By Carl B. Feldbaum
At a time when national security is understandably monopolizing Congress's legislative calendar, as well as the energies of the federal agencies that regulate biotechnology, I am pleased to report that the biotechnology industry's fundamentals are sound.
Investors poured $33 billion into biotech companies in the halcyon year of 2000, leaving 50 percent of publicly traded companies with at least three years' worth of operating cash, according to the latest Ernst & Young report on biotechnology, entitled, Focus on Fundamentals. Even in the current economic downturn, biotechnology has outperformed both the broader markets and the high-technology sector. As of last Friday, the NASDAQ Biotech Index was actually up 8.7 percent compared to its close Sept. 10, the day before the terrorist attacks.
For this year to date, the industry has attracted investment at a pace second only to that of year 2000, raising $10.2 billion through last Friday (October 26). Indeed, the predominant message from analysts and other observers is that the biotechnology industry is extremely well positioned to endure the current economic downturn. More than 350 biotechnology products are in late-stage development, and more than 70 companies have developed FDA-approved biotech medications, vaccines or both. FDA approvals have slowed this year, but even so, this past summer, three companies joined the ranks of those with approved products.
While the market for public offerings has decidedly chilled vs. 2000, venture capital investment in emerging biotechnology companies has actually maintained the brisk, unprecedented 2000 pace. In fact, as of October 26, year-to-date venture capital investment of $3 billion in the industry is just a hair above last year's tally at the same point. Whether this trend will hold as the venture capital industry continues to reel from the dot-com meltdown is unclear. Thus far, venture capitalists have shifted investments from other sectors into biotech, thus maintaining their rate of investment in our sector. And may I say with good reason: As of mid-October, biotech was the only sector producing one-year gains for venture capitalists.
The strength of the industry is also reflected in the proliferation of collaborations and partnerships, which are the lifeblood of biotechnology, as indeed many of you well know. I understand that about half the 5,000 U.S. and Canadian members of the Licensing Executives Society work in the healthcare field, and that it's the fastest growing segment of the organization's membership. That fact certainly comes as no surprise given the phenomenal, almost exponential growth in biotech deals in recent years. In year 2000, there were five times as many new deals between biotechnology companies and pharmaceutical companies as in 1993, the year BIO was formed. Even more dramatic, the number of new deals between the biotechnology companies themselves - the so-called bio-bio deals - jumped 10-fold over that period. In fact, these days bio-bio deals are proliferating at a faster pace than bio-pharma agreements. The formidable balance sheets at biotechnology companies gives even early-stage enterprises the leverage to enter arrangements that are truly collaborative, rather than simply licensing their platform or product candidates to the highest bidder.
There was some fear that the wave of mergers among pharmaceutical companies would significantly slow down biotech partnering, but the impact, if any, appears minimal. In recent years, we've seen Warner-Lambert subsumed into Pfizer, Pharmacia & Upjohn merge with Monsanto to create Pharmacia, Rhone-Poulenc and Hoechst merge to form Aventis, and Glaxo Wellcome and SmithKline join forces. A few deals were shed. Most notably, Pfizer's acquisition of Warner Lambert forced the company to relinquish rights to an OSI Pharmaceuticals cancer drug called OSI-774. A disaster for OSI? Hardly. The company genuinely was glad to get this product back, which it soon re-partnered with Genentech and Roche for $187 million, thought to be a record for an individual product in Phase II clinical testing.
The downside to pharmaceutical mergers has been minor for biotech companies. The most common complaint has been that projects slow down at pharma companies in the throes of reorganizing a merged entity. Pharmaceutical companies are under tremendous pressure to keep up earnings growth of 20 to 25 percent. To accomplish such goals, they need drugs in their pipelines, and they are therefore more eager than ever to partner with pipeline-rich biotechnology companies, with salutary effects on the size, structure and scope of deals.
As for the pharma companies, they need to tap the biotech pipeline more than ever to keep up the flow of blockbuster new products. The senior vice president of global licensing at Bayer told the audience at the Allicense conference earlier this year that his company needs two new chemical entities per year "just to have growth above the market." That's about four times the pace of Bayer's rate in recent years, so the company turned to a biotechnology company, Millennium, in a $465 million deal aimed at identifying more than 30 drug development candidates. Already, one drug resulting from this agreement has moved into development.
