You are on page 1of 24

Pharmaceuticals and Life Sciences

Biotech reinvented
Where do you go from here?
Table of contents
Table of contents

Introduction 2

How well has Biotech really done? 2

A business model that’s bust? 3

Blurring boundaries 7

Putting up a united front 8

The size of the prize 12

Chain links 14

Making the sums add up 14

Acknowledgements 15

References 16

Contacts 19

Biotech Reinvented
Table of contents

Introduction arena – and reinvent itself by adopting launched, and some of these therapies
a more collaborative approach. In have proved very effective in treating
The biotechnology industry (Biotech) is the following pages, we’ll look at the complex conditions.4 Five of the 10 top-
now about 30 years old – a long enough main trends dictating the need for selling medicines in 2009 originated in
time in which to evaluate how it’s done. a new way of conducting research Biotech’s labs (see Table 1).
Unfortunately, despite some notable and development (R&D), and two
The bad news is that Biotech hasn’t
successes, it hasn’t completely fulfilled organisational concepts that would help
made a significant difference to
its promise. biopharmaceutical companies become
Pharma’s productivity, measured in
far more efficient. We’ll also touch on
The business model on which Biotech terms of the number of new treatments
the implications for other parts of the
has historically relied is also breaking reaching the market. Between 1950
value chain.
down, as the research base moves east and 2008, the US Food and Drug
and raising funds gets harder. And the Administration (FDA) approved 1,222
distinctions between Biotech and the therapies (1,103 small molecules and 119
How well has Biotech large molecules). Given that it takes about
pharmaceutical industry (Pharma) are
disappearing, with the convergence really done? 10 years to develop a drug, the total
of the two sectors. But Biotech can’t number of approvals should have started
turn to Pharma for guidance because If the birth of modern biotechnology rising in about 1990, if Biotech had
Pharma’s business model has other can be pinned down to any particular succeeded in improving Pharma’s output.
flaws – as we explained in “Pharma date, it’s probably 1980, when the US But, as Figure 1 shows, the number
2020: Challenging business models”, Supreme Court ruled in Diamond v. of approvals has remained broadly
the White Paper we published in April Chakrabarty that a genetically modified constant.5
2009.1 So what should Biotech do? microorganism could be patented.2 The reason’s simple: Biotech hasn’t
Amgen was formed the same year, and reduced the inherent risk in drug
We believe it should capitalise on the
Genentech (now part of Roche) was discovery and development. Average
opportunities emerging in the healthcare
four years old.3 Since then, Biotech development times for the kind of
has profoundly changed the sort of molecules on which biotech firms
What is Biotech? research Pharma conducts and the sort generally focus – i.e., recombinant
of products it makes (see sidebar, What proteins and monoclonal antibodies – are
Biotech isn’t a distinct sector so
is Biotech?). But how well has Biotech slightly longer than they are for small
much as it’s a collection of disruptive
really done? molecules (97.7 months versus 90.3
technologies for discovering and
developing new medicines, and The good news is that it’s produced months). Average development costs
diagnosing and treating patients some valuable new platform are much the same (US$1.24 billion
more effectively. We’re going to technologies and treatments. RNA versus US$1.32 billion). And the overall
focus here on Biotech’s business interference has, for example, provided success rate is still only 9.1%, compared
model – more specifically, its impact a way of analysing gene activity to with 6.7% for a small molecule.6 In other
on pharmaceutical productivity, and identify novel disease targets. More words, biotech companies don’t develop
its sustainability (or otherwise) in than 100 different recombinant new medicines much more quickly or
the current economic and scientific protein-based drugs and at least 40 economically than pharma companies do.
environment. ‘companion’ diagnostics have also been

2 PwC
Table 1: The best sellers of 2009

Rank Product Therapeutic Subcategory Technology Worldwide Sales ($m)


1 Lipitor Anti-hyperlipidaemics Chiral chemistry 12,511
2 Plavix Platelet aggregation inhibitors Small molecule chemistry 9,492
3 Seretide/Advair Other bronchodilators Small molecule chemistry 7,791
4 Enbrel Other anti-rheumatics Recombinant product 6,295
5 Diovan Angiotensin II antagonists Small molecule chemistry 6,013
6 Remicade Other anti-rheumatics Monoclonal antibody 5,924
7 Avastin Anti-neoplastic MAbs Monoclonal antibody 5,744
8 Rituxan Anti-neoplastic MAbs Monoclonal antibody 5,620
9 Humira Other anti-rheumatics Monoclonal antibody 5,559
10 Seroquel Anti-psychotics Small molecule chemistry 5,121
Source: EvaluatePharma

Figure 1: A flat performance

Impact of faster more Increase due to


productive biotech PDUFA clearing
a 60 should have started backlog of
Small molecules (NMEs) here. An increase in applications
Biopharmaceuticals (NBEs) productivity has not
Number of NMEs or NBEs

50 Total been observed

40

30

20

10

0
1950

1952

1954

1956

1958

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

Source: Bernard Munos, “Lessons from 60 years of pharmaceutical innovation”

Biotech reinvented 3
A business model that’s Figure 2: Biotech’s business model

bust? Venture Capital + Enterpreneurial Source

Worse still, the business model on


which Biotech has relied for the past x
Start-up

x
30 years is now breaking down.
Start-up
This model is based on external
investment – typically, venture capital
– in an innovative idea arising from an
x
Start-up Secondary /

x
IPO / Trade sale
entrepreneurial source, often a group of Start-up
academics (see Figure 2). It assumes Start-up
that investors can realise value through
one of two routes: flotation on the public
markets or, more frequently, a trade sale
to an established pharma company. Small Biotech Pharma
And it carries a very high risk of failure.
In one recent study of 1,606 biotech
investments that were realised between
1986 and 2008, 704 investments
Big Biotech Market
resulted in a full or partial loss, while 16
Source: PricewaterhouseCoopers
only covered their costs.7 Big Biotech
The same study shows that the gross
rate of return on these 1,606 biotech
investments was 25.7%, compared
with a pooled average return of 17% Figure 3: Big variations in cash multiples
on all venture capital invested over 476
the same period. But costs and the
‘overhang’ from unrealised investments
reduced the net rate of return to about
15.7%, and there were huge variations
in the cash multiples earned by the
886 investments that made a profit 269
(see Figure 3).8 Ten-year returns have 228
also deteriorated dramatically since 207 206
2008. The average return on a 10-year
investment ending in December 2008 116
was 35%, thanks to the lingering effects 88
of the technology bubble. In March
2010, it had plummeted to -3.7%.9 16

