The Biotech Industry: 30 Years of Failure
by H.S. Ayoub
BioHealth Investor.com
Biotechnology as a business arguably began with the birth of Genentech (DNA) 30 years ago in 1976. The company had a successful IPO four years later in 1980, which motivated a flurry of other biotech ventures to seek Wall Street’s vast wealth. These companies, which included Genentech, Chiron (now part of Novartis [NVS]), Biogen (now Biogen Idec [BIIB]), Amgen (AMGN), and Genzyme (GENZ), marked the beginning of a new revolution in medicine.
This first wave of excitement for the biotech industry was full of hope as many argued that traditional pharmaceutical research, relying mostly on chemistry to formulate new drugs, would slowly succumb to the new fields of recombinant technology, molecular cloning, RNA interference, viral vectors, and other cutting edge science. Many believed then, and many still do now, that pharmaceutical giants Pfizer (PFE), Johnson & Johnson (JNJ), Eli Lilly (LLY), Bristol-Meyers (BMY), and others could not possibly keep up with the wholly fragmented, albeit, singularly focused research of the many tiny biotech ventures springing up seemingly over night.
The evidence however points to the contrary; the biotech industry has so far failed!
In his new book, Science Business: the Promise, the Reality, and the Future of Biotech
, Harvard business professor Gary P. Pisano provides eye opening proof showcasing how the biotech industry has failed in its attempt to function as a science-based business.
Consider the following observation; from the year 1975 through 2004 the biotech industry as a whole has seen an increasing trend in sales, but total operating income before depreciation is essentially zero. In fact, if you remove the top ten companies; Amgen, Genentech, Genzyme, Gilead (GILD), Biogen, Biovail (BVF), Cephalon (CEPH), ImClone (IMCL), KOS Pharmaceuticals (KOSP), and Chiron, the rest of the biotech industry has lost more than $6 billion. On average it takes a biotech company 12 years after its IPO before it sees its first profit.
Many biotech companies continue the need for additional funding to take drug candidiates through the pipeline. In 1990, biotechs made just as much money from secondary offerings as their IPOs. In 2004, secondary offerings provided double the funding that IPOs delivered.
This analysis does not even take into account the scores of privately held biotech ventures, which are surely losing more money than publicly traded companies. The biotech industry is a business in the red.
What about the biotechnology industry’s other promise; delivering novel and cutting edge research? There was no difference in total productivity between the biotech industry and that of the big pharmaceutical companies over the last couple of decades.
While there are an increasing number of new drug candidates, a fewer percentage are making it to later stages. In fact, between the years 1998 and 2002, 48 percent of drugs in the pipeline were at the discovery stage. This is telling of the direction this industry is taking. New drug candidates require more initial funding. Little startups are hailing any research study that hints at a new drug candidate to attract new venture spending with less emphasis on quality.
Biotechnology was also believed to bring drugs to the market through cheaper means. In fact, there is no difference in R&D spending per new drug between the two industries. Big pharma’s sales per R&D dollar spent was twice that of the biotech industry back in 1987, but was three times as much in 2004. So not only is big pharma more efficient at producing and selling, but the gap is increasing, not narrowing. There is no evidence that the biotech industry is learning.
So why is biotechnology not succeeding as a business? There are many reasons for the industry’s shortfall. One big issue is the length of time and the cost of bringing a drug to the market. But this is a problem for large pharmaceuticals as well, and they seem to be fairing much better.
The true problem with the biotech industry is that the free flow of information has essentially been negated. Intellectual property protection through fierce legal actions has affected the open environment necessary for the collaborative advancement of science and technology ideas. While this type of environment has always existed in the pharmaceutical industry for many decades, biotech is especially in need of a collaborative effort considering the novelty of the scientific techniques being utilized.
Biotechnology was supposed to introduce a new form of enterprise, one which throws away the shackles of old business practices. The formation of Genentech was believed to signal an escape of old business ideas. Genentech was essentially a new and exciting type of venture that was to be run by scientists free of corporate limitations. The opposite has been largely true of the biotech industry as a whole.
