By Jill E. Sackman, D.V.M., Ph.D., Senior Consultant, and Matt Levy, J.D., Business Analyst, at Numerof & Associates, Inc. (NAI)

The pharmaceutical industry has entered a critical period of transition. Business models that have proven remarkably successful over the past 20 years are now encountering major challenges. As biotech companies grapple with the leading symptoms of these challenges – pricing pressures, pipeline productivity concerns, a growing public distrust, and greater political and regulatory scrutiny – it is becoming increasingly clear that a profound shift is underway in what it takes to be successful in this environment.

Biotech business strategy has tended to emphasize market size above all else. This has been translated into a focus on blockbuster drugs and mega mergers, passing on “singles” and “doubles” in the quest for “home run” opportunities. Heavy reliance on such home runs raises the inherent risks, costs, and time involved in clinical development, especially in an environment of heightened regulatory scrutiny. At the same time, the pharmaceutical industry’s increasing reliance on external sources of novel compounds has bid up the price of the compounds, further exacerbating the cost and risk of drug development — and as a result, the public backlash over rising drug costs.

The natural dynamics of maturing markets have become increasingly problematic. With a tradition of reliance on patent protection, brand-focused pharmaceutical companies cannot avoid competing with their own past success. Once generic equivalents are available, the economic attractiveness of other, new branded drugs for a given disease declines rapidly, particularly drugs in the same class. While new drugs typically offer some important advantages over existing therapies, these advantages must offset massive price differentials when compared to generics.

With the management of healthcare costs reaching crisis proportions, payers are raising the bar … insisting on hard evidence of clinical and economic value in comparison to therapies that already exist. In practice, the FDA has also begun factoring unofficial requirements for superior clinical value into the approval process. In this environment, innovation and differentiation play a more significant role than ever before.

Many biotech companies have implemented changes to their R&D process and capabilities. Most haven’t gone far enough. Sustainable leadership in this market requires a radically different development engine. The key requirement is to build a scientific foundation for highly differentiated and sustainable franchises around selected disease states — based on integrated diagnostic and therapeutic capability, extensive product portfolios that address needs over a disease continuum, strategic market insight, and in-depth preclinical and clinical expertise.

While excellent science must be a given, it is not enough by itself.  Biotech companies will also need to master several critical building blocks:

• Build critical supporting infrastructure and core competencies in strategic marketing, economic and clinical value, and portfolio management. Most development programs have appropriate focus on the pathway for regulatory approval of new products. In the current market environment, it is equally important to make optimal decisions on which compounds to move forward, which indications to pursue and in what order, how to position products competitively based on relative economic and clinical value, and what evidence needs to be generated in support of the value proposition.  Most companies do not currently have the capabilities in place at a sufficiently sophisticated level to do this work well.

• Integrate development programs more effectively to improve the risk/return profile of the pipeline.  Without constant diligence, R&D practices easily devolve in ways that run counter to effective program management.  One common example is the evolution of organizational silos that limit effective engagement across critical boundaries, such as the division of preclinical and clinical research.  Companies must thoughtfully redesign processes, redefine roles, and ensure competencies are in place to capture the benefits of integration.

• Reduce clinical development costs through integrated global programs, comprehensive outsourcing strategies, and improved program management capabilities. In addition to making wise portfolio management decisions, companies must find ways to take cost and risk out of their product development process.  Most of the easy savings have already been found. The next steps will require more sophisticated program management capabilities at a strategic and operational level to streamline programs, access lower-cost resources, and leverage global synergies while remaining responsive to local market needs.

Realistic implementation of any major organizational transformation also needs to limit the risks of disrupting the current business. Fortunately, you don’t need to execute a monolithic solution all at once.  Instead, you can select one or two “lead” therapeutic areas to build true franchise capabilities in alignment with your commercial strategy.  Because a siloed organization will not be able to execute such an integrated approach, you must break down barriers across the company and build new, cross-cutting capabilities around your franchise focus.

Leaders throughout the biotech industry need to be proactive in their preparation for a market where new winners and losers will be determined based on their ability to create a new product development infrastructure — one that delivers new products with differentiated economic and clinical value propositions … with lower risks and costs.

