At The Outset Of The Golden Era Of Biotech
Following the Elimination of 600 to 800 Life Science Companies
Life Science Leader
By Randal J. Kirk, Chairman and CEO, Third Security, LLC
At the upcoming 2009 Mid-Atlantic Bio Conference, November 4-6, 2009, held in Washington D.C, I shall be one of the plenary speakers. During my speech, I shall discuss the effects that the economy and healthcare will have on the future of the bioscience industry and identify some initial trends and offer predictions.
Within the next two years, roughly 600 to 800 life science companies will go out of business or be absorbed by others. Based on the challenges that life science companies currently face, there is a common misconception that the industry has suffered a setback similar to that of others — largely due to the poor economy — and that, with recovery in the general economy the industry eventually will return to normal. This misconception naturally begs the following questions: How long will companies be in recovery? Will the industry be able to return to its original state; and, if not, what will it become?
In the current issue of Life Science Leader, Dr. Jim Zhang asks these same questions of biotech, which is part of the life sciences industry. With 100% personal conviction, I believe the biotech industry will not return to a state that we recently knew as “normal.”
Alternatively, the industry is morphing into a new state based on a few factors.
Dependency On An Immature Industry — Healthcare
The biotech industry is dependent on an immature industry—healthcare—that lacks critical feedback mechanisms that are normal to other consumer industries in a market-based economy.
Economically speaking, human healthcare is the largest part of the life science industry and thus significantly impacts biotech. Generally, healthcare is not a mature industry, as I define it, because it does not produce, over time, a higher quality product at lower cost when measured in constant dollars. The system is lacking natural market forces or feedback mechanisms that typically serve to satisfy consumer needs with increasing efficiency.
Following World War II, the American healthcare industry began to adopt third-party payment systems for services and products rendered, which divorced the consumption decision from the payment obligation. This eliminated a direct feedback mechanism that otherwise would serve to balance production and consumption and to minimize price by maximizing price competition. This systemic feature keeps the marketplace from efficiently satisfying consumer needs.
Additionally, healthcare exhibits technological limitations since it is incapable of satiating consumer needs. Today, there are significant areas of unmet health needs. For example, numerous meta-analyses indicate that medicine only offers meaningful improvement in one in four cancer cases. Conversely, for the other 75% of cases, medicine has little or no impact on morbidity or mortality — perhaps even creating negative effects.
When patients are challenged by a need that may not significantly be met in terms of health outcome, the healthcare industry has actually been selling a product that is quite different from what may reasonably be termed ‘healthcare’ and that product is called “hope.” As a product, hope offers considerable profit opportunity. Moreover, in the purchase of hope, when hope is the acute need, consumers exhibit ‘flat relative price elasticity’, an economic term that means that they will buy the same amount of it over a considerable range of prices. Needless to say, real healthcare that is produced by competing vendors is not a product for which consumers will be indifferent as to price (especially if they are paying for the item themselves, or aware that they indirectly do). For example, many of the cancer therapies that gross billions of dollars per year today only manage to move overall survival rates by an average of a few weeks and are largely ineffective for the majority of patients who take them.
As these forces influence demand on biotech companies, they present both a challenge and a potential opportunity, if appropriate strategies are adopted. At the 2009 Mid-Atlantic Bio Conference in Washington, D.C., Nov. 4-6, 2009, my colleagues and I will discuss several of these strategies to help companies seize the opportunity.
Biotech’s Wake-Up Call
For a variety of reasons that I shall elucidate at the conference, much of the biotech industry is based on flawed logic and processes that in the cruel light of day reveal themselves to have been chasing specious objectives with an overabundance of poorly directed capital. Now that it is apparent that the funding has been withdrawn, analysts predict that hundreds of life science companies will go out of business within the next two years. Although it is convenient for many in the industry to conclude that the problem exists entirely in terms of adequacy of funding, the more obvious lesson seems to have gone largely unlearned: We have been creating too little value. Many of the companies that will disappear were originally created on the foundation of “me too” logic or the prevailing “easiest-to-finance” logic that is more akin to a racket than an industry that is dedicated to providing constantly improved value to the consumer.