So what distinguishes the successes Full Partial 1 1-2 2-3 3-4 4-5 5 or >
from the failures? Our analysis of the loss loss x Cost x Cost x Cost x Cost x Cost x Cost
companies behind some of the top- Source: Iain Cockburn & Josh Lerner, “The Cost of Capital for Early-Stage Biotechnology Ventures” (2009)
selling biologics on the market shows Note: Figures include all exited biotech deals as of December 31, 2008

4 PwC
116
88

2-3 3-4 4-5 5 or >


t x Cost x Cost x Cost x Cost

they have several common features. Figure 4: Asia’s higher degrees of change
Most of them started up in the US in the
late 1970s and 1980s, floated very early United
in their history and raised a substantial States
amount of funds in the process. They
were all subsequently acquired by big China

pharma companies, and the products


they make are now marketed by one or India
more such firms (see Table 2).
Germany
However, many of the external
conditions that enabled these biotech
United
companies to thrive are rapidly Kingdom
vanishing. The research base is shifting
geographically, the emerging economies France
are competing more aggressively and
0 2,000 4,000 6,000 8,000 10,000 12,000
financial investors are getting more
cautious. 2006 1998

Source: US National Science Foundation


Eastward ho! Note: Data are for 1999-2006 in the case of France and 1998-2005 in the case of India

The research base is moving East, as


Asia’s emerging economies invest more
in higher education and the ‘reverse
brain drain’ picks up pace. Between
1998 and 2006, the number of students
graduating with doctorates in the
physical and biological sciences soared
43% in India and a staggering 222%
in China, far outstripping the rate of
increase in the West (see Figure 4).10
The ‘returnee’ trend has been equally

Table 2: Winning ways

Product Originator Company Product Origins in Initial Public Well Big Pharma Marketed by Big 2009 worldwide
Founded Launch US Offering Financed Acquisition Pharma sales ($m)
Herceptin 1976 1998 P P P P Roche 4,862
Avastin 1976 2004 P P P P Roche 5,744
Remicade 1979 1998 P P P P Centocor/J&J 5,924
Enbrel 1981 1998 P P P P Amgen/Pfizer 6,295
Rituxan 1985 1997 P P P P Roche/ Biogen Idec 5,620
Humira 1989 2002 P P P Abbott 5,559

Sources: PricewaterhouseCoopers and EvaluatePharma

Biotech reinvented 5
pronounced. In the past two decades Capital constraints venture capitalists – particularly
about 100,000 highly skilled Indian and European venture capitalists – from
The recession has also made it much
Chinese expatriates have left the US for investing in the sector. In 2009, the
their native countries. Another 100,000 more difficult for biotech companies
amount of venture capital raised by
are expected to follow them in the next in the developed economies to raise
biotech companies based in Europe
five years, as the opportunities at home capital. In 2008, Biotech raised just
was just €800 million ($1.1 billion), less
improve.11 $16.3 billion in the US, Europe and
than at any time since 2003.17 And
Canada – 45% less than the previous
money’s likely to remain very tight, as
year. The situation improved in 2009,
Hotter competition most biotech executives recognise;
but the total amount raised fell well
84% of the participants at a recent
Some of the emerging countries are short of historical levels, and nearly half
biopharmaceutical conference thought
also actively building domestic biotech of it went to a handful of established
funding was the industry’s single
industries. Singapore launched its public companies in follow-on offerings
biggest challenge.18
Biomedical Sciences Initiative in 2000 (see Table 3).15
and has already created a powerful They’ve got good reason to worry.
biopharmaceutical nexus. South Korea There are plenty of other signs of the
According to one estimate, 207 of
set up a similar scheme in the late toll the past two years have exacted.
the 266 private and public European
1990s, and has earmarked $14.3 billion In 2009, for example, 10 biotech firms
biotech companies with products or
for its ‘BioVision 2016’ programme.12 (including the highly regarded deCODE
platform technologies in the clinic or
China has invested $9.2 billion in genetics) filed for bankruptcy in the US,
already on the market urgently need
technological R&D, including biotech, while another nine firms closed up shop
to raise funds – and they need a good
in the last 18 months alone.13 And India without being officially bankrupt.16 And
$4.8 billion between them.19 Given that
is currently exploring plans to become though financing conditions have now
the total amount of European venture
one of the world’s top five biosimilars started easing, most industry observers
capital invested in the sector was just
producers by 2020.14 believe the window for initial public
€501 million ($666.6 million) in the first
offerings won’t open again anytime soon.
What’s more, many of the companies half of 2010, it’s very doubtful they’ll all
based in the emerging economies This has inevitably deterred many succeed.20
aren’t just imitating the West; they’re
learning from its mistakes. They’re
dispensing with the costly infrastructure
that burdens companies in developed
countries to create new business Table 3: Fundraising below pre-recession norms
models that are leaner and more 2009 2008 2007 2006 2005
economical, as well as pioneering Initial Public Offerings 823 116 2,253 1,872 1,785
innovative products and processes.
Follow-on Offerings 6,579 1,840 3,345 6,303 4,600
So the US is gradually losing its pre-
eminence as a centre of biomedical Other 10,044 8,244 16,928 14,930 8,442
research. It still leads the way and is Venture 5,765 6,131 7,407 5,448 5,425
likely to do so for at least another five Total 23,211 16,332 29,932 28,553 20,252
years. But it’s no longer the only gorilla Source: Ernst & Young, Beyond Borders: Global Biotechnology Report, 2010
on the block. Note: Numbers may appear inconsistent because of rounding

