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 / Winter 2007 / Issue 49(originally published by Booz & Company)


Best Business Books: Biotech

Pisano’s financial analysis is sophisticated, accounting not only for inflation, but also for the time lag to profitability, high startup costs, and other factors that could cloud comparisons. Among many other measures, he shows that biotech’s cost for developing a truly new drug (known in the industry as a “new molecular en­tity,” or NME) has roughly tracked that incurred by traditional pharmaceutical companies, US$1 billion to $1.5 billion, adjusted for inflation, for nearly two decades. R&D spending per NME varies significantly between companies, with no pattern differentiating the biotech companies from the traditional ones. Over the same period, biotech has garnered some $2 to $4 in sales per $1 spent on R&D, compared to $8 to $10 for traditional pharma. Nor does biotech win on speed: Despite an obviously rapid pace of basic scientific discovery, its time-to-market is not significantly different from that of the traditional sector.

In this highly readable book, Pisano delves deeply into the history and structure of the industry to explain what hobbles and what hinders it. The problems biotech is trying to solve, he argues, are unique and challenging in three ways.

First, the core of biotech is not applications engineering or translational research; it is basic research — which means by its very nature that a profound and persistent uncertainty pervades the entire sector, an un­certainty that does not disappear with the next discovery, or the one after that. Indeed, every new discovery creates at least as many questions as it answers.

Any business plan based on using such basic discoveries to develop products calls for unconventional methods of risk management. The venture-capital model, largely invented for biotech, partially addresses uncertainty by finding ways to spread the risk among different developmental stages. The venture capitalist takes only the risk that the idea or molecule of interest can be developed far enough to interest other investors. These secondary investors take only the risk that it can be developed far enough to interest buyers of a public stock offering. Initial buyers of stock take only the risk that further development will continue to make the company’s prospects more valuable than they are today. At no single stage do investors shoulder the risk that the original technique under study will result in a viable product that produces revenue.

Yet the venture-capital model cannot fully ameliorate risk; it can only spread it around. Moreover, the investor’s focus on financial goals of a relatively short term is at odds with the long rhythms of science. This is true of even the sector’s most prominent companies, notably Genentech, Amgen, and Chiron, which often “hit the wall” at one point or another, largely because their scientists are too dependent on developing narrow product lines. In the summer of 2007, when sales of its two anemia drugs — which accounted for nearly half its revenue — slowed, Amgen had to cut its workforce by 13 percent. Pisano suggests a number of other models for managing the risk of scientific discovery, including outsourcing research and development and replacing current alliances and corporate partnerships with fewer, deeper, longer-term relationships.

The second challenge biotech must grapple with is that the complexity and heterogeneity of the growing knowledge base call for methods of integrating that knowledge across the sector. The siloed nature of the industry, however, has largely defeated integration. Such fundamen­tally different knowledge domains as RNA interference, recombinant DNA, monoclonal antibodies, structure-based drug design, high-throughput screening, genomics, proteomics, and systems biology call for different skill sets that reside with different groups of companies competing for funding, attention, and sales. Those companies typically have little inter­action with one another, even when such interaction might be hugely beneficial. Pisano argues that different structures that inherently have a broader perspective and a longer time horizon than the current venture capital/public market model could help nurture knowledge integration.

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