By Kevin E. Noonan --
Steve Burrill, President and CEO of Burrill & Co. took the stage at BIO 2011 in Washington, D.C. last Tuesday, and spent his 90 minutes in a brief retrospective of his 25 years in the biotechnology industry as well as his impressions and opinions on the current state of that industry. Mr. Burrill's talk, entitled "Looking Back to See Ahead," was light on nostalgia and once again characterized by his trademark futuristic optimism.
The program began with a video representation of the 25 preceding annual reports (now available on a CD-ROM for $95), followed by 75 minutes of Mr. Burrill describing the "labor of love" that has been his experience in financing biotechnology companies. He dates the beginnings of commercial biotechnology with the creation of ALZA as a spinout from Syntex, but quickly moved to "original" biotechnology companies (Cetus/Genentech/Biogen/Genex) that came about in the late 1970's and early 1980's (followed of course by companies like Amgen, Genetics Institute, Genzyme, and others). As he has previously, he credits biotechnology as being a solution to global problems of clean water, energy, and increased food production as well as its conventional role in health care (both diagnostics and therapeutics). In this regard he presented a short reprise of last year's talk and predictions that he said turned out to be "mostly true."
The underlying theme of his message this year was that the predominant feature of the biotechnology environment is change, and rapid change. Such change provides challenges but in characteristic fashion Mr. Burrill (at left) espoused the belief that change provides "extraordinary opportunities." In this he answered the rhetorical question of whether the current situation is the prelude to biotech's greatest moment or its obituary, by saying that biotech's "greatest years are ahead of us."
Turning to the financial state of the industry, Mr. Burrill noted that biotechnology companies had $100 billion in revenue over the past year and were "marginally profitable." There are 400 public biotech companies in the U.S. (700 globally), with a $400 billion market cap. Continuing a trend noted last year, he said that there have been 21 IPOs involving biotechnology companies in the past year, with $60 billion in equity capital raised (the most in any 12-month period). This has raised Mr. Burrill's optimism level from last year's "cautious," based on the industry doing "pretty well" and deserving "pretty high marks" in the ensuing year. He also noted that there has been "every form of merger and acquisition" in the past year, while mentioning that these included substantially more risk-taking by the biotechnology partner and that the time of "$100 million up-front payments" was over. He included in this list "marquee acquisitions" of biotech companies by traditional pharmaceutical companies, and specifically mentioned as "seminal" Sanofi's acquisition of Genzyme and Roche's completion of its acquisition of Genentech (noting that Genentech's value based on the cost of the acquisition is greater than most existing pharmaceutical companies). Mr. Burrill also said that an evolving trend was for big pharma companies to bypass startup biotechnology companies and directly "partner" with university professors for collaboration in drug development (a trend that may raise the significance of the Supreme Court's recent decision in Stanford v. Roche).
With regard to the capital markets, Mr. Burrill said there was "plenty of capital -- it's just hard to get." Removing his tongue from his cheek, he noted the paradox that while the capital markets are not as "friendly" to biotech as they have been in the past, more capital has been raised in the past few years than ever before. One difference is that more American companies are looking to foreign sources of capital, that angel investors are more important in markets outside the "coasts" (where VCs are still predominant sources) and that public and private equity capital are important sources of funding for biotechnology companies. This may be related to the fact that, even in a recovering economy, biotechniology companies are outperforming the rest of the market, with midcap companies doing better than large cap companies (due, in part, to the higher percentage of midcap companies that are being acquired).
The interrelationships between these different players in biotechnology innovation can be conceptualized as "co-opetition," a state where competitors strategically cooperate with one another while continuing to compete against one another; Silicon Valley is Mr. Burrill's paradigm for this situation. He contrasted this with the traditional business model of big pharma, which he said was "not sustainable" and represented the "dinosaurs" of the industry (citing Pfizer's firing of 52,000 people over the past few years as evidence of this failure, and the reality that governments (in programs like Medicare) will be the payor for 80% of heathcare-related biotechnology products so that the need for detailers has decreased dramatically and permanently). Answering his own rhetorical question, "the money," Mr. Burrill said, is in cancer treatment as well as central nervous system disorders and cardiovascular diseases. Paradoxically, while praising the efforts of the Human Genome Project (HGP) for "increasing the tools in our toolbox" (for both humans and other species), drug development based on the HGP has failed most of the time. Also, there remains inefficient translation of academic research to commercial R&D (characterizing current big pharma efforts as "search and development" with regard to the trend to "outsource" research to startups and academic researchers). In addition, Mr. Burrill said that FDA approvals are decreasing at the same time that the investment needed to obtain approval is increasing: in 1975, a new drug could be developed and approved (on average) for about $150 million and could take about 7 years. Today, the cost is $1.5 to 2 billion and it takes 15-17 years. As a consequence, there is "no time" to recover investment of traditional R&D, leaving "no time" for research and generating the need to acquire rather than develop new drugs. The upshot of these trends make Mr. Burrill skeptical that there will be cures or drugs for cancer (and other diseases of aging). This is a problem insofar as 80% of healthcare costs (in the U.S. and worldwide) are expended in end-of-life care, and as he has over the past several years Mr. Burrill recommends that the healthcare system (and the biotech industry) focus on wellness, prevention, and the development of products effective for predictive/preventative care. The increased costs associated with both treatment and prevention must be addressed by innovation or rationed care will be a "reality" worldwide.
