If there’s one sure rule about private equity, it is that there are no rules about private equity! Venture capitalists will tell you that they have different investment philosophies than everyone else, they’ll tell you that they’re not venture capitalists, they’ll tell you that they focus on areas that everyone else ignores.
So, it should come as no surprise that mere days after I posted an article on angels filling the biotechnology funding gap, Business Week should put out an article touting VCs are ‘Biotech’s Unlikely New Pal‘. Truth be told, the investments described in this article aren’t anything new. They’re hybrid business models that combine modest revenue streams with long-term R&D plays.
These hybrid models have been seen before, and were generally abandoned by investors with deep pockets in favor of more mature companies with demonstrated prospects of delivering large returns.
While these hybrid models sound like an intelligent combination of cashflow-positive business units with high potential R&D endeavors, there are some serious drawbacks. Firstly, companies can ‘shift from one foot to the other’, alternately selling the praises of their cashflow business or R&D efforts to distract investors from the fact that neither option actually has any long-term potential. This was clearly demonstrated by firms simultaneously genome databases and internal drug delivery programs in the genome craze of the late 90s. Secondly, the burdens of running a cashflow-positive business can distract management and operations from the company’s real mission – to develop innovative new products leading to significant growth.
Biotechnology companies have been facing a widening funding gap. Between frozen federal research budgets and a growing focus among venture capitalists and senior partners for larger, more mature, biotechnology firms – at the expense of smaller ones – a funding gap is growing between basic research and initial proof-of-principle commercial research.
So, who fills the gap between basic research funding and venture capital? Angels! Angel investors are wealthy individuals who make equity investments in biotechnology firms. Angels differ from venture capitalists because they tend to invest their own money, they tend to invest earlier than venture capitalists, and they may be less experienced in funding start-ups than venture capitalists. A leading question on many industry-watcher’s minds has been whether angels have been addressing the funding gap. Having been burned by dilution from later investors in past funding cycles, and having lost great amounts of money on technologies which didn’t pan out, many angels have shied away from early-stage biotechnology investing. A recent report from the Center for Venture Research has found that angel investing is up 10.8 percent from 2005. Furthermore, healthcare services, and medical devices and equipment continued to account for the largest share of angel investments, with 21 percent of total angel investments in 2006, followed by software at 18 percent and biotech at 18 percent.
What’s interesting is that angels are spending more. A total of 51,000 startups got angel funding in 2006, up just 3 percent from 2005. That translates into average deal sizes notching up 7.5 percent over 2005 levels. All that money came from a pool of investors that hasn’t changed much either.
The United States is the world’s largest pharmaceutical market. Japan is the second largest, although the combined European Union is larger than the Japanese market (but smaller than the U.S.). Naturally, any company looking to sell drugs should focus on these markets, but there are reasons to reach out into smaller markets:
This article describes a strategy to reduce revenue risk by diversifying into markets with reduced regulatory and intellectual property oversight.
Countries use various methods to control drug expenditures. Beyond simple negotiation, countries can also implement price controls or use WTO-authorized compulsory licensing, which enables a country to produce generic versions of branded drugs if they face a health crisis without violating international patent agreements.
The United States threatened to use compulsory licensing to acquire cheap stocks of the antibiotic Cipro in the wake of anthrax-tainted letters being sent through the mail. Thie threat of compulsory licensing was sufficient to compell Bayer to reduce the price of the drug.
The bottom line here is that there is a clash of interests. Countries need to reduce the burden of health care expenditures on their economies, and drug companies need to recover development costs and make a profit. Price controls and compulsory licensing give countries leverage over drug firms, but if these measures eliminate profits, drug companies are liable to simply stop selling drugs – and also stop developing drugs – for specific markets.
So, what is the solution? How do countries which can’t afford to pay for drugs get drugs developed for their specific needs? Organizations like OneWorld Health and the Bill and Melinda Gates Foundation specialize in developing drugs for needy and under-served markets.
