Despite intermittent pulses of IPO activity, the market for new biopharmaceutical issues has largely appeared anemic since the surge of activity in 2000. The 53 new issues to debut that year established a high-water mark that has not been approached since. The best year for new issues since 2000 was 2004, which saw the completion of 25 biopharmaceutical IPOs.
The contrast in issuer profile has been even more striking. In 2000, only 38% of the total issues to come to market had at least one candidate in clinical trials. In 2006, not only did 95% of new issues have a program in clinical trials, but more than 60% had a candidate in late-stage clinical trials if not an already approved product.
These trends have not been lost on the venture capital community. They have had to adjust their funding strategies in consideration of public market sentiment. Where once the investing mantra was “fund at discovery, take public at IND,” today’s prevailing wisdom is “fund after IND, take public at NDA.” An exit even at this stage isn’t assured.
As has become the case all too frequently, many of these IPOs got done only because the existing venture shareholders stepped up and bought into the deal to fill the underwriters’ book. At best, going public is often viewed as accessing an alternate source of funding in advance of a still distant investment exit. The performance of these issues in the secondary market has done little to calm venture jitters. While the performance of the IPO class of 2006 has proven encouraging, 60% of all issues that have come public since the beginning of 2005 trade below their initial offer price. Further complicating the investment horizon are such issues as the impact an increasingly cautious FDA will have on the cost and time required to bring new drugs to market, not to mention the potential backlash related to rapidly escalating healthcare costs.
All of this may explain recent trends in venture funding. From 2004 through 2006, funding commitments to the biopharma sector have dropped nearly 40% with the number of deals funded down nearly 50%. Not the most encouraging of pictures.
To be sure, there have been a number of individual success stories among biopharmaceutical issues that have gone public. This would be expected of any industry that has become as pervasive as today’s biopharma sector. Also, as opposed to the situation from late 2002 to late 2003 when for four consecutive quarters not a single new issue came to market, there has been some level of investor interest. The market’s overall receptiveness to the sector, however, has cooled appreciably. Whereas in 2000 nearly 20% of all new issues were biopharmaceutical related, last year it was less than 10%, which was about as high as it has been in any year since 2000.
Since the bloom fell off the genomics rose, it appears as though the industry has been unable to capture investor imagination or instill an overarching air of confidence and optimism as it once did. What has changed that has led to this apparent loss of investment enthusiasm for the sector and what, if anything, might emerge to change the current notion?
The investment allure of the biopharmaceutical industry has largely been driven by the idea of paradigm-shifting advances and their pronounced economic implications.
First came recombinant DNA technology, which promised an entirely new development paradigm. It started at the product end and worked back to elucidate the manufacturing means to that end. A seemingly straight-forward design that could be replicated for a multitude of protein therapeutics.
This stood in sharp contrast to the slow and labor-intensive screening process employed in the traditional pharmaceutical industry, where serendipitous discovery seemed to drive product development success. For this reason, Genentech’s(www.gene.com) IPO was one of the best received in market history, as evidenced by its first day trading gains.
mAb technology soon thereafter captured investor intrigue. Using the specificity of antibodies, therapeutics that could be configured to selectively target a designated cell surface were promised. As with recombinant DNA technology, mAb technology was believed to embody a rapid and repeatable drug development template.
Gene therapy and antisense technology as well as the idea that perhaps the ultimate drug development template was the four base-pairs of the genetic code were next. Most recent to seize investor interest has been the promise of genomic and proteomic discoveries, expectations fueled by the excitement surrounding the Human Genome Project.
Each of these scientific advances was thought to form the cornerstone of a new industry framework. Just around the corner, so it was thought, was drug development guided by an ordered series of predictable steps rather than large doses of whimsy and luck.
While the promise of each new technology wave came crashing down with the realization that biological complexity was far greater than originally contemplated, there was always the promise that the next layer of the proverbial onion would provide the Eureka moment. It was that promise that seemed to continually feed investor enthusiasm. Until now.
All layers of the onion are now exposed yet drug development hasn’t gotten any easier. If anything, the industry’s appreciation of its difficulties has become more acute. At the same time investors have become much more sophisticated in their understanding of these difficulties and no new paradigm has emerged to restore enthusiasm as it has in the past. More than that, it is not readily apparent that one is likely to emerge.