Related articles:
- Weak U.S. Dollar Good for Biotechs!
- Biotech Landmark Study Finds Challenges to Industry
- Offshoring of Biotech Research to China
____________________
BioHealth Investor.com
Biotechnology as a business arguably began with the birth of Genentech (DNA) 30 years ago in 1976. The company had a successful IPO four years later in 1980, which motivated a flurry of other biotech ventures to seek Wall Street’s vast wealth. These companies, which included Genentech, Chiron (now part of Novartis [NVS]), Biogen (now Biogen Idec [BIIB]), Amgen (AMGN), and Genzyme (GENZ), marked the beginning of a new revolution in medicine.
This first wave of excitement for the biotech industry was full of hope as many argued that traditional pharmaceutical research, relying mostly on chemistry to formulate new drugs, would slowly succumb to the new fields of recombinant technology, molecular cloning, RNA interference, viral vectors, and other cutting edge science. Many believed then, and many still do now, that pharmaceutical giants Pfizer (PFE), Johnson & Johnson (JNJ), Eli Lilly (LLY), Bristol-Meyers (BMY), and others could not possibly keep up with the wholly fragmented, albeit, singularly focused research of the many tiny biotech ventures springing up seemingly over night.
The evidence however points to the contrary; the biotech industry has so far failed!
In his new book, Science Business: the Promise, the Reality, and the Future of Biotech
, Harvard business professor Gary P. Pisano provides eye opening proof showcasing how the biotech industry has failed in its attempt to function as a science-based business.Consider the following observation; from the year 1975 through 2004 the biotech industry as a whole has seen an increasing trend in sales, but total operating income before depreciation is essentially zero. In fact, if you remove the top ten companies; Amgen, Genentech, Genzyme, Gilead (GILD), Biogen, Biovail (BVF), Cephalon (CEPH), ImClone (IMCL), KOS Pharmaceuticals (KOSP), and Chiron, the rest of the biotech industry has lost more than $6 billion. On average it takes a biotech company 12 years after its IPO before it sees its first profit.
Many biotech companies continue the need for additional funding to take drug candidiates through the pipeline. In 1990, biotechs made just as much money from secondary offerings as their IPOs. In 2004, secondary offerings provided double the funding that IPOs delivered.
This analysis does not even take into account the scores of privately held biotech ventures, which are surely losing more money than publicly traded companies. The biotech industry is a business in the red.
What about the biotechnology industry’s other promise; delivering novel and cutting edge research? There was no difference in total productivity between the biotech industry and that of the big pharmaceutical companies over the last couple of decades.
While there are an increasing number of new drug candidates, a fewer percentage are making it to later stages. In fact, between the years 1998 and 2002, 48 percent of drugs in the pipeline were at the discovery stage. This is telling of the direction this industry is taking. New drug candidates require more initial funding. Little startups are hailing any research study that hints at a new drug candidate to attract new venture spending with less emphasis on quality.
Biotechnology was also believed to bring drugs to the market through cheaper means. In fact, there is no difference in R&D spending per new drug between the two industries. Big pharma’s sales per R&D dollar spent was twice that of the biotech industry back in 1987, but was three times as much in 2004. So not only is big pharma more efficient at producing and selling, but the gap is increasing, not narrowing. There is no evidence that the biotech industry is learning.
So why is biotechnology not succeeding as a business? There are many reasons for the industry’s shortfall. One big issue is the length of time and the cost of bringing a drug to the market. But this is a problem for large pharmaceuticals as well, and they seem to be fairing much better.
The true problem with the biotech industry is that the free flow of information has essentially been negated. Intellectual property protection through fierce legal actions has affected the open environment necessary for the collaborative advancement of science and technology ideas. While this type of environment has always existed in the pharmaceutical industry for many decades, biotech is especially in need of a collaborative effort considering the novelty of the scientific techniques being utilized.
