Blue Skies Ahead For Biotech?

By Andrew Emmett, director of science and regulatory affairs, BIO

New studies capture Wall Street’s views on the industry and drug approval success rates.

A study recently released by BIO Industry Analysis and research firm Ipreo shows that investors are optimistic on biotech’s future, and investment in biotechnology will continue to perform well. Findings from the study were presented in February at the closing plenary session of the 13th annual BIO CEO & Investor Conference, the largest independent investor conference focused on publicly-traded biotech companies. The study gathered feedback from 135 investment professionals representing firms with $2 trillion in equity assets under management, including $166 billion invested in healthcare and $38 billion invested in biotech.

 The BIO/Ipreo study indicates that the majority of investors believe biotech is headed in the right direction and that this is generally a good time to invest. More than 86% of investors surveyed believe the major biotech indices will end up in positive territory for 2011, with 35% forecasting double digit returns. Nearly 55% of investors believe biotech will outperform the rest of the healthcare sector in 2011.

Despite the economic challenges facing the industry, biotech is still outperforming other markets. Most sectors were up and down in the stock market last year until September, when a broad rally took over. Most sectors are now up, including biotech. “It’s clear from our findings that biotech continues to be a sector of high interest to investors,” said Brad Joseph, director of biotechnology and healthcare at Ipreo. Investment in the industry is long-term and high-risk. Inherent with this high risk is the potential for enormous returns. Returns on investment often soar beyond expectations once products are put on the market, fueling optimism and hope for the industry. “The industry is one of monsoon or drought,” said Oleg Nodelman, portfolio manager at the  Biotechnology Value Fund. “Raise as much as you can when you can, because who knows what will happen tomorrow.” Chris Swindle, managing director of life sciences at Wedbush PacGrow Life Sciences, suggested “there is still room in the industry for an uptick in valuation.”

The industry may also benefit from some good news in 2011. “There are 10 to 15 pivotal Phase 3 studies coming out this year, mostly from smaller biotech companies, not big pharma,” explained John Craighead, Ph.D., managing director of investor relations and business development at BIO. “The results could drive overall investment in the industry, at least through the first half of 2011.”

Hopefully, positive clinical trial results will drive increased activity in the IPO market. More than 88% of the investors surveyed in the study believe there are going to be the same number or more IPOs in 2011 compared to 2010. However, not everyone is convinced yet.

“I do not see the appetite in the IPO market yet, but that may change if we get really great clinical results this year in terms of the next Gilead or Celgene being created,” said Geoffrey Porges, senior biotechnology analyst at Sanford C. Bernstein and Company.

“The success rates in the industry will go up in the next couple of years because we are doing a better job of conducting the right trials,” explains Eric Roberts, managing director at Caxton Advantage Life Sciences Fund.

Reevaluate The Biotech Business Model
Many CEOs and investors have asserted that the biotech business model needs to be revisited since long drug development timelines and regulatory hurdles often hinder or halt progress and cause some investors to shy away from the industry altogether. The time frame between initial funding and getting a product on the market is excruciatingly long — an average of 15 years or more — and is coupled with astronomical costs.

Drug approval rates may be lower than previously reported, according to another recent study. The BIO Industry Analysis and BioMedTracker (BMT) study shows the overall success rate for drugs moving through clinical trials to FDA approval from late 2003 to the end of 2010 is near 1 in 10. Previous reports, taken from earlier years, showed the rate of drug approvals is one in five to one in six.

“This study highlights the depth and breadth of risk inherent in the drug development process more comprehensively than any other previous study,” said Alan Eisenberg, executive VP of emerging companies and business development at BIO. “Knowing more about the magnitude of risk can lead to smarter drug development as well as smarter investing.”

 The study builds on the findings from previous studies and uses a broader, deeper, and larger sample than previous reviews of clinical trials and approvals data using the BMT proprietary database of 4,500 drugs and over 8,000 unique development paths. The BMT/BIO study examines the clinical phase status of these development paths as of year-end 2003 through year-end 2010, which accounts for more than 59,000 data points. 

 Using clinical trial data from the past seven years, the analysis examines the most recent probability of success by treatment type, phase of development, and therapeutic area.  Before new therapies hit the market, they have to pass a number of hurdles — meeting regulatory thresholds for efficacy and safety as well as maintaining a competitive internal corporate profitability and marketability profile.

Additional Key Findings From The Study:
Overall success rates from Phase 1 to FDA approval are nearly 9%. This number is composed of lead and secondary indications. When separated, lead indications have close to a one in seven rate of approval and secondary indications have a rate of 1 in 30.

Clinical trials that address secondary indications for drugs tend to be far less successful on average. This was seen in all phases of clinical development as well as in all disease areas.

The study also shows that large molecule drugs are twice as successful in gaining approval as small molecule drugs.

More Small Biotech Companies Represented
Data analysts presented results from the study at a panel session at the BIO CEO & Investor Conference in February. The study included more small companies, which is significantly different than previous studies. “Smaller companies are working in riskier and often unproven territory,” said David Thomas, director of industry research & analysis at BIO and co-author of the report.

Another nuance in approvals raised by Lawrence Friedhoff, M.D., Ph.D., FACP, CEO of Pharmaceutical Special Projects Group, LLC, is the importance of individuals in the drug development process. “The majority of drug approvals are attained by people who have done it successfully in the past, and this dynamic is often not captured when looking at drug approval rate averages,” said Dr. Friedhoff.

Ted Buckley, Ph.D., chief economist at Bloomberg, recommended placing a greater emphasis on biomarkers and molecular diagnostics. Dave Thomas of BIO took this idea one step further and suggested combining molecular diagnostics with adaptive trial design, which may facilitate more targeted and, potentially, more successful trials.  

Michael Hay, senior biotechnology analyst at Sagient Research Systems, presented slides on overall success among disease categories, comparing Phase 2 and Phase 2 approval rates. “The data shows where the money is being made broadly, although there may be differences among specific diseases,” said Hay. “As an example, there are 257 specific diseases included within the broad cancer disease category.”

The underlying message from this study is that the innovation cycle is not conducive to ensuring that promising science will survive, thrive, and make it to market.

Indeed, the need to advance science has never been more critical, and therefore, the industry requires an economic and regulatory environment that will support promising science. Positive momentum from clinical trials and an increase in IPO activity may lead to more investment in the industry and, potentially, blue skies ahead for biotech.