To date, the industry has been riding the coattails of convenience by not challenging the system through individual analyses that ask, for example, whether there is a quick and easy way of testing the ultimate proof of concept. The governing thought in these companies has been that clinical candidates of various stages, for example, have a roughly equivalent probability of marketability and that values may therefore be assigned to them. Management’s general direction from the venture community and then the analyst community has been to turn a preclinical product candidate into Phase I, and then to turn it into Phase II, and into Phase III, and then file an NDA. In many cases, a simple proof-of-concept study done initially and correctly would determine if the underlying premise—that the product candidate could achieve its therapeutic goal—was valid or not. Needless to say, proof-of-concept oriented studies have largely been discouraged.
What Should Companies Be Doing?
Companies should be focusing on adding genuine value to the maturation process of the health care industry by developing technologies that produce a higher quality product at lower cost. These two objectives are not conflicting but, as is readily observable in all the many mature consumer industries, are actually complimentary. Currently, our understanding of molecular and cellular biology, and particularly the development of synthetic DNA, is helping to reveal new promise across many esoteric therapeutic motifs. Those at the cutting edge of molecular and cellular biology appreciate that the problems they are addressing scientifically are the lynchpin problems for most of the significant areas of unmet human health needs, since many of these areas have a common problem: either not enough good cells (e.g. diabetes and cardiac disease) or too many bad cells (e.g. cancer).
Companies may be well served to understand these commonalities and develop approaches accordingly. Literature is increasingly showing that developing technologies are becoming more multifunctional as different scientific interests, once characterized as discreet, are converging (e.g. the convergence of cancer, inflammation, and immunology). These and additional approaches to how companies can add genuine value to the maturation of healthcare will be explored at the 2009 Mid-Atlantic Bio Conference in Washington, D.C., Nov. 4-6, 2009.
The Golden Era
Biotech is at a critical juncture: a golden era of valuable discoveries that forever will revolutionize its foundation. Within the life science fields, the most promising space includes molecular biology, cellular biology, and genetics, and the intersection of the three. This space is accruing intellectual capital at such a fast rate that, in my estimation, the quantum of what is known is doubling every 2-3 years.
To put it into perspective, biotech is at a place similar to where the semiconductor and software industries were in 1980. Just as GUI screens, object oriented code, data base software, optical fiber and many other science-based technologies became established as fairly fixed concepts in the development of a meteoric increase in productivity for those industries, biotech today is on the verge of identifying the technologies and motifs that will be the bases of its growth hereafter.
The comparison to the semiconductor and computer industries may be more than casual. For example, while biotech thus far has focused largely on genes and their expressions through cellular processes, there is a Brave New World in DNA in the untranscribed regions, e.g. the regulatory domains. As we develop a deeper appreciation for the logical control motifs within DNA and thus within cellular machinery, we begin to unlock the sort of power that therapeutics thus far have lacked: the ability to operate differentially on diseased vs. healthy cells, the ability to be controlled externally after administration, the ability to provide all sorts of conditionality on the expression of a protein or on some other cellular process. Essentially, the industry for its first 30 years focused on genes, their modification and the processing of their output. Now the focus will shift to the non-transcribed portions of DNA. Within this focus, researchers now understand that the regulatory domains act as logical controllers, and, indeed, that DNA is nature’s logic controller.
Based upon these observations, biotech is entering its golden era, where tremendous growth in technological applications creates meaningful clinical tools. These applications will serve to address the majority of cancers, the majority of degenerative diseases, and so on.
Over the next 10 years, as major advancements unfold, it is going to be an exciting time despite some short-term challenges. At the 2009 Mid-Atlantic Bio Conference, I plan to offer more thoughts on the next wave of advancements, the future direction of biotech and other industry and market trends. My hope is that we can work collectively toward bettering our industry. I hope to see you at the conference.