When manufacturers seeking to sell generic drugs challenge patents in order to try and enter the market, the patent holders will sometimes settle out of court and pay the generic company to wait until the patent expires. There is growing opposition in congress to this practice, with some lawmakers calling it anticompetitive.
In order to challenge a patent, a challenger must either have been sued for infringement, or be able to demonstrate that they are likely to be sued for infringement. This can place licensees in a dilemma where they must decide to license a patent they feel is invalid, or infringe a patent and challenge it but risk paying triple damages for willful infringement. A ruling in the case of Medimmune v. Genentech has strengthened the case for licensees, permitting them to pay licensing fees “in protest” and still challenge a patent.
Sir Chris Evans, founder of Merlin Biosciences, blames British biotech investors for having a ‘sick garden syndrome’, stating “We keep pulling the flowers up every six months to look at the size of the roots, and ram them back in the ground wondering why they struggle to grow.”
There’s been a lot of press floating around lately about the push to develop a framework for biogeneric (or biosimilar, or follow-on, etc.) approvals.
Why are biogenerics so hard to regulate? Why can’t they just follow the same path as traditional generic drugs? The answer lies in their size and complexity. I’ll use the following excerpt from my book:
The difference between traditional drugs (typical of traditional pharmaceutical techniques) and biologic drugs (typical of biotechnology techniques) is illustrated in Figure 4.1. Aspirin is very small. Erythropoeitin (Epogen) is more than 500 times larger than aspirin. This size difference alone makes it difficult to determine that a generic version of erythropoeitin produced by a second party is identical to a version produced by an innovator. Furthermore, biologic compounds can undergo subtle modifications which are currently very difficult to detect.
In order to gain approval, traditional generic manufacturers must demonstrate that their drugs are chemically identical to pioneer versions and exhibit the same properties in the human body as the original drugs do. How can you do this for biogenerics? Well, you can’t. It’s currently not possible to demonstrate that a second-source biologic drug is identical to an innovator’s drug. That’s why the path to biologic generics is likely going to involve abbreviated clinical trials and it’s why the resulting generics will likely exhibit slightly different properties than the original drugs. Because of these differences, biogenerics won’t be as relatively cheap as traditional generics are, and they’ll face an extra burden to demonstrate that they are as safe and effective as the established branded drug they’re competing with.
I’ve been invited to join the editorial board of the nascent Open Biotechnology Journal. The Open Biotechnology Journal is a peer-reviewed open access journal and aims to publish original research papers in all core areas of biotechnology including basic and applied research, e.g, molecular engineering of nucleic acids and proteins; molecular therapy; imaging technology and large-scale biology; regenerative medicine, analytical biotechnology; food and agricultural biotechnology; environmental biotechnology.
If you are interested in contributing to this new journal, please drop me a line via the contact form.
The MaRS Blog has a captivating story of Canada’s recent major diabetes discovery. The first discovery, in 1920, elucidated insulin’s central role in diabetes. The most recent discovery, also from the University of Toronto, has found a strong link between diabetes, pain nerves, and inflammation. Researchers were able to prevent and even reverse diabetes in mice modulating the neuroinflammatory mechanism without any serious side effects.
In the Pipeline issues a dose of realism for the overly-optimistic news of a potential anti-cancer drug found by mistakenly using a high concentration of compounds not previously known to have an anti-cancer effect.
Patents and Regulation
I always like a good inequitable conduct case, and the Patent Baristas have got a fresh one! Amphastar and Teva successfully challenged Sanofi-Aventis’s Lovenox patent by convincing the court of deceptive intent by Sanofi.
Eye on Pharma has some recomendations for the FDA. After years of being simultaneously blamed for being too lax on safety and not moving quickly enough on safety, this nine-step plan for change aims to restore the agency’s credibility.
John Mack at Pharma Marketing has another excellent post on what I’d call “excessive creativity” in pharmaceutical marketing. Whereas branded websites providing information on drugs must carefully meter their statements, the same does not hold true for unbranded sites. Through a little investigative journalism, Mack has discovered a thinly veiled promotional agenda for weight-loss drug Alli.