In the late 1970s, biotechnology turned the drug discovery paradigm on its head. Beginning with an understanding of key diseases at the molecular level, biotech companies sought to reproduce natural proteins and hormones (and variations of them) that could treat hitherto unmet medical needs. Early biotech drugs, such as human growth hormone and insulin, were replacement therapies, compensating for deficiencies in the body. More recently, the industry has developed innovative treatments for cancer, heart disease, and rheumatoid arthritis, using genetically engineered proteins and antibodies to intervene in the course of these illnesses.
Biotech also changed the way biomedical discovery was financed. Most early pharmaceutical research was funded and performed internally by companies. Government-financed research began in the late 19th century, with the founding of the NIH’s predecessor, the Laboratory of Hygiene, in 1887, with an initial budget of $300. In 2002, the NIH had appropriations totaling nearly $23.4 billion, with 84 percent of its investment distributed among more than 2,000 research institutions throughout the nation and abroad. Philanthropic organizations, like the Rockefeller Foundation in the U.S. and the Wellcome Trust in the U.K., are also major funders of biological research.
Twenty-three years ago, the successful public offering of Genentech Inc., the world’s first biotechnology company, appeared to pave the way to a new paradigm: the funding of basic research by the public equity markets. That wasn’t the way the IPO was pitched, naturally; rather, investors were told that buying shares in Genentech, and cousin companies like Amgen, Biogen, and Chiron, was akin to buying the initial public offerings of IBM or Xerox. The marriage of molecular biology and medicine promised the creation of an entirely new growth industry, and with it, the kind of outsized return on investment that accompanies fundamental change.
But the practical significance of the first biotechnology wave seemed to be the establishment of a new relationship among business, academic institutions, and investors. The three parties, whose interests historically had not always coincided, appeared to have found a way to collaborate to advance and commercialize basic scientific research at speeds previously thought impossible. The founders of the early biotech companies included leading scientists from such schools as the University of California at San Francisco, the Massachusetts Institute of Technology, and Stanford University; driven both by dreams of Nobel Prizes and visions of wealth, they pursued basic research with a zeal unknown in the established pharmaceutical industry. Their failures were many, but their successes were profound: powerful new drugs for cancer (Chiron’s Interleukin-2, Idec’s Rituxan), heart disease (Genentech’s Activase, Centocor’s ReoPro), and a host of other ailments.
Although the biotechnology pioneers fulfilled much of their early promise, they did not, with a few notable exceptions, provide much of a return to investors. Indeed, the combined market capitalization of the entire biotech industry today is barely more than the sum of public and private dollars invested over the last three decades.
Not surprisingly, venture capitalists and public equity investors alike have grown wary of investing in early-stage biotech concerns, no matter how promising their premise or how many stellar scientists they employ. The markets are interested in products and in companies with a near-term prospect of profitability. Pure innovation — research without the potential for immediate commercialization — has little luster. Today, after a peak of excitement fueled by the Human Genome Project, valuations of biotech companies are down. With dollars flowing only to later-stage ventures, most biotech companies have cut back or eliminated their own investment in basic research. And the large pharmaceutical companies, consumed by a wave of consolidation and driven by the financial markets to develop “blockbuster” drugs, have not been inclined to finance innovative biomedical research.