Mr. Burrill also repeated a theme common to many of his recent "state of the industry" reports, that the U.S. is being overshadowed by the developing world. In addition to the "traditional" BRICs countries (Brazil, Russia, India, China, and South Africa), Mr. Burrill added the CIVET countries (Columbia, Indonesia, Vietnam, Egypt, and Turkey) as sources of increased international competition for innovation, markets, and capital. The world is a "flat, interconnected, borderless marketplace" with an "exploding middle class spending massively in healthcare," he said. The U.S. is becoming less important and is no longer the economic engine of the world; we are also facing trade friction and regulatory restriction due to most countries erecting barriers to protect their local industry. Mr. Burrill also mentioned greater levels of political instability coupled with the tendency for the developing world building their economies with biotechnology that is based on (or frankly uses) U.S.-developed technology. As a consequence, he said there is "increased commoditization of products" (meaning biotech companies need to understand branding as a source of building market advantage), increasing transparency, decreased cycle times, shrinking margins, and limited supply chains (i.e., by reducing the overall number of suppliers). In the face of this new "reality," "investor expectations are not sustainable" and managers need vision, global insight, and the ability to manage ambiguity and virtuality: success, according to Mr. Burrill, means management must be less hierarchical, capable of balancing short term and long term goals, and require a different managerial skill set that is capable of managing social media and dealing with increased changes in regulatory requirements both here and abroad. "Better and faster and cheaper" was his mantra, and he used the video gaming industry and Twitter as examples of a different type of value capture (where the company essentially "gives away" product and makes money on creating value "outside" the product).
There is plenty of opportunity for this value creation in biotechnology according to Mr. Burrill, in a world of population growth, an increasingly middle class and aging world population. Mr. Burrill reminded the audience that the world population will exceed 7 billion by October, 2011 and reach 9.0 to 9.5 billion by 2050; China has 250 million people aged 65 and over. World economies are growing with world population: India will be the 5th largest economy soon, and Brazil the 5th largest population (and has the world largest development agency). The proportion of biotech/pharma sales in developing countries was 13% in 2001 and will soon be greater than 50%. The U.S. is behind these countries in almost every measure of future innovation, Mr. Burrill stated, including publication of scientific papers, investment, and development of cutting-edge technologies such as stem cells.
A new theme this year was the impact (and lessons) of social media and their effects on the biotechnology business model. Social media is "changing nature of what we do," Mr. Burrill said, including and perhaps most importantly how biotechnology companies do business. He reminded the audience that many of the companies that are the face of social media are relatively new: Google is less than 20 years old, Facebook less than 7 years old, Twitter less than 5 years old. These companies do not fit traditional competition models, supporting Mr. Burrill's thesis that "connectivity changes everything" and "innovation is connectivity." Part of Mr. Burrill's message in this regard relates to his earlier "into the future" speculations, such as diagnostics built into cell phones (where you'll spit on a spot on a cell phone and have the genetic or other diagnostic information transmitted to your physician, for example). But he included the reality of 10,000 apps for the iPhone and the likelihood that more and more apps will be developed to interface "consumer digital health." This will implicate different companies (such as Intel, Cisco, Google, Microsoft, and Apple) that can be expected to get involved in healthcare. It will also implicate "patient empowerment" as well as structural costs: there may be less traditional investment, for example, in hospitals and more in "Walmart medicine" where healthcare has been decentralized and commoditized. He also mentioned the effects that social media are having on conventional clinical trials, where connectivity between patients creates problems with "blinded" trials, and the traditional emphasis on patient privacy have crumbled in the face of mobile phones and global interconnectivity.
Mr. Burrill spent the last 10 minutes of his talk on fuels, genetically modified foods, and the application of biotechnology to the problem of supplying clean water, saying that the industry can "us[e] the same toolbox" as applied to healthcare. Energy (biofuels) and agriculture are being "transformed" by biotechnology, he said, but acknowledged that there was a great deal of "misinformation" about the differential allocations of resources for creating food versus biomass for biofuel production.
In conclusion, Mr. Burrill provided a cornucopia of concepts characterized by the letter "c," including co-opetition, confluence, commercialization, and customers, cultures, creativity, and change. He said that science was moving "faster than anyone thought it would" and that the future was in leveraging the "enormous premium" of virtuality and connectivity to fuel innovation. He predicted "more change in next 10 years than from the beginning of time, in a globally connected virtual world of informed consumers." He sounded quite excited by the idea.
The complete Burrill Report can be purchased from Burrill & Co.; sales at BIO 2011 include access to the company website for Mr. Burrill's presentation slides.