By Kevin E. Noonan --
Last week, Biogen Idec sponsored a "Super Session" at the BIO 2009 International Conference entitled "Weathering the Perfect Storm of Financial Distress and Political Pressure." The session was moderated by Stephen Sands, Lazard Freres & Co., for a panel consisting of Broderick D. Johnson, Bryan Cave; Scott Gottlieb M.D., a senior fellow at the American Enterprise Institute; Vaughn Kailian, MPM Capital LLP; and David Pyott, Chairman and CEO of Allergan, Inc.
Mr. Sands echoed the pessimism over the financial state of the biotech/pharma sector voiced by Steve Burrill in his State of the Industry address at BIO (see "Docs at BIO: Steve Burrill's State of the Biotechnology Industry Report 2009"). Mr. Sands invoked the Chinese curse that we live in "interesting times" and a "very difficult environment," including uncertainties in intellectual property protection. He noted that the economic crisis is coincident with traditional pharmaceutical companies being expected to lose exclusivity for 40% of their proprietary compounds over the next five years as patent protection expires, and that overall, the percentage of branded drugs "on-patent" will fall from 80% to 20%. He said that in his view there are four fundamental principles industry participants must keep in mind: continuing to innovate for unmet medical needs, advancing pharmaceutical pipelines, demonstrating product efficacy, and providing investors with attractive returns.
None of these goals will be easy in the current capital climate, however, according to Mr. Sands, because the capital markets have become "fairly Darwinian." While it is true that the biotech sector has outperformed the market during the downturn (most major stock indices are down 30% while biotech is "only" down 15%), the effects on different biotechnology companies are strongly related to their market capitalization. Large-cap biotech companies are down as much as most other major industries, Mr. Sands said, but biotech companies with market capitalization between $300 million and $2 billion are actually up significantly. He characterized these companies as those that had gotten out of the general morass and have a successful product generating revenue. In contrast, biotech companies with market caps of less than $300 million, constituting 75% of the industry (with 50% having less than $100 million in market capitalization), are in trouble. Since the beginning of the year, 25 biotech companies have declared bankruptcy, a rate that Mr. Sands noted he had not seen in more than 20 years in the industry. He described the state of the industry as being "fragmented" on the low end, with a few "substantial" companies that are "sustainable" at the top end of the market capitalization spectrum.
Paradoxically, Mr. Sands noted that, until 18 months ago, the biotech sector had raised more money each year since 2000 than it did in the previous decade, and that investment was strong up until 2008. However, since last fall, this trend has reversed in view of the tightening capital markets: Mr. Sands used as an example the fact that there have been no initial public offerings (IPOs) since November 2008, and that even last September, investors polled by his company believed that the market would "stay the same or get worse." In the private markets, venture capital investment has dropped by about 50% in the first quarter of 2009, Mr. Sands reported, with 700-800 companies "starved for capital." Sixty percent of venture capitalists report that they are changing how they make investments, with half of them looking to invest in companies that will be sold before they go public. Mr. Sands also mentioned venture investment in public entity funds -- VIPEs -- had amassed capital but deployed little of it, in view of the distress being felt by most public biotech companies. At least one reason that VCs are standing on the sidelines recently is the history of how investment in biotech companies, in the form of IPOs, has worked out in the recent past. Citing the period between 2003-2009, Mr. Sands stated that 76% of the 82 biotech companies with IPOs during that time were valued under their IPO offering price, 75% were below $200 million in market value and 50% had less than two years cash on hand to fund their businesses. The result, according to Mr. Sands, is that these companies have had to return to the capital markets to raise money over and above their IPOs, further diluting the value of the VCs investment.
In answering the question, "What will it take for the biotech sector to come back," Mr. Sands asserted that market stability, combined with a rally in small cap stocks, is what's required, but that any recovery is at least six months away. When investors return to biotech, Mr. Sands thinks they can be expected to demand strong management and strong data, and to avoid investing in companies valued at less than $100-150 million. In addition, investors will be looking to manage risk by investing in "late stage" biotech companies according to Mr. Sands.
So, how to weather the perfect storm? Mr. Sands suggested that deal-making with traditional pharmaceutical companies should not be expected: although there have been 25-30 merger and acquisition deals per year recently, six of the biggest traditional pharmaceutical companies are involved in their own M&A activities, which are distracting them (generally) from reaching out to acquire biotechnology companies. In addition, Mr. Sands cited the increased activities in alliances and partnering, which are on a pace for about 100 deals this year. Mr. Sands put this number in perspective, by noting that in an industry sector with 1,000 companies, 100 deals involves less than 1 in 10 companies. Industry opinion on worldwide (i.e., overseas) alliances is evenly split between those who think it will create value and those who believe it diminishes value. However, if the investment is from outside the U.S., 80% think it will create value, reflecting desire for "undiluted" capital investment, according to Mr. Sands. However, Mr. Sands also mentioned that for investors, partnering is less a validation of a company's worth than it is an admission that a buyer cannot be found for the company.
Mr. Sands did leave this portion of the program on a positive note, however. He mentioned that 20-30% of the top 100 products in development are biotech products, illustrating the continuing truth that biotech is a source of innovation in the sector. His final thought was that a strong, healthy biotech sector was in the best interests of biotechnology, the pharmaceutical industry, and the country.
