Shrinking Economy Hits California Biosector

By Amy Ritter, Pharmaeutical Technology.

A report released on Feb. 8, 2012 from the California Healthcare Institute, BayBio and PwC shows that the shrinking economy, changes in investment strategies, and pressures on the pharmaceutical market have put the brakes on one of the US’s most robust biotechnology centers. California had enjoyed steady growth in its biotech sector for the past two decades, and according to the report, is the source of 28% of the country’s biomedical pipeline. More recently, as with the rest of the world, the slowdown in the global economy has taken its toll on this area. The industry lost approximately 6,300 jobs, or about 2.3% of its life-sciences workforce since 2008, returning employment levels to those seen in 2006.

By Amy Ritter, Pharmaceutical Technology.

A report released this week from the California Healthcare Institute, BayBio and PwC shows that the shrinking economy, changes in investment strategies, and pressures on the pharmaceutical market have put the brakes on one of the US’s most robust biotechnology centers. California had enjoyed steady growth in its biotech sector for the past two decades, and according to the report, is the source of 28% of the country’s biomedical pipeline. More recently, as with the rest of the world, the slowdown in the global economy has taken its toll on this area. The industry lost approximately 6,300 jobs, or about 2.3% of its life-sciences workforce since 2008, returning employment levels to those seen in 2006.

The report defines the biomedical sector as consisting of basic research, biopharmaceuticals, diagnostics, medical technology, research tools, laboratory services, and wholesale trade companies. When broken down by area, the employment news is not uniformly bad. Most of the job losses were from academia and from the device industry, and were partially offset by gains in the biopharmaceutical sector. CEOs within the industry were surveyed as to the reasons for reducing their company’s operations within the state. The top three reasons given were cost cutting, the overall business climate, and expanding new operations outside of California. Most CEOs were optimistic about the future, the majority indicating that they expected to either hold steady or increase operations inside and outside of California.

The investment climate has been affected by the economic slowdown, which in turn, affects the operations of companies in California. According to the report, more than 74% of respondents said that their company had delayed a research or development project in the past year, up from 69% in 2010. The overriding reason, at just over 40% of respondents, was cited as “funding not available.” In an accompanying press release, Tracy Lefteroff, national life sciences partner at PwC US offers this analysis. He says, “The life cycle of biomedical startup companies has changed as challenges to raising capital have increased. Whereas their greatest challenge in years past was in validating the science, these companies now need to validate getting funding by lowering costs and improving returns. The strength of California’s life sciences industry remains closely tied to the level of confidence that the investment community has in the industry’s ability to develop innovative products while effectively managing the challenges associated with clinical and regulatory risk.”

California Biotech — Good Governance Tops Wish List

New industry survey data documents a fraying investment base marked by a distant and unresponsive FDA as well as an unprepared work force complacent about hungry foreign competition.

California’s biotech industry has taken its annual pulse of business conditions — and while the prognosis is not for putting the state on the policy equivalent of life support, corrective therapy is clearly needed. The 2011 California Biomedical Industry report, issued on February 1, is a joint effort of the California Healthcare Institute, the BayBio trade association and consultancy PwC. Its signal finding is that maintaining California’s status as the world’s biggest locus for biotech innovation depends on enlightened, world class regulation.  Unfortunately, however, this is not being provided by the bureaucrats in Sacramento or Washington, especially the FDA.  

The report is a public relations tool with statistics that documents how biotech is an essential driver of productivity and high-value growth.  Nearly 14 per cent of the state work force depends on investments in the sector, which employs some 268,000 people [or 783,000 indirectly] at an average salary of $72,000.  Some 16 per cent of total employment is in the area of academic research, a trend that highlights the growing importance of external partners in seeding the innovation that generates a commercial return.  Likewise, 12,000 new jobs were added by companies in 2008-2009, making biotech “the most resilient of the state’s high tech industries.” More important in an era of fiscal retrenchment, the 1,000-plus biotech and device companies operating in California contribute $86 billion to the local tax base.

The report incorporates a survey of CEOs of local biotech companies, in which the mood was mainly upbeat after the punishing financing reversals of the recent recession.  Access to venture capital, a key asset for the state, is returning in strength;  most of those polled expect a steady increase over the next several years, above the $2 billion recorded in 2010. R&D operations are staying in-state, although only 41 per cent of CEOs expect manufacturing investments to remain at par or increase over the next two years.