6 PwC
Blurring boundaries – up from a third in 2000-2002 – and following suit, while Novartis has moved
the industry leaders have piled in even its research headquarters to Cambridge,
However, yet another change is more heavily over the past year.23 In Massachusetts, and hired a Harvard
taking place: the boundaries between November 2009, for example, Pfizer professor to run it.26
Biotech and Pharma are blurring. One licensed the rights to a new treatment
So Biotech and Pharma are effectively
for Gaucher disease, a condition fewer
sign of the change is the fact that becoming one industry – the
than 6,000 Americans suffer from.24
several large pharma companies have biopharmaceutical industry – although
In February 2010, GlaxoSmithKline
established corporate venture capital there’s a limit to how far Pharma can go
launched a standalone business unit for
arms specifically to make strategic, down the Biotech route. First, biotech
orphan drugs, and Pfizer did likewise a companies typically perform a few key
as opposed to financial, investments
few months later.25 trials, rather than using the belt-and-
in Biotech. Novartis has created an
option fund with the right to in-license Some of the oldest biotech companies braces strategy favoured by Pharma.
innovative products or technologies are simultaneously repositioning This is partly because most of them
from the companies it backs, for themselves as biopharmaceutical have fewer resources. It’s also because
example.21 Similarly, Merck Serono companies, and several pharma small companies are less likely than
has set up a fund ‘to support scientific companies are restructuring their R&D large companies to ask for scientific
functions to emulate Biotech’s more advice from the regulators and, even
excellence in [its] core fields of interest
entrepreneurial approach to discovering when they do ask, they’re less likely
and provide start-up companies with
new medicines. GlaxoSmithKline started to comply with the advice they get.27
the opportunity to interact’ with it.22
this trend in 2000, when it divided But biotech companies pay a price for
Many pharma companies are also thousands of its researchers into groups taking the fast route, with much higher
focusing on developing biologics and of 400 or so and gave them their own failure rates in late-stage development
specialist therapies for orphan diseases, budgets to manage. It subsequently (see Table 4).28
because they offer a faster and more created even smaller Discovery Second, therapies for very small patient
focused route to market. In 2006-2008, Performance Units of 20 to 60 people, populations can’t deliver the returns
Big Pharma produced more than half each focusing on a different disease produced by mass-market medicines,
the orphan drugs approved by the FDA or technology. AstraZeneca is now unless they’re sold for very high prices.
However, patients in many countries
can’t afford such prices and, even in
more affluent markets, cash-strapped
Table 4: Biotech companies fall more often at the final post
healthcare payers are pushing back.
FDA Percentage of Phase III Percentage of
The European Union recently altered
approvals FDA approvals failures Phase III failures
its orphan drug law, for example, to let
Biotech 47 45% 68 74% regulators reduce the 10-year period
Biotech-pharma alliances 16 16% 18 21% of market exclusivity for orphan drugs,
Acquisitions/licences by pharma 4 4% 0 where they think the profits from non-
Pharma 36 35% 5 5%
orphan indications are ‘unseemly’.29
Total 103 91 In short, the external conditions that
Source: Elizabeth A. Czerepak & Stefan Ryser, “Drug approvals and failures: implications for alliances” (2008) helped produce a drug-discovery
Note: All products were approved for the first time by the FDA between January 2006 and December 2007 powerhouse like Genentech have all

Biotech reinvented 7
but disappeared. Pharma can’t copy because each has access to only one agencies, universities, academic
Biotech’s discovery and development part of the biochemical puzzle. This medical centres, research institutes and
methodology too closely and, even not only slows down the discovery and patient groups. They aim to overcome
if it could, Biotech hasn’t brought a development process, it also increases common bottlenecks in early-stage
golden era of productivity that would costs, as numerous organisations biomedical research by enabling the
justify doing so. All biopharmaceutical replicate the same studies on the same participants to piece together the
companies – whether they’re targets. Conversely, collaboration scientific data on the pathophysiology
biotechnological or pharmaceutical in accelerates and facilitates the process, of specific diseases and potential
origin – will ultimately, therefore, have to and two new concepts – precompetitive targets sitting in their separate
adopt a very different business model. discovery federations and competitive organisations (see Figure 5).
development consortia – lend A number of precompetitive discovery
themselves to just such an approach. federations have already been
Putting up a united front established. Most of these collaborations
Precompetitive discovery have been set up fairly recently and
So what might such a model look lie towards the philanthropic end of
federations
like? If it’s to be successful, it’s got the spectrum. They focus on areas
to be more efficient – and one way of Precompetitive discovery federations of unmet need in the less developed
becoming more efficient is to become are public-private partnerships in which world or diseases for which it’s
more collaborative. Sequestering biopharmaceutical companies swap particularly difficult to develop safe,
intellectual property in different knowledge, data and resources with effective medicines. Alternatively,
organisations impedes innovation, one another, as well as with government they aim to make a particular region

Figure 5: Precompetitive discovery federations facilitate and accelerate innovation

