Report on the State of the Industry
To Covance Senior Management, Carl Feldbaum
Ladies and gentlemen, good afternoon. I'm Carl Feldbaum, president of the Biotechnology Industry Organization, and I'm here today to report on the state of our industry, which is, from a big picture perspective, excellent. Biotechnology attracted almost $70 billion in investment since the beginning of 1999 to fuel the advance of more than 350 medicines and vaccines now in the pipeline and the discovery and development of potentially hundreds more products through genomics, proteomics, bioinformatics, nanotechnology, stem cell research and a dazzling array of other tools. That's the snapshot.
Of course, as you know if you follow biotechnology, the closely watched indicator of public offerings fell from the giddy heights of 2000, but even so, 2001 was the second-best year for biotech investment ever, and the first quarter of 2002 outpaced the 2001 rate, with $5.7 billion flowing into the industry -- $250 million more than in all of 1998.
Venture capital investment actually has held steady over the last two years as funds shifted from dot-com and telecom investments into biotech. So far this year, privately held companies have raised $1.1 billion, after raising $3.7 billion last year and $3.9 billion in 2000.
Although investment remains robust, a growing share of that investment is coming from private placements, convertibles and the like, as public markets have cooled for biotech stocks. After rising by 22 percent in the fourth quarter of 2001, the Nasdaq Biotech Index has plunged 29 percent this year. Such dramatic swings are not atypical in this industry, which is still vulnerable to a parade of news of product setbacks, such as the 19 we've experienced this year. These setbacks occur because, despite the best efforts of the world's best scientists, we still cannot predict exactly which products will succeed in clinical trials and which won't. According to Ernst & Young, only one drug out of every five that enter clinical trials will eventually win approval. Fortunes are made and lost by those who scrutinize the minutiae of preclinical and clinical data to predict which one of each five will make it.
Yet, despite the spate of recently bad news, the big picture for biotechnology remains very positive. As of mid-2001, a majority of publicly traded U.S. biotechnology companies had enough capital to carry their research forward for at least three years, a feat that was unthinkable just five years ago. In 2001 and 2002 we have seen the consequences of that historic capital influx begin to play out, most vividly late last year when, over the span of just a few weeks, Amgen offered $16 billion for Immunex, Millennium agreed to purchase Cor Therapeutics for $2 billion, and MedImmune agreed to pay $1.5 billion for Aviron. Alkermes' March agreement to acquire Reliant Pharmaceuticals for $934 million would have ranked as the largest-ever acquisition for a biotech company, but in today's environment it is only the fourth largest in six months.
In addition to demonstrating the financial muscle of the company's involved, these deals illustrate important trends in company strategies. Amgen's purchase of Immunex, primarily to gain the rheumatoid arthritis drug Enbrel, gives the company two of the three biologic products approved for the condition, and reflects a long-standing franchise-building trend at large biotechs. It's the same trend we've seen at Genentech with oncology, Genzyme with genetic disorders, and Amgen itself in blood-boosting products. MedImmune's acquisition of Aviron likewise consolidates a core strength in vaccines.
The Millennium deal also illustrates a larger trend, that of the aggressive movement of the leading genomics companies into diagnostic and therapeutic product development and acquisition. At Celera, the shift has been even more dramatic, with the departure of sequencing pioneer Craig Venter and last week's announcement that parent company Applera will shift the flagship database business to Applied Biosystems, so that Celera can focus more squarely on clinical development.
The Alkermes deal likewise signals a trend among emerging powerhouse biotech companies that launched their first products in the last few years -- companies like Cephalon, Celgene and IDEC. Such firms are leveraging strong market valuations and core products to become fully integrated biopharmaceutical companies with their own marketing and sales forces. And at Cephalon and Celgene in particular we see in Provigil and Thalomid unfolding case studies of how to grow a niche product into a potential mini-blockbuster. Indeed, independent U.S. marketing of such products is increasingly an attractive option. By the time such products win FDA approval, "thought leader" physicians and patients are already intimately familiar with them. The manageable market size can be targeted with the kind of modest sales force even a mid-sized biotech company can muster. Models abound, from Biogen, which grew Avonex into the leading multiple sclerosis drug, to Cephalon, which is building a sleep-disorders franchise from an initial approval for narcolepsy.
