DECEMBER 20, 2006
Technology
Don't Wait Around for the Next Amgen
Author Gary Pisano says the biotech sector is past the stage when startups are likely to make a big splash
In his new book, Science Business: The Promise, the Reality, & the Future of Biotech, Harvard Business School professor Gary Pisano argues that as a business, the biotech sector hasn't matched the innovations of its science. Despite early exceptions like Amgen (AMGN) and Genentech (DNA) that have grown into industry giants, the profits at most biotech companies don't justify the long and precarious drug development and clinical-trial process. And often, there are no profits at all.
With the skills necessary to discover, develop, and market a compound growing ever more complex, the odds—never favorable—are getting tougher for those plucky startups gunning to carry a technology from the lab to the pharmacy. With science advancing at a frenetic pace, how can new developments best be directed to sick patients, and, by extension, to successful businesses?
Pisano recently spoke with BusinessWeek.com reporter Alex Halperin about the obstacles biotech companies face, finding the next Amgen, and how the industry should adapt. Edited excerpts of their conversation follow:
One of the central concepts of your book is the term "science-based business." Can you explain why biotech embodies this more than any other industry?
What we see are private companies not just passively using science that gets created or drawing from scientific principles but actually being active participants in the scientific research process. If you look at a lot of projects that companies do, they're very much basic science. If you go back to Genentech's first research-and-development project as a commercial firm, it was a project to determine whether you could make human proteins in a bacteria cell. That was a fundamental question of biology. Along those lines, [biotech companies] have engaged in projects that were historically more along the lines of what universities did.
The other characteristic is, the lag between when scientific principles are discovered or published and the formation of firms to develop and exploit them is extremely short in a science-based business. If you look at, for example, RNA interference, within a couple of months [of major publications] there were already private firms founded to be RNAi firms. [RNAi is a Nobel Prize-winning discovery of a mechanism to prevent the expression of genes within cells. See BusinessWeek.com, 10/31/06, "Merck's Big Play in RNA."]
One doesn't encounter that in other technologically sophisticated industries?
No. Even today, when semiconductor firms get founded, generally the scientific principles they're using are well established. They're 30-year-old principles of solid state physics. Even companies in optoelectronics aren't out trying to discover new principles of physics or optoelectronics. [Biotech] firms are really engaged in for-profit science.
Does the distinction between biotech and pharma still mean anything?
Not as much [as it used to]. Let's break it up into two spheres. One is in terms of the technology of drug discovery. The distinction between biotech and pharma is very blurry these days. Basically, what biotech has come to mean is a broad constellation of bodies of science that have changed the way we discover drugs, [including] the way we identify drug targets, the way we create synthesized compounds, and the way we find matches between drug targets and therapeutically useful compounds.
Biotech is all-encompassing. It's chemistry, biology, molecular biology, cell biology, genomics, bioinformatics, mathematics, software. And that's how you discover drugs these days. That's pharmaceuticals. So that distinction technologically no longer means as much.
[The other sphere is] when you talk about firms: what's a biotech firm vs. what is a pharmaceutical firm. In general, what people refer to as biotech firms are new entrants, Genentech [founded in 1976] being the first one. If you look at Genentech or Amgen today, they're pretty grown-up firms, they're pretty big. But I think of the firms that enter today as biotech. I think of pharmaceutical companies as companies established prior to [Genentech].
But what these firms do technologically is no longer that different. It used to be that a biotech firm was one that used, fundamentally, molecular biology to create large proteins or monoclonal antibodies as drugs, and big pharmaceutical companies did traditional organic chemistry methods of developing drugs. They actually had different technology strategies. Today, most of the firms that we call biotech are doing small molecules as well as large, and most of the entities we call large pharmaceutical companies have active biotech programs where they're doing large-molecule drugs as well.
Given that expertise in so many areas is now needed for drug development, what kind of edge do startups still have, beyond perhaps getting the technology out of the universities?
Not much. They may be at a disadvantage, because you need so many different disciplines. You need the ability to integrate so many pieces of the puzzle, and that's very hard to do as a startup company. I'd argue it's impossible to do as a startup company.
This is part of the problem. So many firms get founded out of a university [by] a professor or some venture capitalists who know a professor and they have one piece of the puzzle, and that's not enough. Genomics is great, it's a very important tool, but it's not enough to create a drug. Yes [startups] get some advantage at getting the technology out. They can get venture capital involved. Clearly there are advantages to being small and entrepreneurial. But they don't have the scale, the capability, and the experience across the constellation of technologies to do it effectively.
How do you think the business model has to change?
We'll see fewer of these firms that attempt to be standalone drug discovery, because they won't be effective at it. I think we'll see a couple of changes in the business model, though it depends on what big pharma companies do. What I talk about in the book is getting away from the publicly held biotech firm—while that may be useful occasionally, it should be more the exception.
What would be a more effective approach would be what I call quasi-public firms that have very close affiliations with a particular large company. Rather than going out there and being a standalone firm and doing lots of different licensing arrangements with a dozen or more firms, [they should] form a very close relationship with one or two firms, almost become a satellite R&D type of operation to an existing firm, and have a much more symbiotic, closer, and longer term relationship. [It would be] a little like Roche and Genentech. I wouldn't call Genentech a satellite of Roche. Genentech is an independent entity, but Roche owns 60% of Genentech. That's often forgotten.
[This leads to] closer relationships between parties, instead of locked-at-arms-length relationships. That will change the way we finance these things, and the firms won't be compelled to go public as early.
One of the central points of your book is that despite the immense promise, so few biotech firms are successful. But are they perpetuated to some extent by the big paydays they deliver to their initial investors through an IPO or acquisition?
Yes and no. That's part of it. The idea of "Can I start the firm and get out fast enough?" is part of the problem. The founders of these firms can do well enough [without getting a drug approved]. It perpetuates the founding of the firm. But what ultimately begins to happen is that the downstream investors get a little wiser, one would hope, and so if you don't have that you lose the liquidity. [In his book, Pisano notes that even venture-capital returns on biotech investments haven't been spectacular given the risk involved, though he says some companies have almost certainly been very successful.]
Is there going to be another Amgen?
There hasn't been another Amgen since Amgen. It's a little like people who bet big in software on the next Microsoft (MSFT). There wasn't a next Microsoft, but Google (GOOG) rewarded investors quite well. If they come along every 30 years, it may be enough to keep the fires of interest burning.
[For a biotech company] it's much harder to get in now. The Amgens and the Genentechs and the first generation guys—and by the way, very few of them succeeded—went after some fairly well-defined targets and [some] drugs that were fairly well understood. They kind of broke in that way and then built of the cash flow needed to expand their capability. That's a lot harder to do today. I'm not saying it won't happen, but my sense is that the probabilities are very low.
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