Data Aggregator

Biopharmaceutical Research
Companies Organisations

Alzheimer’s disease

Lung cancer

Melanoma

Precompetitive Discovery Federations

Source: PricewaterhouseCoopers

8 PwC
more competitive (see sidebar, they do will be performed virtually,
Connecting the dots
Connecting the dots).30 But at least as the world becomes increasingly
one such alliance has already proved interconnected. And each federation In early 2010, Eli Lilly, Merck and
an outstanding success. This is the will be disbanded once it’s solved the Pfizer formed the Asian Cancer
Structural Genomics Consortium – problem it was set up to deal with, Research Group to promote research
backed by GlaxoSmithKline, Merck and although the insights it generates on lung and gastric cancers, and other
Novartis, among other organisations – will live on – just as filmmakers form forms of cancer commonly found in
which published 450 protein structures syndicates to produce different films Asia. The three companies plan to
within three years of starting work, and and the films they create outlast the create one of the ‘most extensive
aims to publish another 660 structures syndicates themselves. pharmacogenomic cancer databases
by July 2011.31 known to date’ over the next two
There are many advantages to this years. Meanwhile, the Coalition
Translating such findings into useful approach. It would enable each Against Major Diseases is focusing
new therapies is another matter – participant to save money by investing on the development of quantitative
and it’s much too early to assess the less than it would have to do to support disease progression models
impact of precompetitive discovery its own internal research or exclusive for complex neurodegenerative
federations in terms of reducing lead external research programme. It would diseases like Alzheimer’s disease
times and costs, or treating intractable also reduce unnecessary duplication, and Parkinson’s disease. And the
diseases. Nevertheless, the industry help all the participants make faster, Innovative Medicines Initiative (IMI) is
clearly isn’t averse to the idea of better progress by combining their orchestrating the European Union’s
collaborating, and we think that, by insights and permit them to take more efforts to address major obstacles
2020, all precompetitive research will be informed investment decisions. To put it in drug discovery by pooling the
conducted in this way. another way, precompetitive discovery resources of biopharmaceutical
Experts from numerous organisations federations could end the “current modus companies, research institutions and
will assemble to solve a specific operandi in which commercially driven patient groups throughout Europe. It
problem, regardless of whether they clinical trials fall like dominos in the clinic has a €1 billion grant from Brussels
work in industry or academia, and – to the detriment of each company, to and is currently supporting 15
whether they live in the Americas, the detriment of the patients and with research alliances.
Europe or Asia. Much of the work relatively little [shared] learning”.32

Biotech reinvented 9
Table of contents

Of course, determining the boundaries The potential cost savings might also Competitive development
between precompetitive and prove incentive enough to stimulate consortia
competitive research is difficult – and a new attitude to intellectual property
opinions will vary, depending on the management. Pharma companies The discovery process isn’t the only
interests of the respective parties. typically patent all the information they area of scientific R&D that would
Nevertheless, it’s possible to see how hold to block their rivals from working benefit from closer collaboration.
some of the lines might get drawn. in the same area. But evidence from The development process could also
Data preceding the point of filing for a other industries suggests that most be improved with the introduction of
patent (e.g., data on genes, pathways patents remain uncommercialised; competitive development consortia
and bioactivity) could provide various Siemens and Procter & Gamble recently (as we’ve called them) in which rival
opportunities for precompetitive reported, for example, that they’ve only biopharmaceutical companies join
collaboration, for example. And some used 10% of their patent portfolios.34 forces with each other, as well as with
companies might well be prepared to go It would therefore be far more sensible contract research organisations and
considerably further. GlaxoSmithKline is for all companies to segment their platform technology providers (see
one such instance; it recently proposed information into three categories: Figure 6). At present, four or five firms
an industry-wide, open-access ‘patent information they can openly share; often focus on the same target at the
pool’ and offered to license all its information they can safely sell to a third same time, and each might develop
patented knowledge for free, as long as party; and information they plan to use two or three compounds to hit that
the knowledge is used solely to develop themselves.35 target. But if they pooled their portfolios,
treatments for neglected diseases in the they could concentrate on the best
50 poorest countries.33 drug candidates, regardless of which

Figure 6: Competitive development consortia minimise waste and enhance productivity

Healthcare Healthcare
Payers Regulators Providers

Data Aggregator

Biopharmaceutical Contract Research &


companies Platform Technology Providers

Competitive Development Consortia

Source: PricewaterhouseCoopers

10 PwC
company had invented them, thereby and securely – have been extensively
eliminating a great deal of waste. documented. Making sense of disparate New best friends
pieces of information and identifying AstraZeneca and Merck recently
Big Pharma has traditionally shied away
meaningful correlations between embarked on a landmark partnership
from such arrangements, yet competing
superficially unrelated phenomena is still to develop a combination therapy
heavyweights in a number of other
an incredibly labour-intensive task. for cancer, with each contributing an
industries have successfully come
together to develop new products. However, solutions to all these problems investigational compound to the mix.
General Motors, Daimler and BMW are slowly emerging. The Human Combination therapies for cancer
collaborated to create the hybrid Proteome Organisation’s Proteomics are common, but they’re usually
petroleum-electric powertrain solution, Standards Initiative has already tested late in clinical development or
for example. And there’s evidence released standards for representing and after registration. Or a new potential
that some large pharma companies exchanging proteomic data from mass treatment is tested in combination
may now be willing to take a more spectrometry, molecular interactions with the standard therapy. However,
open stance (see sidebar, New best and protein separation techniques, AstraZeneca’s compound was still in
friends).36 for example, while the Clinical Data Phase II, and Merck’s compound had
Interchange Standards Consortium only been tested in 100 people when
(CDISC) is developing standards for the two companies decided to join
Robust data aggregators forces.
exchanging clinical research data
The success of precompetitive and metadata, and various other data They entered into a staged agreement,
discovery federations and competitive standards are well underway.37 beginning with preclinical trials. When
development consortia clearly hinges the results proved promising, they
on the existence of data aggregators Similarly, use of semantic technologies
for integrating and analysing data decided to collaborate further and
capable of collecting and synthesising jointly devised a plan for testing the
data from all the participants in a is growing. Johnson & Johnson is
conducting a pilot semantic project to treatment in Phase I trials. Under the
particular group. No such organisations terms of the deal, the two companies
currently exist. Nor, indeed, do some capture metadata on biological data
sources and make the information will share the decision rights and
of the tools required to manage vast costs, and any intellectual property
amounts of biological and chemical data. easier to retrieve.38 Pfizer, Merck,
Novartis and Eli Lilly are also that arises from the collaboration. The
The challenges – including the sheer experimenting with the semantic web.39 big question is how the regulators will
heterogeneity of the data, lack of And technologies like cloud computing respond if they’re successful, since
data standards, limitations of the are evolving to create a secure, reliable nobody has ever co-registered two
available data-mining technologies and and flexible infrastructure for sharing unregistered drugs before.
immaturity of the IT platforms needed data and applications.
to let researchers share data easily