Jill E. Sackman, D.V.M., Ph.D. is a Senior Consultant, and Matt Levy, J.D., is a Business Analyst at Numerof & Associates, Inc. (NAI). NAI is a strategic management consulting firm focused on organizations in dynamic, rapidly changing industries. We bring a unique cross-disciplinary approach to a broad range of engagements designed to sharpen strategic focus, increase revenues, reduce costs, and enhance customer value. For more information, visit our website at www.nai-consulting.com. Dr. Sackman and Mr. Levy can be reached via email at info@nai-consulting.com or by phone 314-997-1587.

By Eric S. Langer, president and managing partner, BioPlan Associates, Inc.

2012 Annual Study shows budgets, optimism taking a big jump

It looks like the biopharma industry is actually weathering the economic downturn quite comfortably. This year we’ve surveyed hundreds of biomanufacturers and suppliers, and the industry is expressing more raw optimism and confidence than at any time in the past 9 years we’ve been surveying this industry.

More Spending

What this means is that wallets are more open, and investments are being made for the future:

• The firings and hiring freezes that have taken place since 2007, at least within areas that affect productivity, are reversing, and hiring budgets are back up,
• Vendors are spending more on developing new and better technologies,
• Pent-up demand for skilled scientists, and operations staff among biomanufacturers is resulting in more hiring,
• Outsourcing, and off-shoring are being done more rationally, and are no longer a synonym for ‘you’ve just been laid off.’

Our 9th Annual Report and Survey of Biomanufacturing¹ surveys 400 biomanufacturers in 31 countries ever year. And along with the 180 vendors surveyed, we get a good picture of industry trends, problems, and opportunities. This year, we found that both biologics manufacturers and their vendors are spending more, demanding better technologies, and expressing greater optimism for the future than we would expect, given some of the recent gloomy economic trends, and “end-of-world” catastrophe predictions.

Below are just a few of the trends associated with the industry’s buoyant atmosphere. We will continue this discussion during the coming year, and share some of the data from our studies. With a whopping 37.3 percent of suppliers to this industry indicating that their company did either “better” or “much better” than expected in 2011, and with 49.4 percent expecting they will do even better in 2012, I expect this broad optimism will be translating into increased spending, stronger R&D budgets, more capital expenditures, and more hiring.

Short Answer: If you haven’t invested in this industry in some way, now’s probably a good time.  Here’s why:

Industry Growth Rate—Sales growth among vendors is a leading indicator of how the overall bio/pharma industry is doing. On average, sales growth to this industry is currently at around 14 percent annually. This compares to 13.0 percent in 2010, and 14.1 percent in 2007.  Most IRAs don’t return growth rates like that.

Budget Trends—Budgets are also a good indicator of industry strength. And budget estimates for 2012 are, once again, up strongly for areas such as acquisition of new technologies, capital equipment, and training. In fact, early returns from respondents to our 9th Annual Report are projecting increases in all 12 areas measured in 2012, except for outsourcing. Spending this year, in particular, is occurring in:

• New technology;
• Capital equipment;
• Process development and optimization; and
• Personnel training and development.

Other Positive Trends:

• Biopharmaceutical markets—The world market for biopharmaceuticals is now about >$140 billion²;  growing at 15-18 percent annually, definitely a very healthy rate.

• Approval-related Innovation and Progress—Good news: In 2011 FDA biopharmaceutical approvals involved genuine innovation and advances, with nearly all products being approved for new indications or for which the last product approval was granted well over a decade ago.

• Biopharmaceutical Approvals—Despite increasing sales, the rate of biopharmaceutical approvals in the U.S. is flat (12 biopharmaceuticals in 2011). (see www.bioplanassociates.com/biopharma).

• Company and country approval trends—A record number, four (33 percent), of newly-approved U.S. biopharmaceuticals are manufactured outside the U.S. — in the United Kingdom, Germany, Mexico and Italy.

• Biosimilars (biobetters / biogenerics)—Patents are expiring and biosimilars are accelerating worldwide. Expect the entrance of many new manufacturers, and multiple biosimilars for each currently successful biopharmaceutical.  Our global facilities analysis³, indicates that biosimilar/biobetter companies are present in virtually every biotechnology-capable region.

• Internationalization—The biopharma industry continues to expand its presence worldwide, particularly in developing countries.

• Internationalization of Manufacturing—Much of the industry growth involves new capacity being added at existing foreign facilities. This is illustrated by BioPlan’s Top 1000 Global Biopharmaceutical Facilities Index, which ranks facilities in terms of capacity, employment, and production.