Biotechnology companies with clinical-stage products that address large markets usually opt for a marketing agreement of some sort, at least for their initial products. In the past, they have turned almost exclusively to big pharma companies for such support, but the large biotech companies are increasingly joining the fray as well, and a still-small but growing number of biotech companies are simply outsourcing marketing and retaining product rights. Scios and The Medicines Company seized that option for cardiovascular products launched last year, and CV Therapeutics has executed a similar arrangement for its late-stage cardiovascular product, ranolazine.
But of course, the most common structure for marketing remains the bio-pharma deal, and there biotech companies I believe are finally in the driver's seat. Pharmaceutical companies have enjoyed stellar earnings gains in recent years and are under tremendous pressure from investors to keep posting double-digit growth. To do that as yesterday's blockbuster products go off patent, they must refill the pipeline. That's good news for biotechnology companies with Phase III or NDA/BLA-stage products, because these are the optimum replacements for off-patent drugs - they are novel and just on the cusp of entering their patent-protected period on the market. Companies with such products are commanding deals valued at $100 million or more, and are increasingly able to retain co-promotion rights and profit sharing.
For smaller biotech companies that have yet to reach Phase II clinical testing and whose businesses are built around technology platforms that address only one phase of drug discovery -- say, target identification or screening -- the going is tougher. The larger, well-capitalized technology platform companies -- such as Human Genome Sciences, Celera and Millennium -- can move aggressively to drop a database business or acquire or develop therapeutic products. But for hundreds of other companies created in the 1990s based on narrow areas of technological expertise -- such as combinatorial chemistry, target discovery or antibody generation -- partnering with other biotech companies is the only way to generate product candidates. In a typical agreement, one partner might provide a genetic target, while another provides antibodies, antisense or small-molecule libraries to screen. A biotech company may have dozens of such deals.
Partnerships of all kinds have long been the lifeblood of the biotech industry -- allowing entrepreneurial startups to overcome daunting barriers to market entry. And the rate of partnering is growing, driven by the factors I've described: overall industry growth, expansion of the biotech pipeline, pharma's need to stock its pipeline, and the proliferation of technology platform companies that must partner or perish. Since 1993, when BIO was founded, the number of new bio-pharma collaborations has risen almost six-fold, while the number of collaborations between biotech companies has soared almost 12-fold. Last year brought 427 new agreements between biotech and pharmaceutical companies, an increase of 13 percent over 2000, while the number of intra-biotech collaborations rose 16 percent to 526.
Partnering is not the only biotech vital sign to trend upward since 1993. Industry revenues have tripled, to $25 billion in 2000, and R&D investment more than doubled from 1993 to 2000, to $13.8 billion. Employment has likewise more than doubled, to 174,000.
It's not guaranteed, but it is certainly quite possible, that these growth curves will continue upward over the coming years, given the industry's stronger capitalization, as well as governmental initiatives to nurture biomedical research. I believe contract research organizations such as Covance will grow as well in a climate of double-digit R&D expansion. With the cost of developing a new drug now estimated at up to $800 million, there is a large opportunity for organizations such as yours to help biotechnology companies by developing tools that better identify products likely to succeed in clinical trials and that help companies select patients most likely to benefit from particular products. Also, as more of our companies reach pivotal trials for the first time, the opportunities for your peri-approval services are tremendous. Regulatory and quality assurance experience are already at a premium, and the problem will worsen before it gets better, since the biotech industry now has hundreds of products in the pipeline.
Our nation's commitment to supporting basic research will fuel continued expansion of that pipeline. The doubling of the NIH budget since 1998, along with rising state and regional investment in biomedical research and facilities, is powering an acceleration of basic research whose results will launch biotechnology's next generation of companies.
