Stelios Papadopoulos is managing director, SG Cowen
, New York.
Companies with technology platforms that address only a tiny part
of the drug discovery process risk becoming optional or redundant accessories.
The concept of business models has been a favorite subject of discussion
within the biotech industry and the attendant capital markets ever since Genentech's
coming out party in 1980. Acronyms and clever slogans have dominated the debate,
which typically failed to address the fundamental issue of sustainable value
creation. Who can forget the "to be or not to be" predicament
with FIPCOs (fully integrated pharmaceutical companies) or many of the other
models described by an almost endless permutation of vowels and consonants
ending with "co." And not to restrict ourselves to acronyms, we
had the "accelerated commercialization" model, which ranks right
up there in intellectual elegance with being market-driven, product-focused,
and results-oriented. So, when asked to write about business issues for this
compilation, I thought it would be good to try to remind ourselves of some
simple truths that have emerged over time and that might help point the way
for the future.
Biotech 2000 The new reality of biotechnology in the year 2000 has rekindled the business-model
discussion and elevated the "technology platform" model to new
heights. A far cry from being a contract R&D house and clearly a privileged
relative to its "research tool" poor cousin, a technology platform
is, in road-show speak, value-added and broadly enabling. The truth is that
some wonderful science has been developed by the contemporary crop of technology
platform companies; however, they all essentially address nothing more than
a thin slice of the drug-discovery continuum. Under the best of circumstances,
a company can only uniquely occupy one bottleneck in the drug-discovery process;
under the worst, it offers an optional or redundant accessory.
The trademark of Biotech 2000 is that, almost without any connection between
perceived and real value, dozens of these companies have had successful initial
public offerings during the first half of 2000. Interestingly enough, for
the first time in the history of biotech, these IPOs were considered "successful"
as defined by all relevant constituencies—for biotech CEOs, success
meant raising a lot of money; for venture capital investors, it meant doing
the IPO at a high valuation; for fund managers, the stock traded up the first
day; and for investment bankers, a successful IPO meant that everybody was
happy.
This is not the first time the stock market has put the decimal in the
wrong place in the valuation of a group of companies. And if, even for a moment,
we were to believe that biotech is the enfant terrible of the stock
market, we should take a quick look at those prepubescent Internet visionaries
who have given the concept of thinking big a new dimension. But sooner or
later the alarm clock will ring, casual dress will be outlawed, and all of
us will need to go back to work the way we used to. What happens then to the
hundred or so early-stage technology platform companies, both private and
public?
The outcomes will be varied. Much will depend on the value of the technology,
but even more important is the issue of talent and leadership. What is certain
is that none of these companies is likely to be successful over the long term
as currently configured, because there is no long-term business opportunity
based on a narrow technology platform that can support today's valuations
of several hundred million to a few billion dollars.
The road to failure is clear. Remaining limited, under-investing in research,
or not renewing the technology base will certainly drive the company toward
obsolescence and irrelevance. The most obvious strategy for establishing a
sustainable value base is to gradually turn the technology platform into a
proprietary R&D discovery effort and ultimately transform the organization
into an emerging pharmaceutical company. Conceptually, it is a straightforward
proposition, but its execution is not trivial.
The two most notable examples in the genomics world that have embarked
on this undertaking are Human Genome Sciences and Millennium, two of the pioneers
of the genomics era and two of its most illustrious representatives. Both
began as technology platforms for hire, with substantial funds coming from
pharmaceutical companies eager for an early slice of the genomics pie. But
HGS early on turned its platforms inward and focused on proprietary product
development; Millennium followed suit, and more recently sped up the process
through an acquisition strategy.
Though neither company has an approved product, it seems only a matter
of time. It is therefore reasonable to call this strategy a success. But what
are its key drivers? The answer is disarmingly simple: truly outstanding leadership
and scientific talent along, with aggressive capital raising. For CEOs of
young companies the path is now well lit, and if there is another Bill Haseltine
or Mark Levin somewhere out there, another success story will soon be told.
A new option The more interesting question is whether or not there is another way. Indeed,
a major structural shift in the pharmaceutical industry may have opened up
a new option. The ever-increasing size of drug companies resulting from continuing
merger activity is giving rise to unprecedented R&D budgets. During the
1980s, an R&D budget of $1 billion was the Holy Grail; Pfizer's R&D
budget for the year 2001 will be north of $5 billion. And without a doubt,
the rate of growth of R&D budgets has outpaced our ability to develop
management techniques to preserve originality and insert creativity into large
research organizations.
The challenge of creating and maintaining the right environment where discovery
can flourish, coupled with the inherent unpredictability of the R&D effort,
is likely to drive a major portion of discovery research out of mainstream
pharma. Biotech companies are the obvious partners in such endeavors; within
pharma, outsourcing parts of the R&D effort has been a growing trend.
But as more and more alliances are established, the new challenge facing pharma
is how to manage the increasing number of relationships and how to optimize
technologies sourced from different companies that may on occasion be largely
incompatible.
A natural outcome of these constraints is for pharma to search for fewer
but larger relationships, which will require biotech companies capable of
providing answers to a much bigger piece of the puzzle. In the next few years,
the market will demand that within a particular therapeutic category the biotech
company should be able to generate validated targets, provide the attendant
biology, develop assays configured in a format that can withstand the rigor
of high-throughput screening, and finally, along with sufficient chemistry,
generate leads that can be taken into preclinical development.
Being able to present pharma with complete packages along these lines and
executing them effectively should command premium pricing. This assertion
is extremely important because historically, the pharma oligopsony has generated
pricing in the context of strategic alliances that on a risk-adjusted basis
is unfavorable to the small biotech partner. The ability of a biotech company
to leverage its platforms into multiple projects and sell the same outputs
more than once in different packages is likely to give rise to a good business.
After all, there have been companies supplying pharma (e.g., PE Biosystems)
that have built good business with appropriate profitability and growth prospects
to command rational and sustainable valuations of several billions of dollars.
As always, the challenge that remains is execution. Acquiring and integrating
multiple technology platforms requires abundant capital, a richly priced stock,
and a uniquely talented management team. Whether anyone feels confident enough
to pursue the opportunity remains an open issue. And success will not be certain:
In the end, it may well be that all of us in biotech have been seduced by
the big drug chase, and only someone outside the sector is emotionally qualified
to pursue the idea of turning a technology platform into an integrated discovery
engine.
