Biotech Funding: Still Playing Hard-to-Get

After a few lean years, biotechs raised $25 billion in 2010.  For the majority of small companies however, funding remains difficult to find.  Ernst & Young’s annual report on the biotechnology industry, Beyond Borders, was recently released and it paints a less rosy picture than the $25 billion number would appear to.

It turns out that the majority of the money, over 80%, went to the most established companies, many of which have several marketed products.  Further funding is now usually tranched – this means that the company receives less capital up front and more over a longer time via milestone payments.  This isn’t surprising given ongoing global economic uncertainty.  Ernst & Young reports that the funding for smaller companies’ drug discovery efforts actually decreased by 20%.  They call this money “innovation capital” and worry that its lack could hamper research into truly groundbreaking new products.  In fact, companies without marketed products spent less on R&D last year than they did in 2009.

The climate for drug development continues to evolve as well.  It is no secret that the U.S. FDA is taking longer to review new product applications and fewer products are making it to market.  The cost of healthcare remains a contentious (and expensive) issue in the U.S., especially as the economic recovery seems to have stalled.  With the presidential election here next year, the economy and healthcare will both be hot topics.

Can we sustain biotech innovation during this complex time?

The outlook isn’t completely bleak.  While funding is still playing hard to get so to speak, it can be had, even if there is a little more risk sharing (i.e.,  biotechs shouldering more of the risk).  Investors, and potential M&A partners, are out there but they can be highly selective.  Biotechs need to carefully position and differentiate their products – and themselves.  If they can’t show the unique value they offer, potential partners will just move on to the next target.  Only companies that can clearly show how their product fits with a potential licensor or buyer will obtain funding.

As part of their report, Ernst & Young interviewed industry leaders about how biotech companies can find an oasis in the funding desert.  The responses boil down to a few main points.

Orphan & Targeted Products

Focusing on rare diseases is not a new idea – think about the success of recently-acquired Genzyme – but this remains an area where smaller biotechs can succeed.  Both the costs and risks associated with research into rare conditions are lower than those for big blockbusters, but can still be profitable, especially if product use can be expanded later into more common conditions.  This is also an area of great interest to Big Pharma

Better Strategic Planning

Biotechs need to think critically about both their business strategy and their drug development strategy.  They need to become “super market-aware” and develop the flexibility to adjust to changing market conditions.  Part of their strategy must be maximizing efficiency.

Efficiency can be achieved through careful development planning.  A large pharmaceutical company’s coffers will support as many nonclinical and clinical studies as are desired but a small company can afford  to do only what is necessary for their next milestone.  Setting out a clear development plan, and then interacting with regulatory agencies to ensure that plan will be adequate, is a key way that biotechs can avoid unnecessary expenditure.  Thoughtful clinical trial design, and potentially the use of adaptive trials, can also save time and money.

Go Virtual!

In the spirit of efficiency, he Ernst & Young report urges biotechs to reevaluate their organizational structure.  They shouldn’t look like a mini version of a big pharmaceutical company.  Fixed costs should be minimized, roles should be adjusted to meet the specific needs of a small entity.  A fancy office might be nice but there could be greater reward if that cash is invested in R&D.  Looking beyond the office, we need to be more creative and flexible in our approach to all aspects of our industry.

Beyond 2011

Despite the current constraints, there is plenty of opportunity to meet unmet medical needs, and make a profit while doing it.  Ernst & Young reported in 2009 that the biotech industry had finally crossed into profitability and this is expected to continue.  If we learn from the hard times now, I believe the industry will prosper when the funding starts to roll in again.

This is a post by Annabel Bower, M.B.A.  Annabel is the Director of Business Development Strategy and Operations at Cato Research.

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