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by Cynthia Robbins-Roth, Ph.D.
When Frank Talks, Everyone Listens But Will They Act?
By Cynthia Robbins-Roth
BioWorld Today Columnist
Fred Frank, one of the gods of biotech financing since the 1980s, recently revved up his call to industry leaders to quit whining and start innovating - their business models.
Speaking at the recent BayBio conference in San Mateo, Calif., Frank focused considerable attention on the huge structural changes in the health care industry and the financial community that are placing great pressure on biopharma firms and forcing a change in the way companies do business.
Frank, vice chairman of Lehman Brothers Inc., quoted provocative books contending that the best companies are those fueling sustained real growth with expansion into new areas, that in a turbulent age, the only dependable advantage is a superior capacity for reinventing your business model before circumstances force you to.
I was ready to be impressed by prospects of a major evolution in the biopharma ecosystem, a break away from the vicious cycle of raise lots, spend more, frustrate your investors with delays, give the big guys your products just to survive, use that validation to raise lots . . .
But in the end, Frank's call to arms fell short of demanding true innovation. Instead, the imperative for a transformative approach was defined as big pharma increasing its pursuit of external product opportunities from the mass of biotech companies that hold most of the future pipeline.
OK, I was a little disappointed. But Frank was just that: very frank about key weaknesses he sees in the current industry structure, with strong ideas about needed change.
First, Kill The Analysts
Companies need to stop groveling to Wall Street, using suboptimal business strategies to meet the constant demand for quarter-to-quarter net earnings growth. Frank is especially irate about the stock repurchase plans.
Companies are supposed to convert financial assets into another type of asset - products! Instead, they are converting cash into another financial asset - stock certificates, he said. The top five big pharma companies plus Amgen Inc. repurchased over $100 billion in stock between 1999 and 2005. All of these stocks are trading below their 1999 price except Amgen, which is up moderately.
But when you generate earnings growth primarily by stock repurchase and raising product prices at a rate twice that of inflation, sophisticated investors are not impressed. The news that Pfizer plans to buy another $17 billion of its own stock probably did not impress Frank.
Wall Street Journal reporter Peter McKay agrees, writing recently that investors are paying increasing attention to profit purity - derived from growth in sales, not gains eked out on paper.
Frank would like to see companies follow Intel's lead and refuse to give earnings guidance.
Get Real About Drug Pricing
Price control mechanisms found everywhere except the U.S. are seriously threatening to hit the health care sector. So far, the biopharma public response is piling more lobby money into D.C. and stonewalling.
The industry is always in denial, Frank said. Management is constantly whining that research costs are so high, it HAS to keep prices high. Why look for sympathy when this industry has the highest margins around and doesn't need to finance? (He is, of course, referring to the part of the industry generating net income from product sales.)
Frank pointed out that in the 1960s, industry practice was to reduce product prices once a new product had been on the market for a few years and had reached peak sales, thus generating a significant return on investment.
The lack of industry leadership puts the entire sector at great political risk. Frank points to Novartis AG and Genentech Inc. as rare positive examples. While Gleevec and Avastin have heart-stopping prices, the companies have publicly stated that patients deemed suitable for these drugs but unable to cover the cost would receive free drug. Genzyme uses that approach for its orphan drug, Cerezyme, with the annual cost exceeding $100,000 in many cases.
This is one step in the right direction, Frank said.
Innovate Or Die!
The emphasis on innovation in business models, not just products, fueling quality growth is showing up across all industry sectors. IBM's 2006 Global CEO Study, based on interviews with 765 business leaders in 20 industries in 11 mature and developing markets, concluded that the No. 1 priority is business model innovation to maintain real growth.
Frank focused his attention on the need for big pharma and big biotech to increase using the large universe of smaller biotechs as a farm system to overcome the deficits in their own pipelines.
He points out that the 1,500 or so U.S. biotech firms (excluding the top 10) account for less than 10 percent of the industry's cash, market capitalization and R&D spending, while holding two-thirds of the industry's pipeline. The big companies can make use of this multibillion-dollar R&D spending off their own balance sheets and pick up great product candidates!
Frank sees this as a win-win: The big firms desperately need those products, and the smaller biotechs desperately need access to capital, which is not coming any time soon from the public markets or the venture community.
I say: This depends on biotech being willing to put its $20 billion R&D spending to work for someone else's shareholders. Why see biotech as a way to save big pharma? Why not see this as an opportunity for biotech to take over that marketplace, to become the domain invaders (a great buzzword, which will appear in our buzzword generator later this summer!).
The imperative for a transformative approach sounds like a call for a major evolution, not just more of the same. Biotech companies don't have to choose between selling off their children for a chance to stay hungry, or turning into Genentech with its 10,000-employee infrastructure to feed.
Biotech should consider joining the growing global community of entrepreneurs building innovative businesses that look nothing like anything we have seen before. Those new businesses will be small, fast, efficient and working in a global network of collaborators to become the low-cost, high-quality providers of products.
They won't make Wall Street bankers or brokers happy this way - their deals won't be big enough to generate hefty fees. But they just might find a way to carry out the goal of many in this biz: helping create important new treatments and getting them to the patients who need them. And a new group of investors will show up to participate.
-- July 5, 2006
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by Cynthia Robbins-Roth, Ph.D.
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