To give you a feel for just how dramatically the deals have grown, in 1993, the biotech industry was stunned when a startup company called Human Genome Sciences landed what, at $125 million, was then the largest-ever deal between a biotech firm and pharmaceutical company. This year brought bio-pharma collaborations to break the billion-dollar mark: a $1.3 billion agreement between Curagen and Bayer, and an up to $2 billion deal between InClone and Bristol-Myers Squibb.
The trends translate into biotech companies scoring higher deals for smaller slices of their pipeline. The $2 billion ImClone deal with Bristol-Myers Squibb covers just one cancer product. There's a $500 million bonus just for FDA approval of the drug. Compare that to a deal completed just four years ago for what was then a potential blockbuster product on the cusp of commercialization, Immunex's Enbrel. Immunex signed a $100 million agreement with American Home Products, which included a $30 million FDA approval bonus. Of course, companies that can afford to hang onto a product into Phase III trials have always fared better in partnering, and biotechnology's improved cash situation gives more companies the freedom to absorb more of the risk at earlier stages of development in exchange for more lucrative partnerships down the road.
Deals for platform technologies and target and drug discovery are also swelling. Three years ago, the $465 million agreement between Millennium and Bayer for the discovery of genomics-based drug targets and therapeutics was hailed as a wake-up call regarding the value of genomics. This year, Curagen and Bayer signed an up-to- $1.3 billion agreement for genomics-derived targets and development in just two indications, obesity and diabetes.
Alongside the headline numbers for breakthrough deals - the up-front, milestone and equity payments - the numbers that get buried down in the eighth paragraph of a deal story are also increasing rapidly. For many well-funded biotechs, the goal is no longer merely to secure large up-front payments and milestone commitments as, essentially, financing vehicles, but to retain a larger share of downstream revenues. You can track biotech's emergence as an equal not only in the growing size of deals, but in their changing structures. Profit sharing, co-development and co-promotion - these terms denote a tectonic shift in the balance of power, especially among the best-funded of biotechnology companies, which now negotiate as near equals with prospective pharmaceutical partners. The ImClone-BMS deal, for example, calls for the biotech company to receive 39 percent of net sales, plus manufacturing fees. And, in the Curagen-Bayer deal, the biotech company will share 44 percent of costs - and profits.
These biotech companies are no longer supplicants; they are able to act as true partners and collaborators with pharmaceutical firms. And many of them have reached critical mass in financial reserves to act as de facto pharma companies themselves - stocking their own pipelines with the technologies and products of up-and-coming biotech companies. They're even competing with pharma companies for the acquisition of late-stage products. To name just a few examples: Genentech and Idec brought the cancer drug Rituxan to market; Genzyme commercialized GelTex's Renagel and later acquired the smaller company; Millennium acquired a company called LeukoSite and gained the anti-cancer antibody Campath (partnered with Ilex Oncology).
In the recent years, we've also seen some very creative deals between biotech companies themselves. Corixa, for example, has signed deals with both Abgenix and Medarex to bid on promising antibodies that emerge from collaboration. It's a mechanism to determine, product by product, who wants to develop it the most; the other party will receive milestones and royalties along the lines of a traditional partnership. And in one of the most creative moves to date, CV Therapeutics went outside the biotech and pharma communities altogether and opted to outsource sales for its lead product, retaining up to 90 percent of the profits while avoiding the headaches of establishing its own sales force immediately.
But not every deal-related trend is on the upswing. Pharmaceutical companies have always clung tightly to information, but public disclosures about deals are becoming increasingly sketchy. In 1998, 31 percent of bio-pharma deal announcements disclosed a dollar amount - usually of potential milestones or equity purchases. But in 2000, only 19 percent of announcements gave a dollar-figure. The number of deals went up, but the number of announcements disclosing specifics actually declined. Business development professionals have expressed interest in BIO, the Biotechnology Industry Organization, providing services such as members-only databases that would provide deal intelligence beyond what's available on press releases and in trade publications. We're exploring this idea further, although we have to tread carefully, of course, lest we alienate our large-pharma members.
We're also moving to augment our member companies' efforts at the other, earlier end of the deal-making pipeline - the in-licensing for development of technologies from universities, the NIH and other academic institutions. We are considering adding a technology transfer-partnering forum to the program at our annual meeting next June in Toronto, BIO 2002. The forum would consist of brief presentations of university, academic or government technology available for licensing, with space reserved for one-on-one discussions afterward.
