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Biotech Innovators and Investors Assess Challenges, Opportunities

January 29, 2002

STANFORD GRADUATE SCHOOL OF BUSINESS—The biotechnology industry faces major productivity challenges on the road to profits, but venture capitalists predicted blue skies ahead—with just a few dark clouds. Biotech industry leaders echoed that enthusiasm at a Jan. 26 conference at Stanford's Graduate School of Business.

The conference focused on a hard question: "The Biotechnology Productivity Paradox: Will Biotechnology Create Value?" and drew a capacity crowd eager for answers. Organized by students in Stanford's Health Care and Biotech Club, headquartered at the Business School, this third annual conference attracted business people, faculty, and students from the schools of medicine, humanities and sciences, law, engineering, and business.

Biotechnology is fast becoming synonymous with genomics, the nexus of molecular biology and information technology where scientists target genes responsible for disease and develop drugs that interrupt the disease's process. The last decade of biotech advances, crowned by the mapping of the human genome, raised hopes for novel drugs with minimum side effects that would benefit patients with chronic and life-threatening diseases such as cancer, arthritis, diabetes, and Alzheimer's. But now some are asking whether those hopes can be realized and still create value. The science is there. The thrill of discovery and the commitment to development of such drugs are there. The price, however, can be daunting. That is the productivity challenge that companies must address if they are to be successful in getting these drugs to market.

Keynote speaker Gary Pinkus of McKinsey & Co. cautioned: "These drugs will cost more, not less, for a time. … The 'ticket to play' in pre-clinical drug development ranges from $70 million to $130 million annually." Multiply that annual level of investment by the 5 to 10 years it takes to bring a new drug to the clinical trials stage and the challenge is clear: Shorten the development time, decrease the cost, and increase the success rate. That's not a huge problem for a major pharmaceutical company with established, profitable products and more in the pipeline, but it's a formidable challenge for a fledgling biotech company with little or no product.

In big pharma and biotech alike, drug development is a field strewn with casualties—8 out of 10 drugs fail in clinical trials. But failure can prove more costly in biotech than in major pharmaceutical companies because it is so public. As Pinkus explained, "Big pharmaceutical companies can bury the dead at night—they have lots of successes already on the market, so the level of awareness when a new drug fails is low. Failure in biotech is much more public." If the failed drug is only the company's first or second product, damaged investor confidence may sink the enterprise.

Mergers and acquisitions can help solve the productivity challenge. Sam Colella, managing director of Versant Ventures and a 1971 alumnus of the Business School, explained: "Companies have reached a stage where consolidation makes sense and makes money. Last year there were only four [biotech] acquisitions by big pharma and more than 50 biotech to biotech mergers." Carl Goldfischer, director of Bay City Capital, agreed: "The whole competitive landscape has changed in the past few years. The mergers within biotech, such as the recent Millennium/COR merger, would have been unheard of just a few years ago. That's a model of creating value that a host of companies will want access to."

Another potential solution to the productivity challenge is functional genomics, which uses genomic technology—including mass spectrometry, gene chips, gene profiling software, and supercomputers—to help predict how a drug will act in a patient. Eos Biotechnology is a pioneer in functional genomics, with technology that can mine the human genome, identify promising disease targets, and then develop antibodies against them. Monoclonal antibodies such as Genentech's Herceptin and Rituxan have been a biotech success story. David Martin, president and CEO of Eos, explained their approach: "We're not focused on the platform itself but on applying the platform to therapeutics."

Some biotech firms are looking to predictive biosimulation to overcome the productivity challenge and reduce the late-stage failure rate in drug development. Alex Bangs, chief technology officer for Entelos, outlines their approach: "What you want to know is what happens if you make a drug that targets a particular gene. That requires biology—and we help make biology a high-throughput process, which gives companies a faster, more direct route to the final product." Entelos develops large-scale computer models of human disease and provides a framework for integrating genomic, proteomic, physiologic, and environmental data in the context of a particular health problem such as asthma, diabetes, and obesity.

Another approach to accelerating the drug development process and reducing late stage failure uses biological markers to measure drug response in humans. Gordon Ringold, chairman and CEO of SurroMed, explained: "What we focused SurroMed on is how could you begin to decrease the failure rate and make decisions earlier in clinical development—that in fact you have some therapeutic utility in a drug. Biological markers can tell us quickly whether a drug is working in a patient. When you're working on an arthritis drug, for example, you can't wait five years to find out whether there's a response. Surrogate biological markers can give us the answer." These markers can be proteins, sugars, fatty acids, or steroids, measurable in blood, urine, and other biological samples. SurroMed is conducting biological marker discovery research programs in arthritis, allergy and asthma, cardiovascular disease, diabetes, and Alzheimer's disease.

Working with the U.S. Food & Drug Administration (FDA) is uncharted territory for the biotech industry and vice versa. "Big pharma is much more experienced in working with the FDA," said Rachel Leheny, senior vice president for equity research at Lehman Brothers. "They know it can take six or eight meetings before the agency 'gets it.'" Leadership at the FDA is another problem. The Bush administration has not filled the position of FDA commissioner, and industry experts at the conference referred to the acting commissioner as "extremely risk aversive," which frustrates an industry hard-wired for risk taking. In addition, biological therapies, particularly in oncology, the primary focus of biopharmaceuticals, are very different from traditional pharmaceuticals, in both their specificity and potential for toxicity, necessitating a different regulatory approach.

Despite the short-term productivity challenge, veteran venture capitalist Colella is optimistic about the future of biotech: "More money flowed into life sciences last year than ever before. … We've moved away from concept companies and are working with real companies with real products that can generate real sales and real profit. The real movers and shakers are in biotech."

Some analysts say the biotech industry isn't old enough to get a true perspective. According to Leheny, "It will be 5 to 10 years before we can do a robust analysis and see if all this was worth it. It's my guess that it's absolutely worth it, but right now we can't be sure."

Teaching patience to investors hungry for profits and patients desperate for cures won't be easy. One student asked, "How do you balance innovation and risk with the need to create value?" George Scangos, CEO Of Exelixis, a target and drug discovery firm, responded: "You have to be very clear about what strengths you have—why you think you can compete. You have to be very clear about what your weaknesses are and address those. You have to have strategies for capitalizing on your strengths and overcoming your weaknesses. Then you can attract capital and after that—as Sam Colella said this morning—it's a question of execution."

—Nancy Evans