Coming together in hard times: biotech funding

22 February 2013



The productivity of the biotech industry is still in question and funding remains scarce; however, many firms are collaborating and finding creative new ways to overcome the multiple challenges they face, says Jo Pisani of PricewaterhouseCoopers.


How is the business of big molecules faring? In 2010, when we first reviewed the state of the biotech sector, our verdict was mixed. We had three particular reservations: the industry hadn't delivered a significant increase in productivity, measured in terms of new medicines reaching the market; the business model on which it relied was showing signs of great strain; and the US seemed in danger of losing its lead, as the biomedical research base moved east.

But the biotech industry wasn't alone in struggling to translate scientific theory into clinical therapies that the market valued; pharma was experiencing equal difficulties. So what was the solution? If the two sectors joined forces, we suggested, they might be able to develop new treatments more effectively and capitalise together on the push towards personalised healthcare.

Two years on, productivity is still low and money scarce, but a number of biotech and pharma companies are forming long-term alliances, with other organisations and each other.

Fluke or the first signs of spring?

In 2011, the FDA approved 35 new therapies, more than at any time since 2004. Biotech companies were responsible for several of the most noteworthy successes. Vertex Pharmaceuticals was behind Incivek, one of two medicines that could transform the treatment of hepatitis C. Human Genome Sciences, together with GlaxoSmithKline, developed Benlysta, the first new therapy for systemic lupus erythematosus in 50 years. Finally, Incyte crept under the wire in late 2011 with Jakafi, the first treatment for myelofibrosis.

A closer look at the figures, however, shows that the number of biologics approved by the FDA has stayed much the same for the past seven years. Moreover, developing a new medicine is still expensive. Harvard economist Frederic Scherer says it's clear "by any reckoning" that average costs per approved molecule "have risen greatly over recent decades to levels measured in the hundreds of millions of dollars".

"In 2011, the FDA approved 35 new therapies, more than at any time since 2004."

So, the biotech industry hasn't driven down development costs, nor is it bringing in the sort of income that the old blockbusters produced. Market research firm EvaluatePharma predicts that, by 2016, seven of the ten best-selling medicines will be biologics. But Humira, the product that's expected to head the league, is forecast to generate only 80% of the revenues Lipitor earned in its heyday.

Venture funding falls short

If the biotech industry's scientific productivity is still questionable, what about its business model? On the upside, US venture capitalists are back on the scene; our research shows that venture funding in the US biotech sector topped $4.7bn in 2011, 22% more than in 2010. On the downside, the total number of deals dipped again, after perking up in 2010.

Meanwhile, venture funding in the European biotech industry dropped to $1.2bn - down from $1.4bn in 2010 - as the eurozone's problems cast a shadow over the entire region. And, in Asia, venture backing plays a much smaller role; in the first half of 2011, Asian biotech firms raised just $81m.

Big Pharma is now trying to fill the gap. According to the US National Venture Capital Association, it contributed nearly 15% of the venture capital invested in the US biotech sector in 2011. But most of the leading players are under pressure themselves, as their earnings from aging medicines tumble over the 'patent cliff'.

So, the business model on which the biotech industry has relied is very vulnerable. The 'ivy-league' candidates will still be able to attract venture funding, but there won't be enough cash to sustain the whole sector.

Asia smartens up its act

What, then, about our next hypothesis: that the biomedical research base is moving east and the US is losing its lead? Some of the trends we identified in 2010 have continued. The Economist Intelligence Unit reports that, between 2004 and 2009, the number of listed biopharma companies in Asia climbed from 276 to 370, while their combined revenues nearly tripled from $27.4bn to $73bn.
Real estate services firm Jones Lang LaSalle estimates that, between 2007 and 2010, China, Singapore, India, South Korea and Malaysia collectively attracted $70bn in foreign, direct biopharma investment.

