Biotech’s risk profile is shifting

 

The confluence of huge development costs and high attrition rates means biotechnology has always been a very risky sector. But now pricing pressures, globalisation, maturing of the sector and growing competition, are shifting the risk profile in unexpected ways.

For example, international biotechnology companies are facing increased risks in their key markets as greater emphasis is placed on the price of drugs and what value they are adding to the patient.

Add to this the economic downturn which is making investors far more cautious and selective over which projects to back, and it is evident the industry is entering one of its most challenging periods for many years, according to a new report by analysts Ernst & Young, Strategic Business Risk: the top ten risks for the global biotechnology industry.

The report identifies the top ten global risks for biotech companies, based on the views of leading industry leaders from across the world and Ernst & Young’s global biotech analysts.

Pricing pressures could squeeze innovation

The biggest risk facing the industry now is the escalation of price controls and access. The greatest threat here is the looming spectre of price controls in the US, the last major market that remains entirely free of controls.

According to the report, innovations in the US and other drugs markets may not have happened had pricing controls been applied. Many new products on the market today have only been made possible through the reinvestment of healthy financial returns on drugs sold.

Ian Oliver, of Ernst & Young’s biotechnology team in the UK, says that without a certain level of return on capital, investment and subsequent innovation in the biotech sector would dry up.

“Because the US is currently the most significant market in the world for the biotech and pharma industries, the introduction of price controls would change the face of the sector on a global scale. It would drive capital away from the industry and slow down research and development.” Oliver believes that ultimately this could result in the industry’s pipeline drying up.

Is this worth the money?

The panel of industry experts who contributed to the report also identified a relatively new strategic risk, in the form of the increasing regulatory requirement to demonstrate economic value.

For example, markets like the UK and Sweden are incorporating post-approval cost benefit and opportunity cost considerations into decisions on whether or not to reimburse drugs.

In the face of increasing healthcare costs, government bodies are putting increasing pressure on biotech and pharma companies to illustrate that the use of their products will add sufficient value to justify its cost.

“This poses a serious operational challenge for the industry,” says Oliver. “Companies will have to present robust data to prove that the products add value and are cost justified.”

Beyond the extra hurdle of having to prove a drug is economically – as well as clinically – effective, the increasing number of healthcare systems adopting a value-based approach to reimbursement will change the strategic direction of the global industry, believes Oliver.

“Innovative therapies treating unmet medical needs will stand the best chance of commanding higher prices, and as a result biotech companies will be more incentivised to develop, first in class medicines rather than me too drugs.” This could drive the focus away from products with blockbuster potential to more niche areas.

Raising cash could be tricky

The report also highlights, that as ever, the difficulty of raising capital continues to be a major threat to the industry. While good ideas will continue to attract funding, financial backers are becoming far more selective over which projects they back.

According to Oliver, investors are changing the way they assess the viability of biotech projects. “Venture capitalists are favouring investments where they can predict, with relative accuracy, how much capital they need to invest, what value they will extract at the end of the investment, and have a clear understanding of the exit route.”

At the same time private equity funds are favouring public companies with higher market liquidity than the typical biotech company, causing private equity firms to move out from the industry.

“This is a real and serious threat,” says Oliver. “Uncertain access to funding and capital markets will lead to a funding gap for early-stage technologies and impact on the pace of drug development over the long term.”

Risks beyond science and technology

In short, although biotech companies are no strangers to risk, today’s changing and maturing industry is facing new threats that go well beyond those traditionally associated with development of promising science and technology.

“A single underlying factor driving several of the risks for the biotech industry is the issue of ensuring that innovation will continue to be funded. Biotech companies are some of the most highly regulated businesses and consequently it can take upwards of 15 years and $1 billion to bring a product to market,” notes Oliver.

The probability of success needs to be maximised from day one, and as such it is important for biotech companies to identify and manage risks as soon as possible. “[They should] put them on management’s radar screen and develop procedures to mitigate their potential impact,” says Oliver.