AS INVESTORS and executives crammed into a New York ballroom for a conference held this week by the Biotechnology Industry Organisation, the mood was jittery.
The previous week eight biotech firms had launched initial public offerings in America, together raising more than $US500m. In a discussion panel on whether the industry’s latest boom will last, a prominent investor, Oleg Nodelman, joked that he still had suitcases of cash for any firm that wanted it.
Biotechnology is the creation of drugs and other useful products by making use of “nature’s toolkit”–that is, by adapting or exploiting processes found in living organisms. For example, Argos Therapeutics, one of the latest batch of firms to raise money, is working on ways to trigger patients’ own immune systems to fight kidney cancer or HIV infection.
The industry has undergone cycles of boom and bust since its inception in the 1970s, pioneered by firms such as Genentech. (We review a new book about Vertex, another early entrant, “The pharmaceutical industry: When the times were a-changing”.) As the chart shows, last year more biotech firms joined American stockmarkets, raising more money, than at any time since the golden year of 2000. In the past 12 months, even as the S&P 500 share index has risen by 20%, shares in biotech firms have surged by almost three times as much.
One of the main causes for the millennial boom was that investors, flush with money they had made from internet firms, became excited about the Human Genome Project. They hoped that this massive, government-backed effort to lay out the entire genetic code of Homo sapiens would lead to a proliferation of profitable new treatments. Biotech’s flowering is taking some time, however. Biology is complex. Drugs have a habit of being too toxic or not working as well as they should.
Indeed, creating new drugs through biotechnology is at the risky end of a business in which superhuman stamina and bottomless pockets are minimum requirements.
The Boston Consulting Group reckons that 90% of the money spent researching new treatments, conventional or biotech, goes on drugs that ultimately fail. After spending as much as $US2 billion, accounting for all the failures, a company just might have a medicine that works. But then it must win the favour of the world’s most stringent regulators, and convince governments, insurers and patients that the drug is worth paying for.
Overcome these obstacles, however, and the returns can be fabulous. Stelios Papadopolous, a veteran biotech investor, argues that much of the recent rise in share prices is due not to froth, but because the industry is beginning to deliver promising treatments. In December America’s Food and Drug Administration (FDA) approved Sovaldi, a treatment for hepatitis C.
It could now earn revenues of more than $US3 billion this year for its maker, Gilead, a biotech firm from California. Biogen Idec, a firm based in Massachusetts, is expected to earn more than $US1 billion a year from Tecfidera, a pill for multiple sclerosis that the FDA approved last year. The firm’s shares rose by almost 90% in 2013. But the question is whether such triumphs are aberrations or hints of other victories yet to come.
There are several reasons to hope that even if the current share-price and IPO frenzy subsides, biotech firms will continue to prosper. First, many smaller firms have become the research engines for bigger ones, explains Kevin Starr of Third Rock, a venture-capital firm.
For example Sanofi, a French pharmaceutical giant, now depends on Regeneron, an American biotech company, to help drive its growth. This year alone, Sanofi will pump about $US1 billion into Regeneron’s research programme. The goal is not to “Sanofise” Regeneron or any other partner, says Christopher Viehbacher, Sanofi’s chief executive. Rather, it is to combine Regeneron’s capabilities in researching new treatments with Sanofi’s skill in bringing them to market.
Celgene, one of America’s larger biotech firms, has a similar “distributed model” of research. It helps finance the scientific work at smaller companies, then usually takes over a drug’s development as it moves into clinical trials. Besides being costly, these require expertise that younger, smaller firms often lack.
Second–and more important–firms are at last starting to reap the rewards of studying the human genome. As researchers illuminate the underlying genetic causes of a disease, they open up new routes to developing treatments.
For example, Vertex has a drug to treat a subset of patients with cystic fibrosis, thanks to a better understanding of the faulty gene that causes it. Bluebird bio, one of Celgene’s small partner firms, which Third Rock also financed, is working on a treatment for sickle-cell disease that inserts into the patient’s blood cells a properly functioning version of the faulty gene that causes the inherited ailment.
Advances in genomics are making clinical trials smaller and cheaper, since it is now easier to identify which patients have the specific genetic trait that a new drug is aimed at. This makes it more worthwhile to research diseases that are rare, and those that have so far proved intractable. The FDA gives special consideration to drugs that treat such ailments, so companies can expect a speedier path to approval.
Learning from mistakes
The venture capitalists who back biotech firms are trying to avoid the mistakes they made in the past. Index Ventures, based in Geneva, does not shower companies with cash to build lavish headquarters. Instead it assembles a tiny team of scientists and executives to oversee the research on a promising new line of treatment, outsourcing the bulk of the work to external contractors. This makes the costs more predictable. It also makes it easier for Index to halt a project when it looks like failing.
Despite all these reasons for optimism, there is no guarantee that the current boom will last. In these sunny times, it is tempting to forget the dark days that companies have endured. “20-five years later,” quips Leonard Schleifer of Regeneron, “I’m an overnight success.” It is also uncertain that insurers and governments will continue to pay biotech firms’ high prices. Vertex’s treatment for cystic fibrosis costs a staggering $US294,000 for each course.
The most important question is whether research has indeed become more productive. More than 80% of those recently polled by Mark Schoenebaum, an analyst at ISI Group, said yes. Mr Schoenebaum himself, however, is unconvinced.
“I’m not arguing definitively that it hasn’t happened,” he muses, “but I haven’t been entirely persuaded.” There are no data yet, he says, to draw firm conclusions. And for all the advances in genomics, and the increased sophistication of biotech firms and their investors, there is still “a lot of luck involved in R&D.”
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