At the state level, incentives to drive the formation of biotechnology centers are now considered as essential as attracting auto plants was to earlier generations of economic development officials. Right now, for example, five regions are vying for the headquarters of the International Genomics Consortium -- Phoenix; Atlanta; Montgomery County, Maryland; San Diego; and Houston.
A BIO-commissioned report last year found that 41 states offered biotechnology incentives, and that many are moving beyond the traditional R&D tax credit programs to provide substantial funding for incubator facilities and even for venture capital and grant funds. Michigan, for example, is using its share of the tobacco settlement to devote $50 million per year to life-science research, commercialization and development projects.
In the coming years, the states will not only be competing with each other for high-profile researchers and projects, but with regions abroad, which are adopting the legal and regulatory frameworks that have been so successful in the U.S. -- they're implementing orphan drug laws, fast-track application procedures, tax incentives and streamlined technology transfer procedures. Especially in the Far East, there's a push to jump start a biotech industry, and in particular to establish strong programs in the nascent fields of proteomics and stem cell research. Just in the last few months, cloning and stem cell research in China garnered worldwide headlines, as did cloning pioneer Alan Colman's decision to join a young Singapore-based company.
Underlying such headlines are substantial governmental initiatives to build and support biotechnology clusters:
- In Japan a new Biological Information Research Center, a population-specific program to identify single nucleotide polymorphisms, and investment in incubators are aimed at driving the national biotech industry to at least 1,000 companies by the year 2010.
- In Taiwan, the government has created a $570 million investment fund for biotechnology and offers a package of incentives and tax credits.
- Singapore officials hope to make the life sciences industry a fundamental pillar of the economy, along such traditional Asian Tiger industries as electronics and computer technology. To that end, the government has established a Biomedical Research Council, a Life Sciences Ministerial Committee, a "Biopolis" technology park, and a $700 million biomedical investment fund.
Several case studies show government incentives work, particularly in an environment of world-class academic institutions with streamlined rules for technology transfer.
Israel, for example, has developed a healthy and growing biotech industry by providing tax breaks, investment grants, and substantial R&D support, typically funding 50 percent of such costs. By 2000, the nation's biotech industry boasted 160 companies.
The German government likewise sparked rapid growth in the 1990s with government investment matches of up to 300 percent of private investment. Company formation accelerated and today tops 330 companies, including 20 that are publicly traded; Germany accounts for about one-fifth of all European biotech firms.
Of course, the most important measure of this industry's success is not the amount of money flowing into it, or the number or size of deals, but the number of new medications and vaccines we bring to patients. In 2001, the FDA approved 16 new biotechnology-based products, and this year has brought additional important approvals: the first-ever approval of an effective therapy for psoriatic arthritis (Enbrel, in a supplemental indication), approval of a second-generation blood-boosting product for reducing infection in chemotherapy patients, and approval of a radiolabeled antibody for non-Hodgkin's lymphoma.
But this pace has noticeably slowed over the last two years, and we are well off the 20+ approvals for new biotech products we were seeing annually in the late 1990s. Despite the important reforms of the FDA Modernization Act and the substantial improvements wrought by 10 years of the Prescription Drug User Fee Act, the agency is once again becoming a chokepoint in the development pipeline. The commissioner's post has been vacant since early 2001 -- and bureaucracy always becomes sclerotic in the absence of leadership. Filling that position has become one of BIO members' top political goals. Our industry depends on having a regulatory system that can efficiently handle the medicines and vaccines we develop.
The proposal we've negotiated to renew the user fee act would help by giving the FDA the resources it needs to handle its current and projected workload. That agreement also provides sponsors the right to call for an independent consultant to help settle disputes about trial protocols, as well as mechanisms to address the performance disparities between the drug and biologics review centers, and sets up pilot programs in which the FDA will consult with sponsors of fast-track products at earlier stages of development. We are pleased with the agreement, which seems to have provoked no significant opposition in Congress.
