Magazine Article | December 12, 2011

Healthcare Biotech: An Unfulfilled Promise?

Source: Life Science Leader

By Dimitris Dogramatzis, RP, h, Ph.D.

Over the last three decades, healthcare biotechs, starting with Genentech in 1976, have raced to commercially capitalize on the discovery of the double helix, as well as later discoveries on how to manipulate genes by “splitting and splicing.” During this arduous process, countless biotechs have formed, borrowed huge amounts of money, employed strong scientific minds, and eventually very few have managed to commercially introduce biopharmaceuticals or vaccines into the global marketplace. Of the commercial companies, even fewer have managed to reach profitability, thus giving birth to a recent debate on whether biotech has capitalized on its promise to patients, employees, and investors alike that it would soon revolutionize medicine and achieve significant financial returns in the process.

They Had A Dream
Early biotech visionaries believed that biotech would contribute to “the knowledge economy,” create jobs, save lives, prevent diseases, create wealth, bring hope for unmet medical needs, and be competitive. It would improve the quality of life of our aging population, and address the threat of disease outbreaks. It would correct genetic defects, increase survival rates in cancer, offer new diagnostics and targeted therapies to improve response and reduce adverse effects. In the process, drug R&D would become more efficient, faster, less risky, and cheaper. Some of the biopharmas would quickly become fully-fledged pharmas, displacing the incumbents. In fact, past promises of biotech were simply a prologue and the future realities sublime, and biotech will be the future of medicine, while the 21st century will be a “BioCentury.”

Healthcare Biotech Is The Pinnacle
Since the first biopharmaceutical FDA approval in 1982, many once-fatal diseases have become manageable conditions. Biopharmaceuticals increase life expectancy, decrease disability, and reduce the need for health services. By now, biotech medicines have been prescribed to 325 million patients, there are more than 200 approved therapies and vaccines, and more than 400 in clinical trials targeting more than 200 diseases. In 2009 alone, the FDA approved 29 new products. In the EU, biopharmaceuticals on the market increased from 30 in 1996 to 85 in 2005, and the biopharma market share of all pharmaceuticals increased from 4% to 10%. In 2008, biopharma candidates in the European pipeline were over 1,000.

The U.S. industry’s net income jumped from $400 million in 2008 to $3.7 billion in 2009, and the aggregate net income in established markets was positive for the first time. In the United States, biopharmas’ GDP contribution was $114.6 billion in 2008, while exports rose by 60% from 2005 to 2009, to $46 billion or 5% of total exports. In the EU, biotech contributes 1.4% of total healthcare applications’ GDP, 5% of the pharma market’s gross value added growth (GVA) and 0.04% of the EU’s GVA.

Global pharma sales reached $808 billion in 2009 and are expected to reach $1.1 trillion in 2014. The biotech market has shown tremendous growth, reaching $128 billion in 2009. Roche is the global leader with biological revenues of $36.1 billion in 2009, followed by Amgen with $14.7 billion.

In 2014, 7 of the top 10 drugs are forecast to be biotech, compared to just one in 2000. Biotech drugs will account for 50% of the top 100 drugs in 2014, compared to 28% in 2008, while the top six best-selling drugs will be biotech.

In 2008, every U.S. biopharma job supported 3.7 jobs in other sectors, or 3.1 million jobs across the economy. National sector employment grew by 28.8% between 2001 and 2008. It is estimated that pharma will add 17.6 million jobs between 2008 and 2018. And in the EU, biotech contributes 0.4% of the health sector employment.

In 2008, U.S. biopharmas invested $63.7 billion in R&D, while bioscience patents reached 13,150 in 2009, representing 60% of global patents. Meanwhile, in the EU 27 countries patent applications increased from 1,315 in 1994 to 2,790 patents in 2000, and R&D costs increased from the mid-1990s to 2007 from 8 billion euros to 27 billion euros.

Antithesis: Healthcare Biotech Is OverHyped
Rasnick (2003) proclaimed that most of the 140 biomedicines were not moneymakers, either because FDA approval is for rare diseases with small markets or because they just don’t work. Pisano (2006) added that combined revenues of all public U.S. biotechs remain close to zero, while those of all U.S. combined public/private biotechs remain in the red. Thirty years since their creation, very few biopharmas have reached profitability. Any investor who purchased all 340 biotech IPOs between 1979 and 2000 and held those shares until January 2001, or until company acquisition, would have realized a disappointing annual return of 15%, compared to less risky investments. According to Battelle/BIO (2010), of the total of 383 public drug/pharmaceutical firms in 2008, only 98 had positive income, while 285 were in the red.