Biotech reinvented 11
Meanwhile, several big technology ‘innovation culture’ is equally important. industry researchers need discoveries
providers have entered the In view of the investment levels and that have commercial potential. And
computational bioinformatics space. risks associated with drug discovery it’s all too easy for a biotech company
IBM leads the way. It’s currently and development, all the members of a with a single platform technology or
engaged in about 20 projects, ranging precompetitive discovery federation or molecule to overvalue its intellectual
from the development of sophisticated competitive development consortium property. It’s only by understanding
analytical tools to original research will need to be agile, willing to explore such differences in perspective and
on ‘junk’ genes and RNA interference new ideas and open to insights negotiating fairly that a precompetitive
in eukaryotes and viruses.40 Oracle, produced outside their own walls. discovery federation or competitive
Hewlett-Packard and Intel are also Senior management will also need development consortium can prosper.
actively focusing on bioinformatics. to encourage creative brainstorming, If the venture capital industry is to play
networking, calculated risk-taking, a major part in the future of biotech, it
Some formidable obstacles remain,
experimentation and questioning of the will have to be more pragmatic, too. The
but we believe these companies
status quo.42 most successful funds aim for returns of
will eventually play a major role in
analysing genomic and clinical data two to four times the initial investment,
to help individual consortia research A new spirit of realism which is the equivalent of a compound
new medicines and the regulators annual growth rate of 7-15% over a
That’s not all. If this new business
evaluate submissions more accurately. typical 10-year investment period. By
model is to work, it will require greater
Some of them may even assume way of comparison, the FTSE Small-
realism on the part of everyone
responsibility for developing disease Cap Index generated a total annual
involved. Biotech executives and
models and predicting the interaction of return of 1.1% between May 2000 and
academics sometimes complain of Big
different molecules with a given target. May 2010 – evidence of just how high
Pharma’s ‘arrogance’, for example.43
We outlined how this might work in the bar has been set.44
But size isn’t everything and the biggest
“Pharma 2020: Virtual R&D”, where we pharma companies can’t expect to have
discussed how the largest technology everything their own way. So they’ll
vendors could host ‘virtual patients’ on need to become more flexible.
The size of the prize
behalf of the industry as a whole.41
The research institutes and biotech So there are some considerable cultural,
firms they join forces with will also need behavioural and practical hurdles,
An innovation culture
to have more realistic expectations. and some of them may be difficult to
Reliable data aggregators aren’t the Whereas academic researchers prize overcome. But we believe they’re well
only prerequisite for success; an scientific knowledge for its own sake, worth resolving, given the rewards

12 PwC
collaboration can bring. It’s no accident would cut R&D costs by about $160m, medical centres will be responsible for
that IBM has doubled its software as well as accelerating market launch generating original ideas and providing
revenues to more than $20 billion, since by nearly five months. In fact, a 5% disease biology and platform
embracing open-source computing.45 improvement in phase transition rates technologies on a fee-for-service basis.
alone would trim about $111m from
Precompetitive discovery federations The biggest companies will thus benefit
the tab.46
and competitive development by getting access to more innovation,
consortia could collectively enable However, the participants would profit cutting their costs and becoming more
the biopharmaceutical industry to use individually, too. We envisage that the productive – improvements that will help
precious resources more intelligently, largest biopharmaceutical companies them fend off criticism from healthcare
make more astute investment decisions will be responsible for coordinating and payers and patients angered by the
and develop better medicines more funding the federations and consortia in high prices of many new medicines.
economically (see Figure 7). Even which they participate. They’ll also draw Meanwhile, the smaller ones will get
incremental improvements could yield on their huge compound libraries to more stable, long-term financing,
significant savings. We estimate that, develop new molecules and shepherd better opportunities for benchmarking
given average development costs and them through the regulatory evaluation the value of their own contributions
lead times, a 5% increase in success process to the marketplace. Meanwhile, and access to critical regulatory and
rates for each phase transition and a smaller biopharmaceutical companies, marketing skills.
5% reduction in development times research institutes and academic

Figure 7: Greater collaboration will help everyone

Feedback Loops

Precompetitive
Competitive Development Consortium Market
Discovery Federation
• Systems biology • Molecule invention and protec- • Clinical testing in the most ap- • Patient
• Disease analysis and modelling tion propriate environment • Regulator
• Biomarkers • Much higher probability of suc- • Shorter development time due • Payer
• Functional proteomics cess as a result of the work of to live licensing • Provider
the PDF • Lower cost as a result of higher
• Predictive screening
probability of technical and
Blinded screening commercial success

Fewer, more certain


Better ideas Transparent testing Better cheaper treatments
candidates
Source: PricewaterhouseCoopers

