A world of change: biotech in the new normal
The 20% of US companies that were most successful in raising funds garnered 82.6% of capital in 2010.
Pressures on the business model: funding
There's good and bad news about biotech funding in 2010.
The good news: Across the US, Europe and Canada, biotech companies raised US$25 billion in 2010. This is about the same as the average during the four years preceding the financial crisis.
The bad news: The distribution of funding has become increasingly skewed. "Innovation capital" — total funding minus large debt transactions by mature, profitable companies — declined by 20% in 2010. More and more venture capital is tranched, and up-front payments in strategic alliances have dropped steadily over time. The share of venture funding going to biotech declined in 2010, as Web 2.0 investments heated up.
The bottom line in all of this is that funding is being doled out in smaller increments and it comes with more strings attached and more risk "sharing" (which typically means that more of the risk ends up being borne by smaller biotech companies).
Pressures on the business model: innovation
Biotech innovation is under increased strain from numerous trends. The increased risk and uncertainty created by an increasingly cautious and opaque FDA are already starting to dampen investment in the sector. Meanwhile, increasing pricing pressures and the growing emphasis on demonstrating health outcomes are heightening pressures from payers.
To sustain innovation, it is ever more clear that something has to give.
So how can the biotech industry sustain innovation? Our point of view—constructed in part through interviews with leading CEOs, investors and others — highlights a four-pronged approach:
- Prove it or lose it. Companies need to tailor their strategies from the early stages of development to demonstrate comparative effectiveness for regulators. They need to engage in creative pricing approaches for payers including outcomes-based pricing approaches.
- Do more with less. Companies will need to find new ways to conduct capital raising/deployment and R&D more efficiently. On the capital side, companies will need to be creative in raising, optimizing, preserving and investing scarce capital — from new ways of monetizing existing intellectual property to pursuing "virtual" company models to reduce fixed infrastructure. On the R&D side, targeted products for smaller populations can be more efficient, requiring smaller trials, less generic competition and fewer safety issues.
- Build new competencies. To support the first two imperatives, managers will need different competencies: awareness of changing market dynamics (e.g., regulators, payers, pharma); project management discipline and performance measurement; the ability to measure value (e.g., analytical techniques) and communicate value; and the creativity to develop new models and approaches.
A world of change:
biotech in the new normal
- Collaborate for coordinated action. Sustaining innovation will also take changes that biotech companies cannot make alone, requiring coordinated action with other stakeholders. Examples include: encouraging a system of adaptive clinical trials and conditional drug approvals; realigning payment mechanisms around health outcomes; developing incentives to retain biotech investors; and working on transparency and access to build trust.
Total US funding has rebounded after the downturn ...
Source: EY, BioCentury and VentureSource
… but a growing share has gone to mature, profitable companies
Source: EY, BioCentury and VentureSource
A growing gap: up-front payments have declined steadily in recent years
Source: EY, Windhover Information, MedTRACK, BioWorld and company news via NewsAnalyzerChart shows data for alliances with total potential value in excess of US$500 million.
More web, less MD?
Biotech's share of venture funding shrank as Web 2.0 investments heated up
Source: EY, VentureSourceChart is based on US venture investments.
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