The Influence of the Capital Markets
Yet the biotech industry's ability to sustain its increased prominence is not without its own set of challenges. Chief among them are the demands of the capital markets.
Not only are institutional investors shying away from investing in smaller publicly traded biotechnology companies, increasingly the more prominent investment banks are hesitant to bring the issues to market.
More and more, both sides of the capital markets equation are demanding companies with later-stage pipelines and more commercial visibility, as these are the companies that command the higher market capitalizations required to remain meaningful public companies.
The impact of this change in sentiment is most striking when comparing the last two peak years for biotechnology IPOs. In 2000, 53 biotechnology issues came public. Of these, less than 40% had even a single product candidate in clinical trials and only 15% had compounds in Phase III testing or beyond.
In 2004, 25 issues came publicitself a telling sign. More revealing though was that over 90% of these issues had compounds in clinical development and 60% of the companies had compounds in Phase III if not marketed products.
Notably, many of these clinical candidates were not compounds directed at new mechanisms of action for the treatment of hitherto intractable diseases. A number emerged from the growing category of specialty pharmaceuticals enhancements to existing therapeutics.
But in light of the fact that of the 38 new medicines brought to market last year by the biotechnology industry as a whole, half might well be categorized as specialty pharmaceuticals, could it be that investors are merely following what the industry itself may be considering a large part of its future?
It seems highly unlikely that biotechnology can sustain its new product appetite solely on a diet of new twists to old remedies and large pharma cast offs. But if this trend gains traction and remains dominant for any length of time, then who is to foster continued innovation? Not the venture community.
Venture investors have to continually adjust their investment strategy to dovetail with the public markets, often their preferred exit scenario. With the public markets requiring later-stage product stories, venture investors have to adjust their entry points accordingly.
But if therapeutic innovation falls outside the realm of the private sector, are we to expect it to become a matter of public policy, funded through public means? Perhaps public policy should be used to drive private activity?
For instance, public policy dictates might ascribe different financial benefits to novel breakthroughs as opposed to what some suggest is little more than specialty pharmaceuticals' "clever arbitrage" (and to a degree already do). Yet it would appear highly unlikely that public mandates alone can remedy substantially reduced private sector involvement.
Such questions as these must be evaluated within the proper environmental context. So it is critical to have some level of visibility as to what is expected to happen to healthcare costs, in particular pharmaceutical costs, and how this expectation is likely to drive behavior.
As illustrated in Figure 3, the current decade is expected to experience an acceleration in the cost of healthcare with the greatest impact likely felt by the consumer. Spending on pharmaceuticals, in particular, is expected to consume an ever-increasing portion of the healthcare dollar.
With healthcare spending projected to approach 20% of GDP, with ballooning federal budget deficits, with the adoption of Medicare Part D, and because the drug industry has historically been so profitable and will continue to be a political target, we should at least consider how the effect of pharmaceutical costs might impact the future direction of the industry.
By way of example, let's look at the new pharmaceutical arsenal against cancerAvastin, Erbitux, and Tarceva. While these treatments are truly revolutionary, with objective response rates often well below 50%, with life extension measured in months, with a questionable improvement in the quality of life given their use in combination with standard chemotherapy, and with treatment costs as high as $17,000 per monthagainst a backdrop of soaring healthcare costs and their implicationswill there be some backlash or will some alternative value proposition gain prominence?
Historical prescription volumes could in some sense be considered artificially high as healthcare providers had only limited means to qualify users with any degree of accuracy. In fact, "likely 90% of prescription medications work in only 3050% of the people who take them," according to a geneticist with one major pharmaceutical company (San Francisco Chronicle; May 17, 2004)
Today that is changing with clinically validated gender and race profiling as well as pharmacogenomic profiling emerging to dictate use. Yet there also seems to be emerging an incongruity between therapeutic technology and economic self-interest in the manner in which pharmaceutical targeting may ultimately be implemented.