In terms of threats and challenges, the report and its CEO polling data are definitively frank — there are three.  Foremost is duplicative and unpredictable state and federal regulation in key areas like risk benefit, tax and reimbursement, followed by an unprepared workforce and finally environmental standards that primarily impact manufacturing.  The FDA is cited repeatedly for its tilt toward risk over benefit, which is causing the US to fall behind Europe in the pace and scale of innovation.

Many of the CEOs surveyed believe that China, India and other emerging Asian markets will pose a similar threat in being able to “replicate the California biotech ecosystem” without the drag imposed by FDA.  Global competition for a place at the table is intense, with 80 per cent of the CEOs confirming they had been “courted” by other US states or countries for investment in the past year.

Surprisingly, a conference call on the report hosted by the Institute yielded little on what the industry should do to help resolve the state’s current budget crisis, which is likely to force steep cuts in support for California’s world-class university system.  The outcome is far from academic, as one company represented on the call, OncoMed Pharmaceuticals, exists today because of a university-held patent on its key therapy.

Noting that powerhouse California-based biotechs like Chiron and Genentech also had their early roots in the work of academic researchers, OncoMed CEO Paul Hastings said “we were born from this legacy of public investment in basic science.”

Hence we are back to the central question:  who provides the physical and intellectual infrastructure to let the private sector do its best?

Fixing Biotech’s Broken Business Model

Despite some notable successes, the global biotech industry has fallen short of expectations. Strategic collaborations have been on the increase, but there is now a need for more co-operation using new collaboration models, writes Jo Pisani.

The current business model on which biotech has relied is flawed. Due to poor rates of

Jo Pisani, PwC

return, investment has dried up as the model carries very high risk of failure. This was illustrated recently by a study that highlighted that of the 1,606 biotech investments realised between 1986 and 2008, 704 investments resulted in a full or partial loss, while 16 only just covered their costs.

The same study showed that the gross rate of return on these 1,606 biotech investments was 25.7% compared with a pooled average return of 17% on all venture capital invested over the

same period. However, costs and ‘overhang’ from unrealized investments reduced the net rate of return to about 15.7%. There were also huge variations in the cash multiples earned by the 886 investments that did make a profit. On top of this, the external conditions that have allowed companies to thrive are now vanishing.

As Asia’s emerging economies invest more heavily in higher education and the reverse ‘brain drain’ picks up pace, the research base is shifting East. This is shown by the number of students graduating with doctorates in the physical and biological sciences.

Between 1998 and 2006, the number soared 43% in India and a staggering 222% in China, far outstripping the rate of increase in the West. Emerging economies are also now competing more aggressively and many are even actively building domestic biotech industries.

In the last 18 months, China has invested $9.2 billion in technologies R&D, including biotech, and India is currently exploring plans to become one of the top five biosimilars producers by 2020. These particular companies pose even more of a risk to Western biotech having learnt from their mistakes. They are now sidestepping the costly infrastructure that places burdens on companies in developed countries to create new business models that are leaner and more economical, as well as pioneering innovative products and processes.

Furthermore, financial investors are getting increasingly more cautious and capital is no longer easy to raise. In 2008, biotech raised just $16.3 billion in the US, Europe and Canada, 45% less than in 2007, and no significant improvements are expected.

According to one estimate, 207 of the 266 private and public European biotech companies with products or platform technologies either in clinics or on the market, urgently need to raise around $8 billion between them. Given that the total amount of European venture capital invested in the sector was just $666.6 million in the first half of 2010, it is doubtful many will succeed. However, yet another change is taking place as the boundaries between biotech and pharma continue to blur resulting in the creation of the biopharmaceutical industry. Despite this development, all biopharmaceutical companies will need to adopt a very different business model if they are to survive.

A united front
So, what would this new model look like? Efficiency is the name of the game and, as collaboration will accelerate and facilitate innovation, discovery and development, which in turn will reduce costs, two new concepts — precompetitive discovery federations and competitive development consortia — lend themselves to just such an approach and could be the keys to unlocking the industry’s potential.