Biotechnology was supposed to introduce a new form of enterprise, one which throws away the shackles of old business practices. The formation of Genentech was believed to signal an escape of old business ideas. Genentech was essentially a new and exciting type of venture that was to be run by scientists free of corporate limitations. The opposite has been largely true of the biotech industry as a whole.
Related articles:
- Weak U.S. Dollar Good for Biotechs!
- Biotech Landmark Study Finds Challenges to Industry
- Offshoring of Biotech Research to China
____________________
posted by Nico at
8:22 PM
4 Comments:
A very interesting article. In my opinion, the success of the pioneer companies resulted from a targeted focus on biomolecules of commercial importance. I would argue that an additional factor affecting the development of the biotech industry has been the reorientation of the U.S. patent system. The U.S. patent policy at the beginning of the biotech industry rewarded both toolkit design (i.e., how to get a desired biomolecule) and biomolecule possession (i.e., elucidation of the precise structure of a biomolecule). Over time, however, a series of U.S. court decisions changed this policy to favor biomolecule possession. As a consequence, biotech companies shifted their focus away from targeted studies of genes related to commercially significant biomolecules and toward the random sequencing (and patenting) of the entire human genome. Most of this effort has not yielded a present day return on investment, and contributes to the premised failure of the biotech industry. While the sequencing of the entire human genome may one day have value, the effort has come at the cost of diverting biotech companies from their initial focus on biomolecules of commercial importance.
One additional thought, the article appears to suggest that a sign of the biotech failure is that while “there are an increasing number of new drug candidates, a fewer percentage are making it to later stages.” However, the early elimination of drug candidates is highly desired. Late stage testing of pharmaceuticals is extremely expensive. The development of technology capable of screening large numbers of initial candidates coupled with technology capable of identifying failures as early as possible greatly enhances the efficiency of drug development (“fail early and often”).
You make a coupel of good points BIOATTY,
The decrease in the relative number of drugs making it to later stages could very well mean that quality is increasing through better testing and screening technology, but it could also be due to stricter regulation.
While regulation in theory is positive, in reality it could be too strict or influenced by biased political and business strategists, whom many have ties to the industry itself. Hence your point regarding the shift away from research to discover biomolecules of commercial importance, to a narrowed focus on biomolecule possession.
Thank you for your interest and thoughts, much appreciated.
H.S. Ayoub
I've got a number of very serious concerns with Pisano's methodology, which I posted in the January edition of the Harvard Business Review.
He states that if you ignore the profits of the top-performing biotech companies, the remainder demonstrate poor performance. I think this is a veritable tautology for R&D businesses. If you were to ignore the top oil companies, you'd probably find a similar trend. Does this mean that oil companies have failed on their promise to deliver oil?
When comparing biotech and pharmaceutical companies, Pisano isn't making a fair comparison - he compares the entire biotechnology industry with the top pharmaceutical companies. This biases the pharmaceutical company sample by eliminating the unprofitable firms, which unfairly biasing the biotechnology industry by not excluding these firms. Any finding from this analysis are uninterpretable.
What is worth noting is that the entire biotechnology industry used to be compared against a single pharmaceutical company -- Merck -- not it takes 20 pharmaceutical companies to match the performance of the biotechnology sector. I'd consider this to be significant growth!
While it is true that biotech has been a sad disappointment, the fault may not lie in the industry, but in the FDA. Naturally, these innovative companies are designing novel therapies that work in new ways. But the FDA has not changed the parameters of its approval process to accommodate these new ways of doing medicine. Look at the issues surrounding the cancer “vaccines” from CEGE and DNDN. (Which are too complex to do justice in a short blog). Basically, the FDA cannot keep up, so outdated technology gets approved and new medicine is delayed. This is creating a tremendous opportunity for other countries, particularly in SE Asia and China, to take one more industry away from us.
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