Yet Asia's key biopharma players continue to lag way behind the leading industrialised economies in terms of innovation. The number of biotech patent applications originating in the US is far higher than in any other country. But it's not just the number of applications that counts, it's also their quality, and here, too, the US reigns supreme. Industry expert Yali Friedman looked at the location of every inventor of a pharmaceutical patent in the FDA Orange Book between 2000 and 2009. A total of 60% were based in the US and 31.5% in just seven other countries.

"Between 2007 and 2010, China, Singapore, India, South Korea and Malaysia collectively attracted $70bn in foreign, direct biopharma investment."

Of course, this doesn't mean the US - or any other mature country with a strong biotech record - can afford to be complacent. By the end of 2010, there were 187 molecules in clinical trials in China, and some of them have global potential. China's standing as a source of innovation could soon improve, then, but the US looks likely to stay in the lead for some time.

Joined-up thinking

So two of the three concerns we expressed in 2010 still look valid. Fortunately, there have been other major developments as well. The trend towards collaboration has been particularly pronounced, and some of these partnerships hint at the emergence of new business models.

In June 2011, Forma Therapeutics handed over worldwide rights to one of its early-stage cancer medication programmes in return for a lump sum and additional milestone payments.

What sets the deal apart, however, is the fact that Genentech also bought an option to purchase any resulting compound outright, rather than licensing it in and paying royalties. If Forma succeeds, it can deliver a return to its investors without going public or being acquired.

Forma isn't the only biotech firm exploring new ways of realising value. Quanticel Pharmaceuticals has sold Celgene a licence to its platform for analysing genetic variations in patients' tumours. The $45m package includes a stake in the company and an exclusive option to buy Quanticel later on. In other words, Quanticel has given its venture backers an immediate return on their money, as well as making sure that it has enough capital to grow.

Warp Drive Bio, which aims to discover new products by analysing the genomes of plants, animals and wild organisms, has given Sanofi - one of its three venture backers - a non-exclusive option to buy the company. But the deal cuts both ways. Warp Drive Bio will retain the rights to many of the assets it develops unless Sanofi exercises the option. And, if it reaches certain milestones, it can force Sanofi to buy it at a predetermined price.

United front

New pre-competitive discovery federations have also emerged to alleviate bottlenecks in early-stage research. The Pistoia Alliance is one instance; it draws on the collective wisdom of biopharma and informatics experts from a wide range of organisations to devise and document best practice in R&D. Similarly, Sage Bionetworks is an open-source forum where computational biologists can pool their data and brainpower.

Some biotech companies have also turned to new allies. Vertex received $75m from the US Cystic Fibrosis Foundation when it was developing Kalydeco. Amylin Pharmaceuticals has joined with the US Juvenile Diabetes Research Foundation to help fund trials into the effectiveness of a combination therapy for type 1 diabetes.

"Biotech firms are finding new ways to attract funding and create value."

The 'venture philanthropist' model is now spreading outside the US. In March 2012, the Wellcome Trust launched a £200m fund to invest directly in healthcare and life sciences companies. Cancer Research UK has also teamed up with a European venture capital firm to create a £50m fund to boost the development of new cancer treatments.

These moves mark a profound shift. Medical charities and patient organisations have long-supported basic research, but they're now moving down the pipeline.

Package deals

The number of biotech companies collaborating with other businesses to tap into demand for personalised healthcare and added value is also on the rise. In January 2012, for example, Proteus Biomedical signed a contract with Lloydspharmacy to sell pills containing edible microchips that communicate with a disposable monitoring patch worn on the shoulder.

In general, then, the past two years have provided fresh grounds for hope. The biotech sector's productivity may still be open to question, the business model it's traditionally relied on is shaky and there's been an undeniable geographic shift in the research base. But Western scientists are as inventive as ever; biotech firms are finding new ways to attract funding and create value, and the biopharma community as a whole is trying to pull together.

A number of biotech and pharma companies are forming long-term alliances, with other organisations and each other.


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