• Internationalization of R&D—Large international (Big Pharma) companies continue their expansion and off-shoring of R&D.

• Demand for Local Production of Biologics—Companies are developing manufacturing strategies that include local manufacture of vaccines, for example. This contributes to developing countries’ scientific/technical infrastructure and provides continued availability and price stability.

• World Standardization of Manufacturing—As more biopharmaceutical manufacturing is performed worldwide, product developers are working to standardize their products and manufacturing processes.

• Internationalization of Single-use Manufacturing—The increasing adoption of single-use/disposable bioprocessing equipment allows products to be developed, standardized and the same manufacturing systems shipped and installed at multiple facilities; benefitting emerging markets.

• Single-use Bioprocessing Technologies—In 2011, single-use/disposable bioprocessing systems further increased their dominance for the manufacture of biopharmaceuticals for pre-clinical R&D and clinical testing. In 10 years about half of new commercial biopharmaceutical manufacturing systems can be expected to single-use based.

• Microbial manufacturing—Most industry attention in recent years has concentrated on mammalian cell culture-produced recombinant proteins. A confluence of trends is contributing to increased use of microbial (bacteria, yeasts, other fungi, etc.) host cells for recombinant proteins manufacture.

• Outsourcing—Companies of all sizes worldwide continue to increase their outsourcing, particularly R&D, and increase use of CROs, particularly for screening, and clinical research. Based our global survey of biomanufacturing, among 24 areas of outsourcing, the primary outsourced activities included product characterization testing, with 70 percent of biopharmaceutical companies outsourcing at least some activity.

• The Economy—The worldwide economic downturn continues to impact biopharma. Yet, with its underlying sales revenue, the industry has remain insulated.  Financial issues affect most companies; however, demand for new, profitable products, ensures R&D will continue;  ≥$70 billion is being invested by the pharmaceutical industry in R&D.

• Mergers/Acquisitions—The trend for industry mergers, acquisitions will continue.  However, some companies are recognizing that gutting their core competencies such as R&D and manufacturing is counterproductive.

Summary

Most of the fundamental indications are pointing to a positive, healthy industry; and bio/pharma is emerging from the current global economic situation by spending more, becoming more efficient, and, perhaps most importantly, showing great optimism.

I welcome comments on these trends and their impact on the industry.

References:

1. 8th Annual Report and Survey of Biopharmaceutical Manufacturing Capacity and Production:  A Survey of Biotherapeutic Developers and Contract Manufacturing Organizations, BioPlan Associates, April 2011, 490 pages.
2. Rader, R.A., Biopharmaceutical Products in the U.S. and European Markets (database), BioPlan Associates, www.bioplanassociates.com/publications/pub_bpuseu.htm
3. See BioPlan’s Top 1000 Global Biopharmaceutical Facilities Index™, http://www.top1000bio.com/index.asp Accessed June 20, 2011
4. Biopharmaceutical Expression Systems and Genetic Engineering Technology: Current and Future Manufacturing Platforms, BioPlan Associates, Inc. 2008]

Eric S. Langer is president and managing partner at BioPlan Associates, Inc., a biotechnology and life sciences marketing research and publishing firm established in Rockville, MD in 1989. He is editor of numerous studies, including “Biopharmaceutical Technology in China,” “Advances in Large-scale Biopharmaceutical Manufacturing”, and many other industry reports. You can contact him at: elanger@bioplanassociates.com or 301-921-5979.

For every job created in the biotech industry, up to five additional jobs are created to build research facilities; maintain laboratory and computer equipment; supply laboratory and office equipment, and provide basic services to even the most modest biotechnology facilities.

David Miller of the Illinois Biotechnology Industry Organization is well aware of the above statistic. He shared his views on the challenges and payoffs tied to establishing Chicago as a high-tech employment hub earlier this month at conference held at Northwestern University.

Read more about this conference here.
Learn more about BIO’s State Legislative Best Practices in Support of Bioscience Industry Development.

There are pressures on Big Pharma and biotech emerging companies alike to engage in more creative deal making to ensure positive outcomes for both parties, Ted Agres writes in Drug Discovery and Development. While the number of deals has remained relatively flat in 2011, the dollar amount of individual deals has increased overall. Oncology remains the most sought after category, followed by CNS, anti-infectives, metabolic diseases, dermatology and cardiovascular.