Nightingale and Martin (2004) suggested that instead of the ‘biotech revolution,’ biotech is following a pattern of slow and incremental technology diffusion. Biotech’s potential has not been realized, because many applications, including gene therapy, have not reached the clinic. Roughly the same number of drugs was approved by the FDA in 2002 as two decades earlier, and this, taken together with the substantial increase in R&D expenditure between 1970 and 1992, gives further evidence of a productivity decrease. Arundel and Mintzes (2004) suggested that, despite huge investments, only 16 biopharmaceuticals evaluated between 1986 and 2004 were better than ‘minimal improvements’ over preexisting treatments.

There is no sign that biotech has revolutionized pharma R&D productivity, no proof that the unexceptional productivity is due to the complexity and risk of biotech projects, nor that productivity will improve with time. Biotech’s R&D is characterized by profound and persistent uncertainty, rooted in the limited knowledge of human biological systems and processes. Furthermore, since 2001, “biopreneurs” and investors have begun to look for lower-risk, faster-payback models. Also, the biotech business models have worked poorly because they were based on the wrong inferences about the underlying sciences. Glick (2008) counters that from 1982 until 2006 254 biotech drugs were approved by the FDA, indicating an accelerating approval rate as the sector matured. Similarly, the number of biopharmas with annual revenue exceeding $100 million for the first time has been accelerating.

R&D spending per new biopharmaceutical launched decreased from $2 billion in 1985 to $1.3 billion in 2004. Between 1950 and 2008, the FDA approved 1,222 therapies (1,103 small vs. 119 large molecules). Average development times for biomolecules are slightly longer (97.7 vs. 90.3 months), while development costs are the same ($1.24 billion vs. $1.32 billion). And, the overall success rate is only 9.1%, compared with 6.7% for a small molecule. Looking at historic European Medicines Agency applications, an increase in the number of biopharma product applications was observed, whereas in 2008 half were for generics, hybrids, etc., indicating a change of biopharma focus from developing new medicines to improving existing ones.

The biotech business model of the past 30 years is described as breaking down. In a study of 1,606 bioinvestments between 1986 and 2008, 704 resulted in full/partial loss, while 16 broke even. Ten-year returns have deteriorated since 2008, and in March 2010 plummeted to -3.7%. Of the companies with top-selling biologics, most of them started up in the United States in the 1970s, floated very early raising substantial funds, and were subsequently acquired by big pharmas, a process that cannot be repeated anymore. During the last decade the biopharma business environment has changed due to increased costs and time of drug development, decreased likelihood of regulatory approval, and increased payer resistance once approved. To make things worse, high costs of biopharma innovation and strict regulatory oversight translate into high consumer costs. For example, an average 10-month colorectal cancer regimen of Genentech’s Avastin reaches $46,000.

The Next 30 Years
Criticism of healthcare biotech lately abounds; nevertheless, the industry has started to indicate it is turning around: the United States industry reached aggregate profitability in 2008, for the first time ever; R&D productivity is gradually improving, as indicated by the amount of R&D money spent per molecule introduced; profitable biotechs are slowly increasing; global biopharma sales have risen from $13 billion in 1998 to $128 billion in 2009; and biopharmaceuticals are gradually stealing sales away from traditional pharmaceuticals in several therapy areas. Furthermore, annual biopharma approvals are increasing, compared to the dawn of biotech; biopharma approvals are gradually overtaking chemical medicine approvals; the numbers of patients treated, companies formed, employees working, and products and therapy areas involved are impressively rising; the Nasdaq and AMEX biotechnology indices have significantly outperformed the S&P, Dow Jones, and Nasdaq indices over 1995 to 2008; and biotech has outperformed several newer industries, such as telecoms or the Internet.

Various experts have made recommendations for biotech’s next 30 years, such as vertical integration, fewer/closer collaborations, fewer independent biotechs, quasi-public corporations, cross-disciplinary academic research, more translational research, discovery federations, development consortia, and an innovation culture. In addition, greater realism and collaboration throughout the value chain is predicted. To be fair, every human endeavor that propelled mankind to a higher level started with trial, error, and immense disappointment. Our children will tell.

Dimitris Dogramatzis is author of "Healthcare Biotechnology - A Practical Guide", CRC Press, 2010. He is a registered pharmacist and pharmacologist whose industry career includes medical affairs marketing, marketing management, country management, and regional management positions. He has previously served as the regional VP of Northern Europe for SERONO.