Biotech reinvented 13
Table of contents

Chain links The shift from product provider to Making the sums add up
outcomes manager has yet more
We’ve focused on R&D so far, but consequences. Information will The English philosopher Thomas
greater collaboration will be required become as important a part of the Hobbes famously described life in the
in the rest of the value chain, too – sales proposition as the products 17th century as ‘nasty, brutish and
and any company that masters the themselves, and much of the short’.48 Healthcare has come a long
art of working closely with other R&D information that’s generated will come way since then; life expectancy at birth
organisations will have a head start from external sources. In effect, each is now at least 75 years in large swathes
over its competitors because it will be biopharmaceutical company will need to of the world, compared with 35-40
able to apply the lessons it’s learned create its own information supply chain years when Hobbes was writing his
to the other parts of its business. Take and manage it as carefully as it does Leviathan.49 But greater longevity brings
commercialisation. Most treatments manufacturing and distribution. new challenges, and few people can
perform much better in clinical trials The changes taking place in the afford to pay many thousands of dollars
than they do in everyday life, and traditional supply chain have similar for the most advanced treatments.
healthcare payers almost everywhere implications. Biologics are much more Hard-pressed governments with a
are demanding more for their money. difficult to make and move around growing number of elderly citizens will
The opportunities for generating value than small molecules because they’re be equally unable to foot the bill. So,
from standalone products are therefore more susceptible to impurities in the if we’re to make the most of the years
getting smaller. production process and more vulnerable we’ve gained, more effective, more
to damage during shipping. And since economical medicines will be vital –
That means biopharmaceutical
most such therapies can’t be taken and that entails collaboration between
companies will have to switch from
orally, new delivery devices – e.g., micro everyone concerned.
selling medicines to managing
outcomes. They’ll have to bundle needles, magnetically targeted carriers,
different products together and nano-particles and polymer capsules –
supplement their therapies with health are being developed. But these devices
management services like compliance are also hard to manufacture.
monitoring, dietary guidance and fitness The industry will therefore have to
regimes. However, most companies collaborate much more extensively, both
won’t be able to create packages of with contract manufacturers capable of
branded medicines and generics for making biologics and complex devices,
different conditions singlehandedly, and with specialist carriers capable of
so they’ll have to collaborate with transporting sensitive pharmaceutical
rival manufacturers. And few, if any, freight in cold-chain conditions. If it’s to
companies will be able to deliver all capitalise on the increasing prosperity of
the services patients need, so they’ll the emerging markets, it will also have
have to collaborate with numerous to build a much more geographically
other organisations, including hospitals, dispersed supply chain – and it will only
clinics, technology vendors and lifestyle be able to do this by joining forces with
service providers.47 local manufacturers and service providers.

14 PwC
Acknowledgements
We would like to thank the many people at PricewaterhouseCoopers who helped us to develop this report. We would also
like to express our appreciation to all those external experts who so generously donated their time and effort to the project
including:
Barrie Ward, Board member, Onyvax, Cancer Research Technology, Pharming Group N.V.
Cheryl Bishop, Business Development Manager, Roche Pharmaceuticals
Clive Birch, former PwC UK Life Sciences Leader
Mr David Dally, CFO, Merlion Pharmaceuticals Pte Ltd.
Gordon Cameron, CFO, Quotient Biosciences
Ms Nandita Chandavarkar, Director, Association for Biotechnology Led Enterprises
Peter Keen, Non Executive Director, Ark Therapeutics
Ray Spencer, Founder & CFO, Saturn BioSciences Ltd; Founder & Director, MGB Biopharma Ltd
Rob Arnold, Chairman, Clasemont Limited (& former PwC Life Sciences Partner)
Sam Smart, Independent Consultant
Dr Vijay Chandru, President, Association for Biotechnology Led Enterprises.

The views expressed herein are personal and do not reflect the views of the organisations represented by the individuals
concerned.

Biotech reinvented 15
Table of contents

References
1. PricewaterhouseCoopers, “Pharma 2020: Challenging business models” (April 2009).
2. Diamond, Commissioner of Patents and Trademarks v. Chakrabarty, United States Supreme Court, June 16, 1980 447 U.S. 303, 206 USPQ 193.
3. Amgen website, http://www.amgen.com/pdfs/Fact_Sheet_Amgen.pdf; and Genentech website, http://www.gene.com/gene/about/corporate/
history/index.html
4. Medco, “2010 Drug Trend Report”, p. 46; and Jeanene Swanson, “Companion Diagnostics Take Off,” Genome Technology (October 2009), http://
www.genomeweb.com/dxpgx/companion-diagnostics-take
5. Bernard Munos, “Lessons from 60 years of pharmaceutical innovation”, Nature Reviews Drug Discovery, Vol. 8 (2009): 959-968.
6. Joseph A. DiMasi, “Costs and Returns for New Drug Development”, FTC Roundtable on the Pharmaceutical Industry (Washington DC, United
States: October 20, 2006), http://www.ftc.gov/be/workshops/pharmaceutical/DiMasi.pdf; and Joseph A. DiMasi & Henry G. Grabowski, “The Cost
of Biopharmaceutical R&D: Is Biotech Different?” Managerial and Decision Economics, Vol. 28 (2007): 469-479, http://www.manhattan-institute.
org/projectfda/wiley_interscience_cost_of_biopharm.pdf. All subsequent references are to US dollars.
7. Iain Cockburn & Josh Lerner, “The Cost of Capital for Early-Stage Biotechnology Ventures” (2009), http://nationalbbr.org/studiesandstats/nvca_
early-stage.pdf
8. Ibid.
9. National Venture Capital Association, “Venture Capital Industry Saw Short Term Performance Improvements at the End of 2009” (May 14, 2010),
http://images.magnetmail.net/images/clients/NVCA/attach/Performancereleasefinalq42009.pdf; and “Venture Capital Returns Continued to
Reflect Fragile Economic Conditions in the First Quarter of 2010” (July 28, 2010), http://www.marketwire.com/press-release/Venture-Capital-
Returns-Continued-Reflect-Fragile-Economic-Conditions-First-Quarter-1296576.htm
10. US National Science Foundation, “Science and Engineering Indicators 2010”, http://www.nsf.gov/statistics/seind10/appendix.htm
11. Sandip Roy, “Tracking a Reverse Brain Drain to India, China”, New America Media (March 2, 2009), http://news.newamericamedia.org/news/
view_article.html?article_id=ffd612a3b447ba5bfae2f6006a68beea
12. PricewaterhouseCoopers & Association of Biotechnology Led Enterprises, “Leadership in Affordable Therapeutic Products: A Biopharma Strategy
for India” (July 2010). Report prepared for the Department of Pharmaceuticals, Ministry of Chemicals & Fertilizers, Government of India.
13. Wang Guanqun “China to invest billions on key technology development, bio industry”, Chinese Government Web Portal (May 13, 2009), http://
english.gov.cn/2009-05/13/content_1313699.htm
14. PricewaterhouseCoopers & Association of Biotechnology Led Enterprises, op. cit.
15. Ernst & Young, “Beyond Borders: Global Biotechnology Report, 2010” (2010).
16. Brady Huggett, “Optimism in public biotech rises as credit crunch recedes”, Nature Biotechnology, Vol. 28, No. 1 (January 2010): 5-6.
17. Ernst & Young, op. cit. We have converted euros into US dollars using the average interbank exchange rate for 2009. This was 1 EUR: 1.39463
USD.
18. “The Future of Biotech.” Panel discussion at The Biopharmaceutical Conference in Europe, Monte Carlo, Monaco (June 16-18, 2010).
19. Walter Yang, “Europe’s Iceberg 2010: Advancing but frugal”, BioCentury, Vol. 18. No. 24 (May 30, 2010): A15-18.
20. Dow Jones VentureSource, “Q1 2010 European Venture Financing Report April 29, 2010.” http://www.dowjones.com/pressroom/SMPRs/
PM/1Q10EuropeFinancing.html; and “Growth Returns to European Venture Investment After Record Low a Year Ago.” July 28, 2010. http://www.
dowjones.com/pressroom/releases/2010/07282010-Q2EuropeVC-0050.asp. We have converted euros into US dollars using the average interbank
exchange rate for the first half of 2010. This was 1 EUR: 1.33054 USD.
21. Roger Longman, “Novartis: Having & Eating Its Cake,” The In Vivo Blog (August 3, 2007), http://invivoblog.blogspot.com/2007/08/novartis-having-
eating-its-cake.html