The Bayh-Dole Act of 1980 opened the floodgates of technology transfer and helped foster the biotechnology revolution in which we are engaged. And yet we hear that technology transfer offices are overburdened and lack sufficient resources to promote available technologies, and that therefore a fair amount of worthwhile technology still remains "on the shelf." So perhaps with initiatives like a tech-transfer forum, BIO can act as a matchmaker for biotech companies and non-profits, just as we have with our partnering forums for biotech and pharma companies.
The NIH is, of course, one of the major sources of inventions available for technology transfer to biotech and pharmaceutical companies, and the federal government quite rightly wants to ensure it is getting a fair return from the industry. We believe - and the NIH believes - that the public is reaping manifold returns on investment. A May 2000 report from the Office of the Chairman of the Joint Economic Committee found that publicly funded research generates rates of return to the economy averaging 25 to 40 percent; that the benefit of increased life expectancy as a result of advances in health care is $3 trillion annually; and that, between 1970 and 1990, annual return on investment just for reductions in mortality from cardiovascular disease was far higher than average annual spending on medical research. The system we have in place clearly works, and that's the point we have made in our letters and discussions with legislators.
Stability in NIH licensing structures - indeed in most facets of our interaction with the federal government - is important to maintaining the industry's momentum. In 1989, Congress added "reasonable price" clauses - or price controls - to cooperative research and development agreements with the NIH. Companies thereafter shied away from these agreements, a setback to important research. Those rules were revoked in 1995 and research under CRADAs rebounded quickly. But the threat of price controls is almost always latent, even if expressed in politically popular code. Senator Ron Wyden, who ordered a recent study of taxpayer return on investment for research spending, would like to see a quote "guarantee" that quote "federal funding that leads to the creation of 'blockbuster' drugs promotes the public interest in affordable drug therapies" unquote.
Ernst and Young's Rene Salas noted when launching their annual report earlier this month at BIO's first-ever Venture Forum conference that changes in public policy represent the only major threat to the industry's positive trends. The viability of this industry hinges on predictable intellectual property laws and regulatory processes, a rational and streamlined regulatory system based on science, and market-based incentives to reward the massive investments of time and money in research and development that are required to develop a new product. Biotechnology has flourished here in the U.S. because those supportive systems are in place.
In fact, BIO's greatest accomplishment in its first five years was perhaps the Food and Drug Administration Modernization Act of 1997, coupled with the five-year renewal of the Prescription Drug User Fee Act. The results until recently have been unambiguous: More than half of the 120 biotechnology drugs and vaccines on the U.S. market were approved in the last five years, including 21 new products in 1999 alone. Median approval times plunged from more than 30 months in 1993 to under a year in 1999, but went up in 2000 (it's unclear whether this reversal is an aberration or a trend, or a consequence of the FDA commissioner vacancy). Slated for renewal in 2002, PDUFA naturally a top priority for BIO. Already, negotiations with FDA officials are under way.
In the post-September 11 Washington, we are also working with the federal government on anti-terrorism issues and gingerly handling the emerging hot-button issues surrounding intellectual property.
Biotechnology has long been enlisted in federal efforts to develop defenses against biological warfare, but before September 11 these efforts had all the urgency of any that involve a purely hypothetical threat. To illustrate this shift in priorities, note that the Department of Health and Human Services spent $50 million on bioterrorism preparedness in fiscal 2001; now, the agency is proposing a $1.6 billion package.
At the behest of the Department of Health and Human Services, we surveyed every biotechnology company in our databases in late September - both BIO members and non-members - and gathered more than 400 responses outlining technologies and products in the works or commercially available with potential biological defense applications.
Our members have told us techniques of the biotechnology revolution - such as monoclonal antibodies, various drug delivery technologies, and genomic and proteomic analysis - are ready to be used for national defense and public health just as they have been to create a new generation of medicines for use in conventional healthcare. And indeed, many biotechnology companies have already worked with federal agencies through existing programs to develop new techniques for defending against biological or chemical attack through relatively modest grant programs. Some products, such as detection devices, are already in service.
But the scope of these efforts is about to widen considerably, creating a whole new spectrum of opportunities in defense research and contracting. At BIO, we have drafted legislation for a program to stimulate counter-bioterrorism research and development. Regarding vaccines, we are urging that Congress provide an indemnification program; support for additional security measures; and a long-term commitment, so that research and development will move forward even after the current crisis abates. We have also asked that HHS and the FDA submit a report to Congress detailing changes in law and regulations needed to expedite approval of biological defense products.