Partnering activity at BIO events is on the rise, as well. At the 2012 BIO Business Forum during the BIO International Convention, BIO hosted an unprecedented number of partnering meetings – 21,183. The upcoming BIO CEO & Investor Conference is the largest investor conference focused on publicly-traded biotech companies and is expected to draw a significant amount of interest from attendees in partnering.

Check out the December 1 issue of Drug Discovery & Development for Ted Agres’ story on partnering.

This week, Fierce Biotech recognized 15 women who are leading the way in biotech. Each of them represents the drive and determination that it takes to succeed in the industry, but what do they recommend beyond these inherent qualities? We pulled together the list below based on their profiles so that others can learn from their experience (yes, that made the list). In no particular order:

1. Take risks
2. Have an entrepreneurial spirit
3. Encourage teamwork
4. Be creative
5. Mentor others
6. Balance personal and professional life
7. Shatter stereotypes
8. Cultivate your business acumen
9. Be technically savvy
10. Seek knowledge and information
11. Stay curious
12. Exemplify leadership
13. Cultivate your career
14. Plant seeds
15. Buck the trends

Check out our Leading the Way series, which is co-hosted by Women in Bio.

The latest IPO window has stalled. There have been five IPO withdrawals since June and around 30 since 2005. Global macro events are threatening to completely shut it.

Reverse mergers have become an increasingly popular option with eight transactions in the last year. Unfortunately, 47 percent of reverse mergers have decreased in value post-close since 2008.

At the 2011 BIO Investor Forum, a panel of experts examined the current financing environment and what private executive teams need to be aware of as they pursue the public path.

“I always get very nervous, as a board member, if I hear one of the venture capitalists, or someone on the board say, ‘Hey we can’t get public, let’s do a reverse,” Mark Beer, president and CEO of Aegerion Pharmaceuticals, said.  “I think certain companies deserve to be public and certain companies don’t deserve to be public.”

While he recognizes that the reverse may be a cleaner way to go public, Beer said that if a company isn’t ready to go public it will get crushed either way.

In other words, the market is rational and if a company isn’t ready to go public a reverse merger isn’t the answer.

The President’s Council on Jobs and Competitiveness issued an interim report with suggestions to increase job creation and growth in the U.S., as well as plans for encouraging investment in the industry. Of particular interest to the biotech industry, the report offers suggestions for streamlining the FDA approval process.

The report also outlines ideas for eliminating capital gains on investments of $25 million or less that are held for at least five years and recommends taxes be reduced for the first three years of a company’s existence. Furthermore, the report proposes a 30 percent refundable tax credit for angel investors, which would provide an incentive to invest in emerging biotech companies.

The report also recommends amending Sarbanes-Oxley (SOX) to allow shareholders of public companies with market valuations below $1 billion to opt out of Section 404 reporting obligations.

We recently released a comprehensive policy agenda to unleash the promise of biotech to speed life-saving treatments to patients, encourage private investment, and defend our nation’s leading position in the global industry.

Dr. Michael Hunkapiller has been named BayBio’s 2011 Lifetime Achievement DiNA Award recipient.

He will be honored on Thursday, November 3rd, at the 2011 Pantheon Awards Ceremony, an annual program hosted by BayBio, a life science trade association representing the industry in Northern California.

From the invention of the DNA sequencer during his days at Caltech, to the introduction of first automated DNA sequencer in 1986 and the realization of the Human Genome Mapping Project in 2003, Dr.Hunkapiller has been a scientific and industry trailblazer. Under his leadership, industry pioneers Applied Biosystems, Celera and Applera grew into global giants, contributing to success of countless biotech companies and researchers in expanding the frontiers of genomics and proteomics.

Additionally, BayBio will recognize six industry executives and stakeholders who played a key role in life science advancements in Northern California throughout the year:

2011 DiNA Award Recipients:

Bruce Alberts
Biotechnology Educator

Alios BioPharma, Inc.
Outstanding Partnering

Alair® Bronchial Thermoplasty System by Asthmatx,
a Boston Scientific Company
Outstanding Product (Device)

Clovis Oncology
Fast Start Company

Zelboraf™ cobas® BRAFV600E Test by Plexxikon Inc., Genentech/Roche, Roche Molecular Diagnostics
Outstanding Product (Therapy)

ChemoCentryx, Inc.
Outstanding Company

BIO’s annual International Convention has emerged as a must-attend event for countries, states and regions that are hungry for industry investment. The convention gives them the ideal platform to publicize and promote what they have to offer to industry leaders in terms of economic development opportunities.

