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Biotech Startups Face New Challenges in the Marketplace

April 2006

Debrework Zewdie
Penhoet

STANFORD GRADUATE SCHOOL OF BUSINESS—When Edward Penhoet cofounded Chiron Corporation in 1981, he knew the Emeryville-based biotech startup had a lot going for it. "We had a big lead in the field," the Stanford graduate and former dean of UC-Berkeley's School of Public Health told attendees at the 2006 Stanford Health Care Symposium. "We were based in the Bay Area. We knew about recombinant DNA and had experience with it, and we were able to tap into our knowledge of infectious disease." What's more, he said, "The investor community wasn't as sophisticated as they are today, so we could sell them a bill of goods and they would invest."

Today, the climate for startups in the biotech industry is distinctly chillier, said Penhoet, AB '63, in his April 12 closing keynote address. Industry giants like Eli Lilly and Merck, which made their names developing chemistry-based pharmaceuticals, are now major players on the biotech field, investing heavily in acquisitions or their own biotechnology research labs.

At the same time, investors are more cautious about getting involved with small biotech startups particularly when they see the average biopharmaceutical approval process lasting more than eight years. "There are lots of MDs and PhDs now who are analysts, and it's hard to pull the wool over their eyes," Penhoet told the audience of industry professionals and students from the Stanford Graduate School of Business. Money for biotech startups is tight, he cautioned, "and I don't think it's going to come back soon."

Penhoet, who currently serves as president of the Gordon and Betty Moore Foundation and vice chairman of the state-appointed board overseeing California's $3 billion stem cell research initiative, was Chiron's president and chief executive officer from its inception until 1998. The company, which was sold in April to Novartis, is best known for its development of a vaccine for hepatitis B. It also is one of the world's largest suppliers of influenza vaccine.

Speaking to an audience including hopeful biotech entrepreneurs, Penhoet advised them to "focus very sharply and narrowly on your niche, because to try to build a modern biotech company with the same business plans that virtually all of the biotech companies had 25 years ago would be too difficult." The collective research and development budgets of the pharmaceutical and biotech companies, he said, total about $60 billion a year. "So if you're starting a new company with an R&D budget of $2 million a year, you'd better be awfully sure you've got something special. Otherwise there's no way you can compete."

"Some of you may be discouraged by the heavier competition and high costs," he added. "However, the market pull for new therapies and new diagnostic tools is stronger than ever." While major technological and political challenges remain for stem cell research, infectious diseases like bird flu and HIV will provide increasing opportunities for growth. So will the insatiable demands of aging baby boomers. As Penhoet said, "This is the most spoiled generation of people in the history of the world. They are not going to go down easily. And they'll be delighted to spend your money on their health."

Earlier in the day, the audience heard about trends in health care delivery systems from opening keynote speaker Stephen Hemsley, president and chief operating officer of UnitedHealth Group. For too long, he said, America's health care system has not been oriented toward the consumer. "If Coke put two cans in every hundred that hit the shelf, that gave you a very bad experience if you opened them, Coke would be out of business," he said. "In health care, that might be state-of-the-art."

Among the changes his company is promoting: more personalized health care packages starting for as little as $60 per person per month, personal health histories that patients and their doctors can access online, more understandable and paperless financial statements (replacing the dreaded EOBs, or Explanation of Benefits), and specialized care management programs for patients suffering from chronic diseases such as congestive heart failure or diabetes. The idea behind these cost-effective programs, Hemsley said, "to get the right people to the right places at the right time for the right treatments."

Opportunities and challenges in developing innovative health care products was the subject of a panel discussion moderated by Dr. Vera Kallmeyer, MBA '90, managing partner of Equity4Health LLC and consulting professor in the Stanford Department of Neurosurgery, Among the most exciting new ideas, said Dr. Paul Yock, co-chair of Stanford's new Department of Bioengineering and director of the Stanford Program in Biodesign, are bio-absorbable stents for treating heart patients, implantable defibrillators, and brain "pacemakers" that may someday help people with seizure disorders.

Kevin Wasserstein, a partner with Versant Ventures, said today's investors are excited about funding such devices. Products with the best chance are those that address unmet clinical needs and also have potential markets of over $500 million. "There is as much money now as there has ever been. It's a fantastic time to be an entrepreneur with a great idea," said Wasserstein, who earned his undergraduate and masters in engineering from Stanford, as well as his MBA in 1997.

Panelists agreed, though, that guiding new products through today's regulatory environment can be exasperating. "Leadership at the FDA (U.S. Food and Drug Administration) has been like musical chairs in recent years," Wasserstein complained. "You can't guide drugs through the FDA. You have to ram them through in a politically correct manner." Smart companies, he said, throw a lot of time and resources at the regulatory process early on.

The day's second panel discussion, "Maximizing Value of the Health Care Dollar: Innovations in Health Care Delivery," was moderated by Stefanos Zenios, Associate Professor of Operations, Information, and Technology. Panelists agreed that while improvements like computerized health records can help America's health care system, the underlying problem of unequal access will persist as long as Americans feel entitled to any kind of health care they want without bearing the true cost.

David Bernd, chief executive officer of Sentara Health Care and a board member of the American Hospital Association, recalled a visit he once made to a cancer treatment center in Kent, England, where the government provides universal health coverage. The hospital was set up to handle 2,800 patients a year. However the number of cancer cases in the area was closer to 3,500. "I asked the physician in charge, ‘What happens when the 2801st patient walks through the door?' And he said, ‘We triage. If the patient is terminally ill we give them pain medication and send them home.' If you did that in the United States, there would be three congressmen and four senators and five newspapers all over you instantly for making those kind of decisions."

The upside of the British system, Bernd said, is that the United Kingdom spends far less of its gross national product on health care than the United States does, "and they have a phenomenal set of preventative and primary care services, whereas we spend money on the back end, after the disease has progressed. We produce artificial bladders and $5,000 stents because that's what the U.S. consumer demands and wants. And we're not going to have a solution to the problem of access in our health care system until that is debated and discussed."

Other speakers at the day-long event, hosted by the Stanford Health Care Club and the Graduate School of Business, included Dr. Anmol Mahal, president of the California Medical Association; Jim Kalamas, principal at McKinsey & Company; Eric Miller, senior vice president for marketing at Intuitive Surgical; Howie Rosen, MBA '87, vice president for commercial strategy at Gilead Sciences; Sam Saks, CEO of Jazz Pharmaceuticals; and Michelle Snyder, vice president for marketing at Epocrates. The event was organized by MBA students Zeryn Mackwani and Katherine Platt.

—Theresa Johnston

Stanford GSB News

Biotech Startups Face New Challenges in the Marketplace

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