The remainder of the discussion was a free-flowing give-and-take between the members of the panel. Mr. Kailian began this part of the talk by questioning whether statements by VCs and traditional pharma companies might not be posturing and a negotiating position intended to drive down the price of investing or acquiring biotech companies caught in the capital market squeeze. He said that this is a cycle like other ones, and that while he expects the industry to come out the other side, in the meantime the way to survive is with cash. Mr. Pyott (at left) agreed that a company's focus should be to have sufficient cash on hand to weather the next 18-24 months, and that his job at Allergan was to try to manage the timing of an unpredictable product pipeline, since it cannot be expected that everything in a company's pipeline will fulfill all its promises. He characterized this as a "balancing" of high-risk and low-risk projects, across Allergan's diversified investment portfolio.
Mr. Johnson (at right) addressed health care reform and the effect of reform on the biotechnology industry. First, he said that he believed that President Obama had "staked the success of his first term" on healthcare reform presented as a comprehensive whole rather than piecemeal. He says that he expects healthcare reform to pass in Congress either with or without bipartisan support (he believes bipartisan support is a goal the administration should pursue zealously), and that the success of BIO's members companies depends on the success of healthcare reform. Mr. Sands asked him whether healthcare reform is in trouble since it is not moving forward, and Mr. Johnson said that while there were "monumental political challenges" to enacting reform, "the die is cast" for this administration.
Dr. Gottlieb (at left) noted that one reason why healthcare reform might not be so certain is its price -- he said there are estimates in Congress (from the Congressional Budget Office) that reform may cost $1.5-2 trillion dollars. In response to Mr. Sands comment that while reform might result in a greater patient (read: customer) population, there would also be pressure to reduce costs, Dr. Gottlieb noted that innovator companies would not be so focused on bigger markets per se. What does concern him, however, is the likelihood, or perhaps at least the propensity, that the Centers for Medicare and Medicaid Services (CMS) would expand its role under healthcare reform from merely being a healthcare cost payor to asserting its own clinical judgment on care decisions (something Dr. Gottlieb stated CMS did not have the trained staff to do properly). He said that instances of such CMS attempts to expand its authority were not new, and that the agency had previously tried to introduce concepts of functional equivalence for drugs, had tried to mandate the use of only the least costly alternative, drug and had taken the position that drugs approved by the FDA under accelerated approval regimes were not FDA-approved drugs and thus were not eligible for reimbursement. In addition to not having the clinical staff to make these decisions, Dr. Gottlieb also stated that the process for having the agency properly determine such questions was "opaque." He also accused CMS of being one of the reasons for healthcare sector inflation, due to how the agency reimbursed doctors and other medical personnel.
Mr. Johnson countered that the expense that would be incurred by not enacting healthcare reform was much greater than reform, and in addressing Mr. Kailian's (at right) earlier comment that BIO did not have a seat at the table at the White House when reform was discussed, reassured the audience that BIO was well-represented in the Senate committees and councils on these issues. (Mr. Kailian mentioned that not being invited to the White House might not be such a bad thing, since in his view most of the industry groups that had visited had later been "demonized.") He also said that the key even under reform will be innovation, because while reform puts at risk 3rd and 4th generation drugs produced by traditional pharmaceutical companies to generate revenue, truly innovative drugs will always get reimbursement. The biotech industry is in a perfect position to use its innovation to address unmet medical needs, he said.
Turning to follow-on biologics (FOBs) or biosimilars, Dr. Gottlieb stated that there will be legislation "in the near future" but that this had not advanced in Congress because Rep. Waxman could not move his own bill out of (his own) committee, and that there was a competing bill by Rep. Eschoo that had greater support in Congress. He also said that delaying passage of biogenerics legislation was beneficial because it increased the number of years that Epogen would be off-patent and would improve the estimates from the CBO. He also said that he expects the FDA to more slowly in approving FOBs and that they will not be approved as true "biogenerics," at least in part because the FDA would not approve them as being interchangeable with the innovator biologic drug. However, he cautioned that CMS could attempt to classify FOBs under the same reimbursement code as the innovator and in this way try to treat these drugs as generics despite FDA's determination to the contrary. He reminded the audience that CMS had tried to exercise this authority on other occasions, and that the chief counsel prevented it. Since neither statute nor regulation prevents it, a new chief counsel at the FDA could change the policy "by fiat," according to Dr. Gottlieb, or Congress could expressly grant that power to the agency.
Dr. Gottlieb went on to say that he expects that, with the exception of peptides or short proteins, FDA will require Phase III clinical trials and "switching studies" in anticipation of the likelihood that in practice an innovator biologic drug and an FOB would be switched (inadvertently, of necessity or otherwise). He said that the expectation in the industry is that traditional generics companies like Mylan and Dr. Reddy's would not be involved in FOBs, and that companies like J&J, Biogen, Genentech, and others would be. Mr. Johnson agreed that FOB legislation had stalled in Congress because Rep. Waxman cannot get the support he needs, even in his own committee, due to greater support for Rep. Eschoo's bill.
Mr. Kailian made one statement about FOB legislation, and that was that he believed that Rep. Waxman's five year data exclusivity proposal was "dead in the water," stating that in his opinion "rationality will prevail."
Mr. Johnson brought up patent reform legislation, which he believes will go forward. He said BIO was well positioned as a resource on this bill, being a "cool head" on the value of reform but that the mantra of "innovation must be supported" should be stressed.
The panel also took questions from the audience, Mr. Kailian garnering a chuckle with his response to the question of how to weather the "perfect storm." "Cash," he said, "you can hide in a bucket of cash for a long time."