A Sustainable Biotech Path

Investment from venture capitalists and the public capital markets remain the lifeblood of the biotechnology industry. While aggregate funding totals have substantially recovered from the low point of the global financial crisis, the overall funding environment remains unsettled and subject to volatility from macroeconomic conditions. A vast majority of capital raised, approximately 80%, goes to only 20% of the companies.

Challenges

While larger, established biotechnology companies have access to funding they require, the same cannot be said for the majority of precommercial-stage companies in the sector. These firms are facing an environment of increasingly savvy investors who have set the bar higher in terms of the scientific and reimbursement data necessary to support an investment decision.

Also, the total amount of capital available to the venture-capital industry has decreased substantially over the past few years, and that smaller pool of capital has competition from other industries that hold the promise of faster returns. While the total announced venture-capital dollars invested in the sector is on par with prior periods, the investments in early-stage companies is increasingly tranched, with a large fraction of the total funding round received only after additional milestones.

Compounding the challenge is that the path to receiving product approval has become increasingly lengthy, expensive, and risky in recent years. Although the industry is actively working with regulators to address this situation, the reality is that regulatory approval is not the last hurdle in the process—getting paid for an approved drug at a level that rewards investors for the risks taken requires demonstrating improved outcomes for patients.

In this environment, biotechnology firms face the challenge of not only doing more with the funding that is available but also working from the earliest stages of development to show the potential value of their products to investors, payers, and regulators. The 2011 edition of Beyond Borders, Ernst & Young's annual report on the state of the global biotechnology industry described four complementary approaches for biotechnology companies to sustain innovation in this increasingly challenging environment as outlined below.

Ways to sustain innovation

Prove it or lose it. In a healthcare system where budgets are increasingly strained, companies will be under increased pressure to prove that their products are truly differentiated in their ability to improve patient outcomes. In such an environment, it will be essential for companies to tailor their strategies from the early stages of development to demonstrate comparative effectiveness and efficiency for regulators. Companies also will need to adopt creative pricing approaches, alone or with Big Pharma collaborators.

Do more with less. Companies will need to find new ways to conduct capital raising and deployment and R&D more efficiently. On the capital side, companies will need to continue to be creative in raising, optimizing, preserving and investing scarce capital—from new ways of monetizing existing intellectual property, to creative partnership structures that retain upside for investors, to pursuing virtual company models to reduce fixed infrastructure. On the R&D side, targeted products for smaller populations promote efficiency and require smaller trials, with better defined safety profiles for regulators.

Build new competencies. To support the first two imperatives, managers will need different competencies: awareness of changing market dynamics (e.g., regulators, payers, and pharmaceutical companies); project–management discipline and performance measurement; the ability to measure and communicate value to payers and investors; and the creativity to develop flexible funding and capital deployment approaches.

Collaborate for coordinated action.Sustaining innovation also will require changes that biotechnology companies cannot make alone and will require coordinated action with other stakeholders. Examples include: encouraging a system of adaptive clinical trials and conditional drug approvals; realigning payment mechanisms around health outcomes; developing incentives to retain investors; and working on transparency and access to build trust.

Despite the significant challenges, biotechnology companies are not in it alone. The same basic pressures—the need for greater efficiency and the drive to align behaviors with outcomes—are becoming more acute for all players. Pressures currently facing the industry should ease over the long term as demographic changes and continued efforts to curb healthcare costs encourage policymakers and payers to create incentives for new and efficacious drugs, thereby creating an inherently more efficient form of healthcare. In the meantime, companies must use the creativity, resourcefulness, and adaptability that has been the industry's hallmark to establish new approaches to sustain and drive innovation and move from simply producing new medicines to demonstrating improvements in health outcomes.

Glen Giovannetti is global life sciences leader for Ernst & Young. The views reflected in this article are the views of the author and do not necessarily reflect the views of the global Ernst & Young organization or its member firms.