16 PwC
22. “Merck Serono sets up strategic venture capital fund to invest in biotech start-ups”, The Medical News (March 23, 2009), http://www.news-
medical.net/news/2009/03/23/47238.aspx
23. Walter Armstrong, “Pharma’s Orphans”, Pharmaceutical Executive (May 1, 2010), http://www.curefa.org/_pdf/
PharmaceuticalExecutiveMagazineArticle.pdf
24. Andrew Pollack, “Pfizer Deal Signals a Move Into Treating Rare Diseases”, The New York Times (December 1, 2009), http://www.nytimes.
com/2009/12/02/business/02drug.html?_r=1&partner=yahoofinance
25. John Carroll, “Pfizer creates a new R&D unit for rare diseases”, FierceBiotech (June 15, 2010), http://www.fiercebiotech.com/story/pfizer-creates-
new-r-d-unit-rare-diseases/2010-06-15
26. Jeanne Whalen, “Glaxo Tries Biotech Model to Spur Drug Innovations”, The Wall Street Journal (July 1, 2010)
27. Jan Regnstrom, Franz Koenig et al., “Factors associated with success of market authorisation applications for pharmaceutical drugs submitted to
the European Medicines Agency,” European Journal of Clinical Pharmacology (2010) 66:39–48.
28. Elizabeth A. Czerepak & Stefan Ryser, “Drug approvals and failures: implications for alliances”, Nature Reviews Drug Discovery Vol. 7 (March
2008): 197-198.
29. Walter Armstrong, op. cit.
30. John Carroll, “Pharma giants join forces behind Asian cancer research group,” FierceBiotech Research (February 23, 2010), http://www.
fiercebiotechresearch.com/story/pharma-giants-join-forces-behind-asian-cancer-research-group/2010-02-23; “Coalition Against Major Diseases,”
Critical Path Institute, http://www.c-path.org/CAMD.cfm; and Michel Goldman, “New Challenges for Drug Innovation: The European Perspective”.
Presentation at Forum CQDM, Montréal, Canada (June 8, 2010).
31. The Structural Genomics Consortium (April 2010), http://www.thesgc.org/about/SGC-overview.pdf
32. Aled M. Edwards, Chas Bountra et al., “Open access chemical and clinical probes to support drug discovery”, Nature Chemical Biology Vol. 5
(2009): 436-440.
33. Michael R. Barnes, Lee Harland et al., “Lowering industry firewalls: pre-competitive informatics initiatives in drug discovery”, Nature Reviews Drug
Discovery, Vol. 8 (2009): 701-708.
34. Oliver Alexy, Paola Criscuolo et al., “Does IP strategy have to cripple open innovation?” MIT Sloane Management Review, Vol. 51 (2009): 73-77.
35. Salima Lin, Teri Melese et al., “Cultivating innovation beyond corporate walls”. IBM Institute for Business Value (December 2008).
36. Pearl Huang, “Presentation at Extending the Spectrum of Precompetitive Collaboration in Oncology Research Workshop” (February 2010), http://
www.nap.edu/catalog/12930.html
37. Sandra Orchard & Henning Hermjakob, “The HUPO proteomics standards initiative—easing communication and minimizing data loss in a
changing world,” Briefings in Bioinformatics, Vol. 9, Issue 2 (2008): 166-173, http://bib.oxfordjournals.org/content/9/2/166.full; Clinical Data
Interchange Standards Consortium, http://www.cdisc.org/mission-and-principles
38. Laurent Alquier, Tim Schultz & Susie Stephens, “Exploration of a Data Landscape using a Collaborative Linked Data Framework,” Proceedings of
the HCLS/WWW2010/Workshop (Raleigh, North Carolina, April 26, 2010), http://imageweb.zoo.ox.ac.uk/pub/2010/Proceedings/FWCS2010/07/
Paper7.pdf
39. Vivien Marx, “Pharmas Nudge Semantic Web Technology Toward Practical Drug Discovery Applications,” BioInform (March 6, 2009), http://www.
genomeweb.com/informatics/pharmas-nudge-semantic-web-technology-toward-practical-drug-discovery-applicatio?page=2
40. IBM Computational Biology Center, https://researcher.ibm.com/researcher/view_project.php?id=1080
41. PricewaterhouseCoopers, “Pharma 2020: Virtual R&D” (June 2008), pp. 4-5.
42. Jeffrey H. Dyer, Hal B. Gregersen et al., “The Innovator’s DNA”, Harvard Business Review, Vol. 87, No. 12 (December 2009): 61-67.
43. Heather Fraser & Stuart Henderson, “A marriage of minds: Making biopharmaceutical collaborations work.” IBM Institute for Business Value
(September 2007).

