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Biotech: Solid to Spectacular?

What the industry can learn from the $2,500 'Nano' car.

By | August 1, 2008

Biotechnology is a pernicious business. Forty percent of all startups are shuttered after providing no return whatsoever to investors. A further 50% return something, but less than the capital invested.

This year, just eight biotechnology companies have filed for initial public offerings (IPOs), of which only one has successfully gone public. (For comparison, last year 35 went public.) Peter Winter of Burrill & Company says that "Companies will either disappear or tread water for a little bit."

So, in this time of recession, biotech is a bad bet, right? Wrong. I've been canvassing opinions from venture capitalists on the state of the industry and, surprisingly, they are fairly buoyant. Here's what I found.

There has been a transformation in biotech investment strategy over the past decade, such that the IPO numbers quoted above are pretty much irrelevant. As the feature by Sam Hall and Alistair Wood describes, a biotech's exit of choice is sale at one of several "inflection points" in a company's development.

Cash-rich legacy pharmaceutical companies (the 50 most profitable have $150 billion in reserves) are always on the lookout to fill their pipelines. And since there's a never-ending need for new therapies, market opportunities are pretty well limitless. (In practice, of course, there are substantial barriers: New products must be safe and more effective than existing treatments, and priced competitively to boot. Hence the eye-watering attrition statistics.)

Despite the high failure rate, the healthcare venture industry has provided steady returns over its 30-odd-year lifespan, another reason for its ongoing popularity. This contrasts with other technology sectors, which have experienced massive swings: Remember the dotcom boom, and the implosion that followed it? No sector is totally recession-proof, but biotechnology isn't suffering from an acute lack of funds at the moment.

In any case, the industry seems to have undergone a shift in thinking from more capital to efficient use of it - the key to success, venture capitalists agree. An analysis last year1 revealed that the less capital invested in a company, the better the returns. The old ploy of grabbing as much funding as you can has been replaced by an idiom that, as a Scotsman and a small business manager, strikes me as second nature: Look after the pennies and the pounds will look after themselves.

Solid science is a prerequisite for success, but what else sets apart the 10% of companies that provide the returns on which the entire industry depends? There's no real mystery, it is discipline, focus, and experience.

Discipline means avoiding building unnecessary infrastructure and fancy facilities, as well as outsourcing wherever possible.

Focus means identifying the killer experiment. And doing it. And then being brutally tough on the implications of it. Spend, but spend intelligently.

Experience brings adeptness across the board. Examples: Knowing how to access grant money for business use, sharing management costs, structuring finance around major costs, ensuring you have quality commercial diligence to match your technical diligence, having clear go/no-go decision points, and knowing when to shut down a company.

These may seem fairly obvious, but a surprising number of companies lack this basic rigor.

Still, this tinkering is not going to be enough to transform biotechnology from a solid to a spectacular performer. That will require a quantum leap. What, for example, would it take to cut the cost of drug development in half?

Some hold up as an example the Nano car, a "comfortable, safe, all-weather people's car, high on fuel efficiency and low on emissions"2 that will sell for $2,500. Tata Motors assessed every aspect of car design and manufacture to find ways to shave costs while preserving quality. Perhaps it's the model that we need.

Drug development is an order of magnitude more complex than car design, but doesn't that just give a lot more opportunity for creative savings? Watch this space.

 

References

1. B.L. Booth, "When less is more," Nat Biotechnol, 25:853-7, 2007. 2. tatamotors.com
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