All eyes were on pharma biotech companies in 2020, as they raced against each other to find solutions to alleviate the Covid-19 pandemic through vaccines and treatments. Investors flocked to biotech stocks as biotech indexes vastly outperformed the market. The NASDAQ Biotech Index was up ~60%[1] since the bear market in March 2020 due to companies like Gilead, Moderna, and Regeneron playing pivotal roles in Covid-19 treatment and prevention. While the public is just catching on to the capabilities of the biotech sector, it has had the attention of established pharmaceutical companies and private equity/venture capital firms for a while, due to their role in discovering new innovative products and for the high potential return on investment.
A report[2] on pharmaceutical innovation found that the return on late-stage pipelines for the top 12 pharma companies dropped from ~10% in 2010 down to ~2% in 2018. The cost to bring an asset to market has increased to record levels as well, from $1,188m in 2010 to $2,168m in 2018, an increase of> 80%. This decline in pharmaceutical efficiency has been much reported and even a term has been coined to describe this: “Eroom’s law” (the opposite of Moore’s law, which details the exponential growth in the semiconductor sector). A report in Nature[3] published the graph below, which shows the number of new drugs produced per billion US dollars of spending on R&D. It indicates that R&D efficiency has been going down for decades and that the number of new drugs approved by the FDA per billion US dollars (inflation-adjusted) spent on R&D has halved roughly every 9 years.
This may seem puzzling, given that academic research is at an inflection point with the advent of cell and gene therapies. However, there is an increasingly high bar for improvements over existing therapies coined the “better than the Beatles” problem in the paper. The article argues creating new products is analogous to producing a new record for untiring Beatles fans. Drug-development is increasingly getting more complicated since there is a strong catalog of predecessor drugs and this means that companies must expand their efforts into “hard-to-treat” diseases.
However, biotech companies have a better track record with R&D efficiency especially in the aforementioned “hard-to-treat” as well as rare disease categories, bypassing the “better than the Beatles” problem altogether.
The same report on pharmaceutical innovation used a cohort of four mid-to-large cap specialized firms as a proxy for the biotech sector and despite having much smaller budgets, they outperformed pharmaceutical companies and generated, on average, a return of 9.3% on R&D in 2018[4]. According to another report[5], in 2018, the percentage of new drugs approved by the FDA that was sponsored by a biotech companies with overall worldwide sales less than $100 million annually was ~50%, and the percentage of new drugs that originated from biotech firms with sales less than $100 million was 63%. This divide in R&D efficiency is still evident when you compare established pharmaceutical companies to much smaller start-ups that received venture capital (VC) in the last 15 years. An analysis found that 4.5 new drugs were approved by the FDA per billion dollars of early-stage R&D spend at a start-up, and by the same standards, only 0.7 new drugs were approved at established pharmaceutical companies[6].
As a result of these trends, a report from Morgan Stanley in 2010[7] went to an extreme and stated that all established pharmaceutical companies should reinvest most internal research to in-licensing, replacing Research & Development with Search & Development. Currently, most basic science research, drug discovery, and early-stage clinical research is conducted by small biotech firms funded by VC, while larger companies license or purchase these products to fund phase III clinical trial investments.
The analysis by Morgan Stanley only highlights the scale of opportunity in the biotech sector. It is a common adage that start-ups and smaller firms are more innovative, and adage certainly appears to be true in the biotech sector. Perhaps this is due to specialized knowledge leading to more focused and dynamic R&D better prepared to handle the increasing challenges with biopharma R&D as well as their nimble organizational structures allowing them to be more agile.
However, biotech firms still face some key challenges:
- Biotech is a risky investment
This sector is perceived as risky by investors for multiple reasons. For one, early-stage research can take significant time and money with often murky data on the prospects of the product. Additionally, the outcomes at the very early stages can be binary, a lead product can only either fail or succeed. The most attractive proposition for investors is high yielding, low-risk investments. However, this is extremely challenging to deliver in the biosciences sector. Investments in bioscience typically require high upfront costs for a roughly 5% chance of success. Although the potential yield can be in the billions, the odds are certainly dissuading. Therefore, building a strong case to demonstrate a product’s value earlier in development is crucial and commercial development needs to be prioritized in line with clinical development. Inbeeo’s expertise in identifying key value drivers and in competitive value landscape analysis will help demonstrate the full potential of assets to VC stakeholders.
- Biotech firms are faced with tricky pipeline decisions
Firms need to determine the commercial potential of their drug pipeline objectively, to make strategic decisions about their portfolio investment. For each research project, early R&D has the potential to spawn a series of very different products and thus making strategic decisions at this stage can be incredibly multi-faceted. Firms need to determine how to guide their R&D money, based on the diverse product profiles and determine which indications and target patient populations to pursue. Firms will have to ascertain the potential value-add is in the eyes of payers and other related stakeholders and the potential hurdles they could face in this process. This will then inform the R&D investment needed to address those hurdles.
Possibly the most complicated of all is that firms will have to determine realistic future pricing levels of their products at an early stage. This can be challenging especially if the firm does not have much experience with product development beyond being originators and focusing on early R&D. Inbeeo can offer tailored solutions and support firms with expertise in this sector by delivering such analyses that are critically useful for key strategic decisions as value exploration, landscape analysis, and early pricing estimates. We also have a specialized tool, i-VBP that can generate custom value frameworks inputting all the attributes of value of a new product into a single framework, which can be leveraged by biotechs to contribute to early key strategic decision-makings.
- Navigating how to shape the best possible market access
Biotech firms are increasingly choosing to work on the development of drugs all the way to approval rather than licensing or selling early their product to an established pharmaceutical company. Hence, firms must be savvy about navigating market access to ensure that their product is likely to get prescribed by doctors and is made available at an acceptable cost to the payer. It is key to demonstrate well the clinical and economic value of even the most innovative product to obtain optimal reimbursement at the right price. This can be a challenging area for biotech firms without experts who can navigate this complicated process, especially so in a resource-limited environment like a start-up. Inbeeo can help with payer strategy and insight to inform evidence generation plans – including clinical study design – as well as create a step-by-step market access strategy optimized to different geographies.
Inbeeo’s team of experts help steer through those challenges and more. We can help assess the value potential of future medicines, identify the most valuable target product profile for a given research compound and its related pricing potential, establish the right value and pricing strategy, all of which will contribute to your key strategic decisions. If you want to speak to a member of our team, please contact: contact@inbeeo.com
Full List of Sources:
[1] https://http://www.investors.com/news/technology/biotech-stocks-catch-fire-2020-coronavirus-pandemic-heats-up/
[2] https://www2.deloitte.com/content/dam/Deloitte/uk/Documents/life-sciences-health-care/deloitte-uk-measuring-return-on-pharma-innovation-report-2018.pdf
[3] https://www.nature.com/articles/nrd3681
[4] https://www2.deloitte.com/content/dam/Deloitte/uk/Documents/life-sciences-health-care/deloitte-uk-measuring-return-on-pharma-innovation-report-2018.pdf
[5] https://www.hbmpartners.com/media/docs/industry-reports/Analysis-of-FDA-Approvals-2018-and-Previous-Years.pdf
[6] https://www.baybridgebio.com/blog/rd_bigpharma_startup.html
[7] https://www.thepharmaletter.com/article/morgan-stanley-analysts-review-drug-stocks-upgrading-astrazeneca