Some biological defense products that emerge from the new R&D imperative will likely have applications to conventional healthcare needs - broad-spectrum antibiotics can be used to treat a gamut of infections, for example - but many, such as the smallpox vaccine on which the federal government proposes to spend $509 million (for a disease eradicated years ago in natural environments), have no viable spin-off applications and will essentially be stored under glass for use only in an emergency. Indeed, one of the lingering tragedies of the September 11 attacks and subsequent anthrax assaults may be the diversion of resources to develop these products we hope to never use.
BIO is looking at ways to educate our members about the ramifications to them of the new counter-bioterrorism imperative. Defense Department officials have said they want to integrate biology into every aspect of their operations - but how does that desire translate into specific projects? And what kinds of terms will grants and contracting agreements at both the Department of Defense and the Department of Health and Human Services entail?
We're also attending to the ethical issues involved in biological defense research by developing a statement of principles reiterating our long-standing policy opposing the use of biotechnology to develop weapons of any sort. We do, however, believe it is appropriate to use biotechnology to develop products and services to inoculate citizens against infectious agents that may be used in an attack, to detect biological or chemical attacks, and to diagnose and treat those who may have been exposed to a biological or chemical attack.
You may think a statement of principles is unnecessary, that the moral issues surrounding application of biotechnology to defense are unambiguous and obvious: Use of biotechnology for defense is ethical; use of the technology for offensive weapons is reprehensible.
But the pressures of war can cloud the ethical dilemma. Just ask a nuclear physicist.
Insulated by a decade of peace and prosperity following the Gulf War and the collapse of the Soviet Union, we are only just beginning to grapple with the potential of our own breakthrough technology to wage or defend against war. And as we probe these issues, we may discover, as did the nuclear scientists, that the issues are not quite black and white. What if biotechnology products are used to counter sleep deprivation or increase the stamina of soldiers - is that an offensive or defensive application? Should we attempt to genetically modify certain animals for use as biosensors? We'll need to work through such questions.
As a sidebar to the anthrax scare, intellectual property is the other hot-button issue in Washington right now. Patent protections are the cornerstone of the biotechnology industry's success - drug development is simply so expensive and risky our companies have to be permitted a period of exclusivity for innovative products. Yet these products receive shorter effective terms than other inventions because the patent-term clock starts ticking well before market launch, while products are in clinical development and under regulatory review. A study by the Tufts Center for Study of the Drug Development found that the effective term of biotech patents for drugs and vaccines averages only 11 years. Congress attempted a remedy in 1984 with the Hatch-Waxman Act, which partially restores term lost to development and regulatory review, but which also imposes a 14-year upper limit on patents extended under the law. That means, at best, these patent terms still end well short of the standard term. If caps on Hatch-Waxman were repealed, BIO has found in a new study, biotechnology therapeutics would receive, on average, another four years of protection, while biotech vaccines would gain 3.5 years.
When debating whether such inequities vs. other products are fair we, of course we must acknowledge that biomedical products are unique, and that there is an ethical element to protection of this kind of intellectual property. Nobody much cares if a breakthrough in cappuccino machines is exclusive to a single company for years. But medicines and vaccines are a different story. In some cases there is only one drug that effectively prevents or treats a disease. While the intellectual property involved is hard earned - often more than a decade of testing and trials - a company with such monopoly power over health - sometimes over life and death - must be attuned to the political and social implications of that power.
There's a famous scenario Harvard psychologists used in the 1970s to analyze moral reasoning in children. It goes like this: Hans has a wife who is dying but can be saved by an expensive drug invented by a local druggist. The man cannot afford the drug or get credit to purchase it. Do you think the man should steal the drug to save his dying wife?" According to the psychologists who designed this Rorschach test of morality - and obviously didn't consult with their colleagues in intellectual property at Harvard Law - those with a higher level of moral development would say, "Yes, Hans should steal the drug, because saving a life is more important than obeying the law." (Interestingly, the metrics of the test were later criticized because they gave short shrift to girls' tendency to advocate for a compromise between Hans and the druggist - which in the real world would of course be the best solution.)
That psychologists invented this scenario as a gauge of moral reasoning suggests how resonant these issues are. You have only to substitute Africa or Brazil for Hans and makers of HIV drugs for the druggist to see how this dilemma applies to our industry. Or, to use the example that's on everyone's mind - Cipro and an anthrax-concerned U.S. government and public. If we don't want Hans to steal the drug - and we don't want legislators to change the laws that give the druggist incentives to create the drug in the first place - we've got to find ways to solve such dilemmas.