Defining the Industry's Next Chapter
Genomic advances will, in all likelihood, translate to significant advances in drug development at some point in the future. Investors, however, appear disappointed that the initial mapping of the human genome did not produce more immediate therapeutic breakthroughs and seem to have quickly discounted its impact.
Yet, while genomics-directed drug development may remain a distant event, genomic advances seem poised to have a profound impact on dictating prescription patterns in the near term. The emerging use of biomarkers provides clear evidence of this trend.
It is often the case that certain people derive more benefit from one drug of a particular class than another medication in that same class. This is the reason a number of the cholesterol-lowering statins have achieved blockbuster sales status, for instance. Such differences in response are increasingly being linked to genetic variation among individuals.
The implication of the link between response and genetic variation would be the ability to prescribe medicines based on genetic profile. Examples of this application are just now beginning to emerge.
Consider maraviroc, the first in a new class of anti-HIV therapeutics being developed by Pfizer(www.pfizer.com). Maraviroc works by blocking viral entry through the CCR5 pathway. In some 15% of newly infected patients, however, the virus accesses the host cell through an alternate CXCR4 entry against which maraviroc has limited effectiveness. In its Phase III trial, the company coupled the use of maraviroc with the Monogram Biosciences(www.monogrambio.com) assay to screen for CCR5-tropic patients. Pfizer plans to market the drug alongside the CCR5 assay. In April, an FDA advisory panel recommended accelerated approval of maraviroc.
Bucindolol, a beta blocker, provides further evidence that the long-awaited promise of biomarkers is at the cusp of realization. Bucindolol is a long-since-forgotten heart failure drug. Recent DNA analysis revealed that in heart failure patients with a particular genetic variant for a protein receptor on heart cells, bucindolol was highly effective, significantly more so than other beta blockers. This revelation led to the creation of ARCA Discovery, which is looking to commercialize this biomarker-linked therapeutic.
Yet, it is not readily apparent who would fund the clinical trials necessary to establish the widespread application of biomarker-guided drug selection, despite successes such as these. Historical prescription volumes could in some sense be considered artificially high as physicians have had only limited means to qualify users with any degree of accuracy.
Drug selection heretofore has largely been a trial-and-error process, with doctors often changing prescriptions repeatedly in the hope of identifying the best drug for a particular patient. According to a geneticist with a major pharmaceutical company, quoted in a 2004 San Francisco Chronicle article, “likely 90% of prescription medications work in only 30% to 50% of the people who take them.”
This apparent incongruity between therapeutic technology and the economic self-interest of drug companies explains in great part why, despite the FDA strongly encouraging the submission of biomarker data with NDA submissions, the industry has been dragging its feet.
If not the pharmaceutical industry, then who might take the lead to promote biomarker-driven therapeutics? Clearly significant investment in discovery as well as clinical trial validation would be required.
Economics have not rewarded participants in the diagnostic industry for making the investment necessary to advance such innovations. High volume at low cost continues to be the overriding operating philosophy of the industry. The few companies that have made the pharmaceutical-size investments to bring diagnostic advances to market have been unable to recapture that investment.
The managed-care industry could drive implementation as it looks for additional opportunities to control costs. Certainly the largest of these firms would have the economic clout to push change. Yet, as long as their policy holders continue to shoulder cost increases, managed care’s motivation to move aggressively seems uncertain.
Perhaps, though, it will be the pharmaceutical industry itself that ultimately become the champion of biomarker-linked medicine. While response-based patient segmentation would likely result in fewer prescriptions, it is unclear whether this would translate into less revenue. The pharmaco-economic case for reduced system-wide costs may likely support significant price increases. At the same time, the costs to bring new drugs to market would likely be substantially reduced. Clinical trials would be much more targeted toward specific patient populations. Marketing costs would also be dramatically reduced, as sales calls and ad campaigns become secondary to objective scientific criteria.
Likely, it will be the recognition of benefits such as these that will provide the impetus to overcome the sector’s initial aversion. And with it, the industry just might find a new rudder to guide its future course.