Pre-competitive discovery federations
Pre-competitive discovery federations are public-private partnerships in which biopharmaceutical companies swap knowledge, data and resources with each other and additional third parties, such as government agencies and universities. Their aim is to overcome bottlenecks in early-stage biomedical research and a number have already been established. Many of these are fairly new and sit toward the philanthropic end of the spectrum. One such alliance, the Structural Genomics Consortium, has already proved a success.

Backed by organizations such as GlaxoSmithKline, Merck and Novartis it published 450 protein structures within three years of starting work, and aims to publish another 660 structures by July 2011. It is much too early to assess the overall impact of pre-competitive discovery federations in terms of reducing lead times and costs, or treating intractable diseases. Nevertheless, given the benefits, including, cash savings as investments costs will be lower and reduced duplication, it’s probable that all precompetitive research will be conducted in this way by 2020.

Determining the boundaries between pre-competitive and competitive research is difficult and opinions will vary. However, it’s possible to see how some of the lines might get drawn. For example, data preceding the point of filing for a patent could provide various opportunities for pre-competitive collaboration with many companies possibly prepared to go considerably further.

Competitive development consortia
Closer collaboration could also benefit the development process with the introduction of competitive development consortia (as we’ve called them). These consortia allow rival biopharmaceutical companies to join forces with each other, as well as with contract research organizations and platform technology providers.

The pooling of their portfolios could enable them to concentrate on the best drug candidates, regardless of which company had invented them, thereby eliminating a great deal of waste. Big Pharma has traditionally shied away from such arrangements, yet competing heavyweights in a number of other industries have successfully come together to develop new products.

General Motors, Daimler and BMW collaborated to create the hybrid petroleum-electric engine, for example. And there’s evidence that some large pharma companies may now be willing to take a more open stance Indeed, AstraZeneca and Merck recently embarked on a partnership to develop a combination therapy for cancer, each contributing an investigational compound to the mix. Combination therapies for cancer are common, but they’re usually tested late in clinical development, after registration, or a new potential treatment is tested in combination with the standard therapy.

However, AstraZeneca’s compound was still in Phase II, and Merck’s compound had only been tested on 100 people, when the two companies decided to join forces. As trials have moved on, and look promising, collaboration has also been agreed for testing the treatment in Phase 1 trials. The big question is how regulators will respond if they are successful as no one has ever co-registered two unregistered drugs before. The success of these new federations and consortia will hinge on the existence of data aggregators. No such organizations currently exist. Nor, indeed, do some of the tools required to manage vast amounts of biological and chemical data.

Nonetheless, solutions to the challenges are starting to emerge as big technology providers enter the computational bioinformatics space and the use of semantic technologies for integrating and analysing data grows. An ‘innovation culture’ and a new spirit of realism, on the part of all involved in the chain, will also be vital if this approach is to succeed. Organizations will need to share assets and insight that they have previously ring-fenced for themselves, will need to be willing to take risks and work with third parties and assets that they don’t own and this will require investors to take a longer term view on rates of return and change the funding model.

The size of the prize
By following this new model, the biopharmaceutical industry would be able to use their precious resources more intelligently, make more astute investment decisions and ultimately develop and deliver better medicines and even small savings could yield significant savings. We have estimated that, given average development costs and lead times, a 5% increase in success rates for each phase transition and a 5% reduction in development times could cut R&D costs by about $160m, as well as accelerating market launch by nearly five months. In fact, a 5% improvement in phase transition rates alone would trim about $111m from the tab.

In addition, there is also room for companies to benefit individually. The biggest companies will see increased access to innovation, higher productivity and lower costs — improvements that will help them to fend off growing criticism from healthcare payers and patients angered by the high prices of many new medicines that are currently coming to market. Meanwhile, the smaller companies will be in a position to obtain more stable, long-term financing, better opportunities for benchmarking the value of their own contributions and access to vital regulatory and marketing skills. There are considerable cultural, behavioural and practical hurdles to overcome if the industry is to succeed but, given the rewards collaboration can bring, they’re well worth resolving.

Making the sums add up
Hard-pressed governments are now struggling to meet the healthcare demands of growing populations and their changing demographics. More effective and more economical medicines are now more important than ever and only when the industry can work together will it be on track to meeting the demands of today’s society.

About the Author
Jo Pisani is Partner, Global Pharmaceuticals and Life Sciences at PriceWaterhouseCoopers, UK.