The Cipro case is a pretty good example. The anthrax assaults and the run on Cipro, the only antibiotic approved specifically for the treatment of inhalation anthrax, attracted an unprecedented level of mainstream media attention to this always-smoldering issue of pharmaceutical patents. In the U.S. and Canada, some politicians called for overriding patents on Cipro to augment supplies during the crisis. Canadian officials actually took that radical step, but subsequently negotiated a deal with patent-holder Bayer to provide the drug at a reduced price on short notice. In the U.S., Sen. Charles Schumer (D-N.Y.) called for the federal government to shore up supplies by likewise invoking its authority to bypass the patent, but the administration has declined to do so. But that radical step has been forestalled by Bayer's negotiation of an agreement with the government to supply the government with Cipro at a substantial discount.
Although intellectual property is the essence of licensing and one of the fundamentals to continued growth of biotechnology, the public is clearly ambivalent about our IP. Patent protections for biotechnology products have long fueled bioethical debates - is it "right" to patent genes or organisms, or to uphold market exclusivity for products vital to human health? U.S. law and court rulings have consistently answered yes, upholding intellectual property protection as a vital spur to innovation. Indeed, the industry's first substantial growth surge occurred immediately after the 1980 Supreme Court ruling that organisms could be patented in Diamond v. Chakrabarty.
But even before the current crisis over Cipro, biomedical patents were increasingly under siege around the world:
In South Africa and Brazil, government officials have declared the HIV/AIDS epidemic an emergency that justifies overriding patent protections for anti-HIV medications. These countries - and scattered supporters in the U.S. Congress - are challenging the worldwide patent system for drugs even though several pharmaceutical companies have responded to the crisis by providing low-cost medications to developing countries, and both the Clinton and Bush administrations have followed a policy of not seeking sanctions for patent violations in impoverished nations ravaged by AIDS. Moreover, an October 2001 study published in the Journal of the American Medical Association found that patents were not a substantial barrier to AIDS treatment in sub-Saharan Africa. The real culprit, according to the report, is "the extreme dearth of international aid finance." But pharmaceutical patents make an attractive political target.
In the Canadian province of Ontario, Premier Mike Harris has challenged intellectual property protection for a genetic test for breast cancer predisposition. He argued that Canadian laws should be amended to prevent private firms from patenting human genes to provide greater access to genetic tests. Harris is not the first to question the ethics of patenting genes. However, as we noted in a letter to the premier, patents are not granted on raw DNA sequences of genes, nor on genes, as they exist in nature. A patent is awarded only if one can describe a gene's role in human health or other commercial application - a painstaking process that fully merits protection as an invention. In March 2000, comments from President Bill Clinton and British Prime Minister Tony Blair in favor of publishing the human DNA sequence were widely misinterpreted as an assault on gene patents. The result? Biotechnology stocks tumbled 12.5 percent in a single day, once again illustrating the direct connection between strong intellectual property protections and investment in biomedical R&D.
In India, generic manufacturers are seeking entrée into markets for the current generation of patented prescription pharmaceuticals. In March, for example, an Indian generics manufacturer asked South Africa for rights to sell eight AIDS drugs under patent protection, igniting the debate over pharmaceutical patents in that country. And, as has been widely reported in the current crises, Indian generic makers are willing to churn out Cipro for a fraction of the cost of the name-brand product.
While situations may arise that are so dire they demand certain patents be suspended temporarily, such a step must never be taken without carefully weighing the consequences and without negotiating with the patent-holder - "the druggist" of the "Should Hans steal the drug?" parable - to find a solution. Shortcuts to larger supply and lower costs may quickly expand availability of an existing product, but in the long run, if such actions are taken cavalierly, they may erode incentives for investment in development of new products.
Biotechnology and pharmaceutical communities are committed to saving and improving human lives . Companies with some of the most expensive products have established assistance programs to make those products available to low-income uninsured patients, and many have made products available at lower cost in impoverished regions of the world, or declined to take action to protect patents in such regions.
Such compromises are necessary if we are to protect the integrity of the patent system, and, frankly, if we are to protect biotech's hard-won reputation as people working to benefit mankind. The general public and our political leaders have very favorable opinions of the biotech industry, but once an industry is tagged as avaricious, it's an arduous, expensive and usually impossible task to get back your reputation. Maintaining our much-envied, world-famous legal and regulatory framework requires us to do much more than lobby Congress and the White House, or spin a story for the media. Quite simply, we have to do what's right. We have to live up to who we claim to be.
Ladies and gentlemen, thank you.