International and domestic public officials take the time to attend because they recognize the enormous potential of the industry. This year’s event drew more than 100 public officials and 11 U.S. Governors.

Sheri Stickley, President of the Oklahoma Bioscience Association sent in the following wrap-up which provides a good sense of the value that states derive from the event. Give it a read:

The BIO International Convention is an important annual event for the Oklahoma bioscience community, and 2011 was no exception. Each year, BIO offers a unique opportunity for our bioscience companies to gain valuable information, secure strategic partnerships, and find new customers. Plus, it’s a great venue for the rest of the world to learn more about Oklahoma’s dynamic, diverse bioscience sector.

Oklahoma Pavilion exhibitors at the 2011 BIO International Convention; OK Gov. Mary Fallin (seated, center)

As President of the Oklahoma Bioscience Association, I was pleased that Oklahoma brought a 70-member-strong, statewide delegation to D.C. this year. Our industry has nearly a $7 billion impact on the Oklahoma economy, so all of us go ready to talk about the “Oklahoma Story.”

We were especially glad to have Gov. Mary Fallin join us at BIO this year. Her attendance underscored the state’s strong commitment to life sciences as a key industry sector. Having Gov. Fallin at our state reception and working the booth significantly upped our game.

Oklahoma Gov. Mary Fallin discusses economic development initiatives with a 2011 BIO International Convention attendee

Oklahoma’s pavilion saw a record attendance of 2,712 people who agreed to be scanned for our Kindle giveaway. Many of the attendees were surprised at the strength of Oklahoma’s presence. Within minutes of the convention opening, individuals from throughout the world were visiting the OKBio pavilion, learning about Oklahoma’s bioscience industry and getting their pictures taken with OKBio’s special guest: a life-size cut-out of Oklahoma City Thunder standout Kevin Durant! We know more people visited our booth than we were able to scan, so we’ll be prepared with additional scanners next year!

From our companies’ perspectives, this was a successful trip. Dave Karlman, Chair and CEO of Otologics Pharmaceutics, Inc., told me, “This has been the most productive BIO for our firm since its inception. The leads, industry knowledge, and relationships forged will serve OPI in the near and longer term as we extol Oklahoma as an exciting place to launch and foster life science companies.”

Craig Shimasaki, President of LumiDX and Biosource Consulting, said it was “a very productive and beneficial conference for the future of” his companies. Both LumiDX and Otologics were recipients — along with Onconos, Inc. — of OKBio scholarships to attend BIO, funded by the Oklahoma Business Roundtable.

We believe the state made a strong impression, and for us, BIO continues to be a worthwhile investment in the future of bioscience in Oklahoma.

Forecasters at the National Conference of State Legislatures’ 2011 Legislative Summit expect a dramatic reduction of state deficits in the coming years, along with business-friendly tax-cuts.

The projections are based on a survey of budget officials in all 50 states last month, said Corina Eckl, director of state services for NCSL.

Michigan State Capitol dome interior, Lansing, MI

Eckl also noted an emerging trend in which state governors and legislatures are allowing for the expiration of temporary business taxes. Notably, the Michigan Business Tax was eliminated and replaced with a six percent corporate income tax that essentially exempts small business. North Dakota has also cut the corporate income tax rate while Indiana and Arizona will soon phase-in similar tax cuts. Florida also raised the corporate income tax standard exemption from $5,000 to $25,000.

Unfortunately these corporate tax cuts do not provide much-needed capital to small biotech companies because their lack of profits makes tax benefits unredeemable.

Most emerging biotech companies with promising scientific innovation are small, research-intensive and not yet profitable because they do not have an FDA-approved product on the market. Biotech start-ups generally struggle to raise capital to finance their research, and BIO advocates two important policies that enable them to continue critical R&D of advancements and breakthroughs.

The biotech industry has shrunk dramatically in recent years based primarily on the continued tight capital markets and increased aversion to risk on the part of investors.  As a result, scores of small companies have shut down operations and closed their doors.

Eckl evidenced that the worst may be behind most states in that revenues are generally growing and year-end balances are stabilizing following the longest recession since World War II. Of course, this is still contingent upon the strength and sustainability of economic recovery – which is still very much in the air.