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by Cynthia Robbins-Roth, Ph.D.
Is The Big Pharma Model Broken?
Survival Of Fittest In 2005 For Biotechnology Firms
By Cynthia Robbins-Roth
BioWorld Today Columnist
Biotechnology is in an interesting situation these days - interesting in the Chinese proverb sense of the word.
The public markets have rewarded the sector with stock performance that outshines the S&P 500 since 2000, and yet raising money - public or private - remains difficult.
Venture investing has returned to biotech. Still, most startup teams complain about nine-month long due diligence, miserly valuations and lack of investors for early research deals.
According to BioWorld's figures, Series A financings raised $422 million in 2004, of which almost half went to specialty pharma companies with management pulled from big pharma and drug candidates already in the clinic. The classic biotech startup - with innovative, proprietary science aimed at a novel medical target and still in the research phase - almost has been shunned by the venture community.
The good news is that biotech is churning out a growing number of products that are changing the practice of medicine and bringing billions in revenue to the bottom line. But here's the bad news: Biotech faces an uncertain future in which the key regulatory agency - FDA - is under serious scrutiny over safety concerns, big pharma is in the crosshairs and consumers are reaching the breaking point over the cost of drugs.
The financial community is debating whether the "biotech business model" is broken. I propose that it's the big pharma model that's broken.
Here are a few ways biotech can begin to better itself:
-- March 14, 2005
- Biotech CEOs must take a public stance that their companies will be open and truthful about the risk/benefit equation for new drugs and how they are marketed. They should voluntarily post all clinical trial results. Biotech must reinsert the concept of public good and ethical behavior into its business plans.
The ongoing public battle between public safety and financial gain is drawing more attention to biotech and increasing the probability that regulatory changes are coming. David Graham at FDA and Elliot Spitzer in New York are getting attention for claims of companies hiding unfavorable safety data, with cover-ups and poor approval decisions at FDA.
The pharma industry is providing its own evidence that financial gain trumps safety, including 13 products pulled off the market between September 1997 and September 2004, GlaxoSmithKline plc being sued by Spitzer over hiding Paxil data, and the recent uproar over COX-2 inhibitor dangers. Biotech is not immune to these problems. Biogen Idec now must defend itself (along with the FDA) regarding the decision to market Tysabri for multiple sclerosis. It didn't help that Biogen Idec's general counsel sold 89,700 Biogen shares the same day the company learned about a serious adverse effect.
- Biotech should take the lead in working with the federal government and big business to ensure that access to important products won't bankrupt businesses and families. Companies must retool their business models to survive and thrive in a future with price controls.
The increasing financial pressure of employee health care on big corporate America is going to beat the lobby pressure of big pharma against drug pricing. In January, General Motors hit the front page of The Wall Street Journal with news it was lowering its 2005 profit forecast because of its employee health care bill. To date, big pharma and biotech have responded solely by refusing to support any changes in that area, and insisting that the drug industry will fall apart if it can't charge what the market might bear to support R&D. In January, prices were raised on many top-selling drugs.
The public's only recourse has been busloads of the elderly heading across the Canadian border for cheaper drugs, which has Canadians up in arms as big pharma threatens to cut their drug shipments.
The $550 billion in 2004 global drug sales is not funding innovation. The FDA said 314 drugs were approved from 2000-2003, including 132 biotech products. But only 10 percent were new molecules with significant improvement over existing drugs - the rest were "me-too" drugs or new indications for existing drugs.
Working on fatal diseases isn't the answer to pricing concerns, either: $40,000 for a cancer drug that adds three months' lifespan is tough to justify.
- Biotech CEOs need to change their "deal" with Wall Street, to focus on building a growing, sustainable business that makes a profit and shares that profit via dividends - not continually inflated stock price.
Big pharma has promised its public investors annual double-digit net earnings growth, which becomes impossible to deliver. That has been a driving force behind many of the mega-mergers in the sector - delivering on the earnings promise by firing thousands of employees. But then what? Pfizer, the most avid U.S. merger, is expected to see reduced sales over the next five years.
Perhaps the focus on stock price has more to do with delivering rising profits on senior executive stock options than with building value in the company.
- Biotech must be more creative in reducing the cost of sales and marketing to weather the inevitable price controls.
Big pharma spends as much, or more, on marketing new drugs as on discovering those drugs. The Financial Times reported that drug companies spent $3.3 billion in the U.S. alone on direct-to-consumer advertising and gave away $16 billion in free samples last year. (Not to mention launch parties in Las Vegas.)
- Finally, big pharma is no longer biotech's partner of choice. Biotech and its excellent innovation machine should use the specialty pharma and growing global network of low-cost service providers to support downstream activities.
Big pharma today is a dinosaur due for extinction. It relies on biotech for new products. Conventional wisdom says big pharma excels at the downstream functions: clinical development, commercial-scale production, sales and marketing. However, products pulled off the market for serious safety problems, asthma inhalers hitting the shelves without medicine, and bloated sales and marketing budgets perhaps suggest that some of those pharma companies are actually not so good at that stuff.
Biotech needs to build a leaner industry to survive the coming climate change. An end to board of director meetings in Irish castles could mean the beginning of a new world for biotech.
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by Cynthia Robbins-Roth, Ph.D.