At $3.92 billion in 2011, venture capital investments in biotech has dropped significantly from its peak of $6.17 billion in 2007 — but those VentureSource figures do not reflect the actual health of the sector.
In Massachusetts, CROs and CMOs appear to be as busy as ever, because development work still needs to be done even as the industry model has shifted significantly. With development costs that can exceed $1 billion, and 40% of drugs failing during Phase III trials, the industry needs to use capital more efficiently. A combination of structural changes at Big Pharma and changes in investment strategies among venture capital firms has led to the growth in the number of CROs and CMOS as well as the growth of virtual biotechs.
For example, at the recent CRO/CMO Symposium conducted by the MassBio CRO/CMO Committee, we saw at least four virtual biotechs. A few of them had just three or four employees, all with specialized responsibilities — though one startup had a single employee operating out of his home office, with all other aspects of development either outsourced or handled by consultants.
Examples of changes to the pharma model include:
- CROs and CMOs must step up beyond serving as order takers — they must provide value-added services to survive. These days, CROs and CMOs are intimately involved in the regulatory and QA aspects, advising clients (not just virtual startups) on regulatory issues.
- Big Pharma continues to conduct some vertically integrated development work, but they are increasingly turning to nimble CROs and CMOs, which have hired the most talented of the laid-off Big Pharma scientists, to handle early-stage development at lower costs.
- VCs continue to fund biotechs focused on discovery and early-stage development, while Big Pharma continues to focus on discovery, marketing and late-stage development.
The implications from those changes include:
- Big Pharma is driving harder bargains — increasingly these companies are linking their investments to proof of success.
- VCs are more selective about what they will fund — not only are fewer deals getting done, not every good concept will get funded.
- Biotechs have to use capital more efficiently — because the size of deals getting funded is shrinking. The days of huge infrastructures and fancy offices have faded into the past, replaced by more emphasis on more cost-effective strategies, like outsourcing.
The pressure from VCs on the number and size of deals means they are applying more rigorous standards to the deal flow process, and are weeding out less deserving, less likely projects that probably did not deserve to be funded in the first place.
Meanwhile, even as the number of deals has slowed, more biotechs are being established by former Big Pharma executives. For CROs and CMOs that can operate efficiently, the growth of biotechs represents a good opportunity, even as the dollar amount per deal has dropped. (According to one industry source, a big difference between CRO development and Big Pharma internal development is that CRO teams works on several projects simultaneously where Big Pharma teams generally work on one project at a time.)
Wired magazine recently reported that, under the traditional Big Pharma integrated drug development process, “the R&D to discover a promising new compound now costs about 100 times more (in inflation-adjusted dollars) than it did in 1950. (It also takes nearly three times as long.) This trend shows no sign of letting up: Industry forecasts suggest that once failures are taken into account, the average cost per approved molecule will top $3.8 billion by 2015.”
That cost and slow development process is why Big Pharma is increasingly funding early development — and why VCs are increasingly looking to focused biotechs to develop specific molecules. If the molecule shows efficacy, it could generate $50 million in licensing fees from Big Pharma, which then conducts late-stage development. (Even at $50 million, early-stage development typically costs Big Pharma several times that amount — which means VCs can fund many more early-stage development projects conducted by CROs and CMOs for the same as what Big Pharma would spend to develop a single molecule.)
To succeed in the current environment, CROs and CMOs need to demonstrate that they can be more productive — by establishing and meeting key milestones – and can provide enhanced value add. For example, we recently introduced a Cambridge virtual company with a European later-stage company, a kind of corporate matchmaking that might not have been necessary a few years ago.
Contract service providers need to make sure their leanly-staffed biotech customers understand regulatory compliance issues — which once might have been handled by a separate Big Pharma team — to prevent the customer and the outsourcer from running the risk of FDA issues.
The whole sector is enormously dynamic as business models continue to evolve, in part due to pressure from VCs. In drug development, if anything, it is getting harder to define a single successful business mode because there are so many different routes. Factors such as the amount of funding available and the background and expertise of the executives involved, for example, can dictate the approach a biotech should take: virtual, semi-virtual, and brick-and-mortar. Beyond that, the makeup of the molecule itself will dictate what technology a biotech needs as well as the access to talent, and whether internal or external expertise — via partners or CMOs — will be required.
For CROs and CMOs, the range of business models deployed by biotechs requires an additional level of scrutiny before taking on assignments to assess the level of risk. Virtual biotechs can succeed in today’s climate, but at the very least, they require additional skill sets — and an increased demand for clear communications on both sides — to make it work.
Edward S. Price is the co-chair of MassBio’s CRO/CMO Committee and the president of PCI, a 12-year-old custom chemical manufacturer of new chemical entities (NCEs), generic active pharmaceutical ingredients (APIs), and other specialty chemical products. He can be reached at Ed.Price@pcisynthesis.com.
(Expert Opinion posts reflect the views of their authors, and not the views of Contract Pharma. If you'd like to comment on Mr. Price's piece, log in and start a discussion in our Comments section below!)