the biotech industry’s aggregate performance improved in 2010, there is now a widening gap between large, established companies and those at earlier stages for whom access to capital continues to be difficult,” said Glen Giovannetti, Ernst & Young’s Global Biotechnology Leader.
“Biotech firms will need to adapt creatively to this environment by doing more with the funding that is available and by working from the earliest stages of development to demonstrate the potential value of their products to investors, payers and regulators,” Giovannetti added.
Companies in the industry’s established biotech centers of Australia, Canada, Europe and the US had a record-breaking aggregate net profit of US$4.7 billion, a 30 percent increase from the previous year.
E&Y also reported a bounce in aggregate funding among companies in Canada, Europe and the US, which raised US$25 billion in 2010 — equaling the average for the four years before the global financial crisis.
Funding for innovation declined, according to the report. In the US, large debt financings by mature, profitable companies grew by 150 percent over 2009. Conversely, there was a 20 percent decline in the amount of “innovation capital” for the sector, defined as total funding minus large debt financings.
The report showed more skewed funding, with 82.6 percent of funding havng gone to just 20 percent of US companies, up from 78.5 percent in 2009. The bottom 20 percent of companies raised 0.4 percent of funds, down from 0.6 percent in 2009.
Also, alliances were said to remain strong, but not up-fronts. The total potential value of strategic alliances remained strong, totaling more than US$40 billion. However, up-front payments from partners to biotech companies dropped 37 percent to US$3.1 billion.
Meanwhile, merger and acquisitions (M&As) involving European or US biotech firms dropped sharply from 58 deals in 2009 to 45 deals in 2010, while the aggregate value of these transactions remained relatively flat (after normalizing the 2009 numbers to exclude the mega-acquisition of Genentech).
The report notes a confluence of challenges that will make it hard for the industry to sustain its historical level of innovation. In addition to less available “innovation capital,” biotech companies face increased competition from other sectors for a smaller pool of venture capital.
Even with less capital available, companies are being asked to do more, as the process of discovering and developing drugs has become increasingly lengthy, expensive and risky.
Drug approvals continue to be near historic lows and it is becoming increasingly common for regulators to request additional data for approval after a company has undertaken clinical studies, increasing the time, expense and risk of developing products.
Giovannetti also points out, “health care systems across the globe are under increasing pressure to rein in costs, creating continued downward pressure and uncertainty on the prices that innovators can secure for their products.
“This lack of sustainability in health care is also leading to a sweeping movement under which companies will need to move from simply producing new medicines to demonstrating improvements in health outcomes.”
The report identifies four complementary approaches for biotech companies to sustain innovation in this increasingly challenging environment namely, “prove it or lose it,” “do more with less,” “build new competencies,” and “collaborate for coordinated action.”
According to E&Y, in an outcomes-driven ecosystem, companies will experience more pressure to prove that their products are truly differentiated. As a result, they will need to tailor their strategies from the early stages of development to demonstrate comparative effectiveness for regulators and be willing to engage in creative pricing approaches for payers including outcomes-based pricing approaches.
Companies will also need to find new ways to conduct capital raising/deployment and R&D more efficiently. On the capital side, companies will need to be creative in raising, optimizing, preserving and investing scarce capital — from new ways of monetizing existing intellectual property to pursuing “virtual” company models to reduce fixed infrastructure.
On the R&D side, targeted products for smaller populations can be more efficient, requiring smaller trials, less generic competition and fewer safety issues.
To support the first two imperatives, managers will need different competencies: awareness of changing market dynamics; project management discipline and performance measurement; the ability to measure value and communicate value; and the creativity to develop new models and approaches.
Sustaining innovation will also take changes that biotech companies cannot make alone, requiring coordinated action with other stakeholders. Examples include encouraging a system of adaptive clinical trials and conditional drug approvals; realigning payment mechanisms around health outcomes; developing incentives to retain biotech investors; and working on transparency and access to build trust.