Two decades ago, my company was hit hard by merger and acquisition activity in the pharma industry. Several of our most established contract research clients and customers for our products were acquired.
These clients were large firms in the top 25. Research and development sites were shut down, our key connections were let go. The acquiring firms rightfully exercised their right to drop us as a supplier of products and services. The acquirers would frequently cancel early development projects. This was very tough for us, but certainly fair.
Recovery took over a decade. Many of our best clients scrambled to start new firms, being frustrated with a loss of control at the old mother ship. A month ago, I was alerted to the suggestion from a California congressperson that the current business model for pharma development was somehow stifling overall innovation. My reaction: Really? Does that make sense?
Is the new business model she described new? Yes, if considering a 50-year view, but not at all considering the last 20. The structure of the industry has changed dramatically. Large firms have indeed been fishing for molecules in a very vibrant biotech ecosystem that ties universities to venture-backed startup companies, exploring new ideas with potential to benefit patients.
There are multiple positives of this approach. The first is passion. Large firms tend to beat the passion out of people trying new things. There is nothing wrong with that. A lot is at stake. Something great must happen to move the financial needle every 90 days. It’s hard to decide to go and easy to find a list of reasons to not go. The clock is running, and cash is flowing. In small firms we must go and not be inhibited by meetings to decide.
Readers of this publication don’t need an education on the decline in vertical integration of life-sciences R&D. But is this bad? Does it suggest reduced competition and a need for antitrust enforcement? I’d think not. Government has a poor track record at fussing with such things, although raising issues for debate is always welcome.
Keeping much of the risk passion in small biopharma has been productive. These are companies focused on proving a concept, managing precious cash reserves, and operating with an efficiency impossible at a large firm. Pennies per share? Below zero is expected! Value creation for the investors and the employee option holders comes from the promise of clinical success. The more that is realized, with data, the more the value.
So, what’s wrong? Most will fail. Not all shots go in during March Madness either. That’s hard on the team and is why this ecosystem model works best in locations where there are many such firms, buckets of risk capital, and careers are more gig than lifetime. Every job prepares us for the next one. Capital gains are recycled and we try, try, try again.
It takes real strength of character to accept the high risk and not be psychologically crippled by it. We are far beyond the time when Ph.D. students would be driven by a vision of income for decades at a stable employer. In 2020 we had excellent validation of the present model. Pfizer and BioNTech, Moderna and NIH, AstraZeneca and Oxford, Lilly and AbCellera, Novavax and CEPI (Coalition for Epidemic Preparedness Innovations), and many others.
The same model is employed in in-vitro diagnostics and medical devices. It’s working. Vaccines and treatments are arriving at previously unheard-of speed. The situation today is admittedly abnormal given the volume required over time (billions of doses in one year). Cheap as dirt. On the other hand, the same system is innovating for entirely unmet needs for orphan diseases. In those cases, doses per year can be 100 and each can cost as much as a garage full of exotic cars.
How can pharma win back some positive public recognition? In September 2019, the Gallup organization famously ranked pharma at the bottom of 25 sectors in their survey, just below the federal government. With the ongoing COVID-19 battle raging, pharma moved up just one spot in 2020, passing the feds by a hair. I’m not expecting much improvement for 2021. We do it for the patients. Those who do not die from COVID-19 this year may not thank a system that few can understand. We know.
To paraphrase the late comic Rodney Dangerfield, “We developed multiple vaccines in less than a year that saved millions of people and they rank us below Congress? I’m tellin ya, we get no respect.”
Peter T. Kissinger is a professor emeritus at Purdue University, founder of Inotiv, chairman of Phlebotics and director of Tymora.
