It is broke and it needs fixing

Nuala Moran, Senior Editor

As we report elsewhere, Ernst and Young’s 23rd annual survey of biotech – Beyond Borders: Global Biotechnology Report 2009 – concludes that the current global financial crisis is making the biotech business model unsustainable.

The biotech industry is no stranger to lean times, but what is unprecedented now is the uncertainty of when the markets will return, according to Ian Oliver of Ernst and Young’s biotechnology team in the UK.

But in truth the model in which seed funding, followed by three rounds of venture capital, translated to an initial public offering and exits all round, has not applied since the genomics bust of 2002–2003.

Yes, companies got to list on public markets, but few of these deals represented immediate exits for private funders. Many listings raised sums akin in size to VC rounds and went ahead only on the grounds that VCs stayed on board. This scenario is a particularly good fit for what happened in the case of many of the technology companies listed on the now moribund Alternative Investment Market in London, and was also in evidence elsewhere in Europe.

What went wrong?

In the UK, the government-appointed Bioscience Innovation and Growth Team (BIGT) devoted much of last year to understanding precisely why the financing model is broken and how to reshape and rebuild it.

As John Aston, Finance Director of Cambridge biotech Astex Therapeutics and chair of BIGT’s Finance and Investment group, told the BioFinance and BioInnovate Europe conference in London last week, the two main factors are that public markets have no faith in the sector ¬– biotech accounts for a paltry 0.2 per cent of activity on the London Stock Exchange – and at 10-15 years the drug development pathway is incompatible with the five to seven year investment cycle of venture capital funds.

Measures such as creating tax incentives for pharma to invest in biotech, increasing R&D tax credits and pumping more public money into seed and venture funding, may provide some relief, but what is needed is a new business model, as Simon Best, another BIGT member, told delegates.

The critical factor is to reduce the risk that is implicit in the 10-15 year drug development cycle. A number of initiatives are in place already that could underpin this re-engineering, and Best said that if the industry gave a push, many doors will open.

Examples include the FDA’s Critical Path initiative, which Best argued will be re-invigorated under the new administration, with its mandate for healthcare reform and the move towards health technology assessment in the US.

Another example is European Union’s €2 billion Innovative Medicines Initiative, which aims to reduce bottlenecks in drug development.

In addition, UK and Canadian regulators have recently agreed to cooperate to avoid duplication, and the signs are that this is the start of a more widespread cooperation movement amongst regulators.

Elsewhere, regulators including the FDA are edging towards allowing conditional licensing and earlier licensing for cancer drugs, and are beginning to appreciate the value of using biomarkers to single out likely responders to take part in clinical trials.

The financial situation is certainly unprecedented. But there should be no complacency that when the markets defrost there will be a return to business as usual.

To revive investors’ appetite – and fix the model – biotech must first reduce its risk.