Our health policy efforts are moving on to Medicare prescription drug coverage, which is fast rising to the top of the congressional agenda. We testified at a Ways and Means Medicare hearing on April 17, and in the Senate a major bipartisan bill is being drafted for debate this summer. We could see the House actually vote on a bill by June. The structure of such a benefit obviously will have a huge impact on health care generally, and especially on the biotechnology industry, both because the bulk of our products in development address diseases associated with aging and because our industry is so dependent on capital markets, which are easily spooked by the specter of price controls.
Clinical trial reform is another emerging issue on Capitol Hill, and one sure to be of interest to companies like yours. Before September 11th, Congress was gearing up to consider recommendations for reform submitted by the National Bioethics Advisory Commission. The matter was delayed but has resurfaced this spring, with a Time Magazine cover story coinciding with a Senate hearing on the subject last week. BIO, which testified at the hearing, supports reform and has developed four key principles:
- Congress should develop centralized, streamlined procedures for review of trial protocols and the obtaining of patient consent. As it stands, sponsors, investigators and institutional review boards are drowning in paperwork, much of which is redundant and does not improve patient safety. In fact, as has been noted in the press, when review boards are overburdened, scrutiny of trials may be compromised rather than enhanced.
- The regulatory framework should be modified so that review is commensurate with the type of risk involved for the research participants. Review boards should be spending more time on trials that involve interventions with patients or healthy volunteers than on studies that retrospectively examine patient records.
- We need to establish a federal structure that supersedes often conflicting state laws; in an era of multisite trials, it's important that testing not be slowed nor results not be confounded by different requirements and procedures at different sites.
- The industry, academic medical centers, companies and researchers need to develop an approach for addressing real and perceived conflicts of interest.
These measures would benefit all concerned -- investigators, sponsors and patients. True, safety lapses are exceedingly rare in a system that handles 20 million patients a year, but they are tragic and the consequences of those lapses have medical research can be enormous. Two years ago, the federal government took a very hard look at gene therapy trials because of one death, and last year the NIH suspended publicly funded research at Johns Hopkins following the death of a healthy volunteer. Reform of the trial oversight system has become inevitable and, in fact, it is desirable for our industry, whose future rides on maintaining public trust that the benefits of participating in trials outweigh the risks.
I'm sure you've heard about our other leading legislative issue this spring, an issue that also raises complex ethical concerns: cloning. The House last summer passed a ban that encompassed both reproductive and therapeutic cloning, and the Senate has been nearly deadlocked on the issue. BIO opposes human reproductive cloning, but supports therapeutic research using somatic cell nuclear transfer. Our stance has been difficult politically, but we agree with the scientific community that this research has important medical potential and must not be criminalized.
The cloning and stem cell research debates, alongside controversies over issues like gene therapy, genetic testing, clinical trial protocols and privacy, are increasingly putting the biotechnology industry itself under the microscope of scrutiny by the public, the media and elected officials. William Kristol last week sent me a letter demanding to know if BIO supports patenting of cloned embryos (and of course we don't). The president himself has raised the specters of embryo hatcheries and human life as a commodity. Thankfully, we have spent years earning our reputation as hard-working scientists and entrepreneurs seeking to benefit humanity, and we have worked through bioethical dilemmas before they became front-page news. We've also consistently communicated the benefits of our industry's research to the public: More than 130 new drugs and vaccines that have helped more than 250 million people, with another products in the pipeline to address more than 200 disorders, ranging from rare diseases to heart disease, cancer and neurodegenerative diseases that afflict millions.
We did all this in preparation for the day when this once-exotic industry entered the mainstream. That day has arrived. On any given morning, almost 40 percent of the nation's major daily newspapers run at least one story pertaining to biotechnology. Our industry has come of age over the last few years, and the media and the public are eager to learn about our breakthroughs in the lab, on the farm and in the clinic, and to ponder their implications. Yet, despite the impressive statistics I've reeled off and high public profile biotechnology has attained, ours is still a fragile young industry whose promise is only just beginning to unfold. We ask investors and the public to trust us, to help us make dreams of treatments and cures a reality, and we in turn must each day prove ourselves worthy of that trust.