What the industry needs is not a bailout, but some sensible policies
By Stephanie Marrus
Biotech is in trouble, again.
125 of the 370 US-based public companies have less than six months of cash — a 90% increase in close-to-broke companies compared to 2007, according to the Biotechnology Industry Organization (BIO). And that number does not take into account the private companies suffering; about 40% of small private biotechs have less than one year of cash.
Venture capitalists are hoarding cash or closing their doors; private equity firms are retrenching, the public markets are in tatters. Big Pharma is shopping with a discriminating eye; the companies that most need to be saved are the least likely to be bought. The industry expects many bankruptcy filings, clinical trial cancellations, layoffs and sell outs.
The JP Morgan Healthcare Conference, arguably the premiere healthcare investment conference in the world took place in San Francisco last month. There is no better venue to dial into industry sentiment. Big Pharma, biotech CEOs, executive search consultants, attorneys, accountants, Wall Street analysts, institutional investors, investment banks, venture capitalists, hedge funds were all there. The conference buzz was: “No buzz.” “Cautiously pessimistic.” “Wait two years and come up for air.” “The well is dry.”
Drug development has always been a tough game. Most companies live in a hand-to-mouth existence, hoping that their science progresses far enough with successful results to look appetizing to funding and sources. It takes 10-15 years before you know if you have a drug that passes human clinical testing, hundreds of millions of dollars in development cost.
Companies with hot technologies or exciting drug candidates get funded either by venture capital, pharmaceutical partnerships, acquisition or the public markets. In past downturns, a small number of biotechs have merged or disappeared but most managed to survive. 2009 is different.
Some will argue we are due a bailout. Surely the biotech industry is as deserving as the automobile industry. We discover and develop medicines that can save human life, a higher calling that should entitle us to at least as much help as the makers of gas-guzzling autos. There is no question that the cost of discovering and developing a pharmaceutical is off the charts and the failure rate is astronomical.
On the other hand, there are too many biotech companies with non-viable businesses. It is a widely held opinion that many companies are “science projects” rather than real businesses. Companies with complimentary technologies or programs could benefit by pooling resources rather than maintaining their own duplicative infrastructures. Management teams have a vested interest in keeping their company intact to the detriment of their shareholders. Is it finally going to be the time to rationalize the industry?
Some companies should continue life only as part of a merged entity. Some companies should sell their assets. Other companies may have to bite the bullet and shut their doors. Management needs to act responsibly for the shareholders even if it means their jobs will end.
For the many firms that have created real value, there should be a future even in these economic times. For that to happen, though, government policy needs to facilitate the continuation of these firms, not obstruct it. Here are a few key policy changes that would help.
FDA: Appoint a respected leader for the FDA and resource the agency properly. Do not go overboard with control in the post-Vioxx era, thereby preventing life saving drugs from coming to market. Let informed patients choose — sick people without good options are willing to take some risk.
Price controls: Do not make the mistake of interfering with free market pricing mechanisms. If a drug is overpriced relative to its efficacy, it will not sell. Setting a ceiling or instituting other price controls will only serve to insure that new drugs are not developed. Industry must see an economic return to invest in highly risky drug development or it will opt out.
Intellectual property: Intellectual property protection is the lifeblood of the industry, and the reason investors will fund companies without revenue. Set policies to enhance and extend protection, not dilute it. Do not weaken the predictability, value and enforceability of patents such as provisions of the Patent Reform Act of 2007, which made it through the House but thankfully stalled in the Senate last year.
Funding sources: Increase NIH funding so that fledgling companies have a pre-venture capital source of funds. NIH funding has remained stagnant for a number of years as costs continue to rise. Consider the national venture capital fund model used in other countries to provide financing during the “Valley of Death,” the period when companies are engaged in translational research to bridge academe to industry and not yet fundable by venture capital.
It is in the public interest to help the beleaguered biotech industry. Biotech companies have discovered hundreds of therapies, vaccines and diagnostics that impact human life. Biotech is increasingly serving as a productive engine for new drug development, replacing big pharmaceutical companies as innovation leader. We have accomplished much with scarce resources and deserve to survive and prosper.
Stephanie Marrus is a life sciences management consultant/ interim executive based in the Bay Area who advises firms on strategy, business development, communications, operations, restructurings and M&A. She can be reached at portfoliostrategies@gmail.com.
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