Biotech reinvented 17
44. Details of the performance of the FTSE Small-Cap Index are available at http://www.ftse.com/Indices/UK_Indices/Downloads/FTSE_All-Share_
Index_Factsheet.pdf
45. Genevieve Khongwir, “Open Source a successful business model”, ciol.com (September 10, 2008), http://www.ciol.com/Open-Source/Interviews/
Open-Source-a-successful-business-model/10908110120/0/
46. We have based these estimates on average development costs of $1.24 billion and average development times of 97.7 months, using the figures
cited earlier in this paper.
47. For a comprehensive discussion of how we believe pharmaceutical commercialisation is likely to evolve over the next decade, please see
“Pharma 2020: Marketing the future” (February 2009).
48. Thomas Hobbes, Leviathan (1651).
49. “Life expectancy at birth,” The CIA World Factbook (2010); and Eileen M. Crimmins & Caleb E. Finch, “Infection, inflammation, height, and
longevity”, Proceedings of the National Academy of Sciences, Vol. 103, No. 2 (January 10, 2006): 498-503.

18 PwC
Territory contacts

Argentina India Russia


Diego Niebuhr Sujay Shetty Alina Lavrentieva
[54] 11 4850 4705 [91] 22 6669 1305 [7] 495 967 6250

Australia Ireland Singapore


John Cannings John M Kelly Abhijit Ghosh
[61] 2 826 66410 [353] 1 792 6307 [65] 6236 3888

Enda McDonagh
Belgium South Africa
[353] 1 792 8728
Thierry Vanwelkenhuyzen Denis von Hoesslin
[32] 2 710 7422 [27] 117 974 285
Israel
Assaf Shemer
Brazil (SOACAT) Spain
[972] 3 795 4681
Luis Madasi Rafael Rodríguez Alonso
[55] 11 3674 1520 [34] 91 568 4287
Italy
Massimo Dal Lago
Canada Sweden
[39] 045 8002561
Gord Jans Mikael Scheja
[1] 905 897 4527 [46] 8 555 33 038
Japan
Kenichiro Abe
Czech Republic Switzerland
[81] 80 3158 5929
Radmila Fortova Clive Bellingham
[420] 2 5115 2521 [41] 58 792 2822
Luxembourg
Laurent Probst Peter Kartscher
Denmark
[352] 0 494 848 2522 [41] 58 792 5630
Torben TOJ Jensen
[45] 3 945 9243
Markus Prinzen
Mexico
[41] 58 792 5310
Erik Todbjerg Jorge Luis Hernández Baptista
[45] 3 945 9433 [52] 55 5263 6106
Turkey
Zeki Gunduz
Finland Netherlands
[90] 212 326 64 100
Janne Rajalahti Arwin van der Linden
[358] 3 3138 8016 [31] 20 5684712
United Kingdom
Andrew Packman
France Poland
[44] 1895 522104
Anne-Christine Marie Mariusz Ignatowicz
[33] 1 56 57 13 42 [48] 22 523 4795
Kate Moss
[44] 20 7804 2268
Germany Portugal
Georg Kämpfer Ana Lopes
[49] 69 9585 1333 [351] 213 599 159
United States
Michael Swanick
[1] 267 330 6060
Martin Schloh
[49] 89 5790 5102

Biotech reinvented 19
Tablefurther
For of contents
information, please contact:

Global Europe
Simon Friend Jo Pisani
Partner, Global Pharmaceutical and Life Sciences Partner, Pharmaceuticals and Life Sciences, Strategy
Industry Leader PricewaterhouseCoopers (UK)
PricewaterhouseCoopers (UK) jo.pisani@uk.pwc.com
simon.d.friend@uk.pwc.com [44] 20 7804 3744
[44] 20 7213 4875
Sandy Johnston
Steve Arlington Partner, European Pharmaceutical and Life Sciences
Partner, Global Pharmaceutical and Life Sciences Advisory Advisory Services
Services Leader PricewaterhouseCoopers (UK)
PricewaterhouseCoopers (UK) sandy.johnston@uk.pwc.com
steve.arlington@uk.pwc.com [44] 20 7213 1952
[44] 20 7804 3997

Asia Pacific
Michael Swanick
Partner, Global Pharmaceutical and Life Sciences Sujay Shetty
Tax Services Leader Director, Pharmaceutical and Life Sciences
PricewaterhouseCoopers (US) Advisory Services, India
michael.f.swanick@us.pwc.com PricewaterhouseCoopers (India)
[1] 267 330 6060 sujay.shetty@in.pwc.com
[91] 22 6669 1305
United States
Beatrijs Van Liedekerke
Doug Strang Director, Pharmaceutical and Life Sciences
Partner, US Pharmaceutical and Life Sciences Advisory Advisory Services
Services Leader PricewaterhouseCoopers (Singapore)
PricewaterhouseCoopers (US) beatrijs.vanliedekerke@sg.pwc.com
douglas.s.strang@us.pwc.com [65] 6236 4322
[1] 267 330 3045

Marketing
Middle East
Attila Karacsony
Sally Jeffery Director, Global Pharmaceutical and Life Sciences
Partner, Healthcare Advisory Services, Middle East PricewaterhouseCoopers (US)
PricewaterhouseCoopers (United Arab Emirates) attila.karacsony@us.pwc.com
sally.jeffery@ae.pwc.com [1] 973 236 5640
[971] 4 304 3154
Marina Bello Valcarce
Global Pharmaceutical and Life Sciences
PricewaterhouseCoopers (UK)
marina.bello.valcarce@uk.pwc.com
[44] 20 7212 8642

20 PwC
Table of contents

pwc.com/pharma

PricewaterhouseCoopers provides industry-focused assurance, tax and advisory services to build public trust and enhance value for our clients and their stakeholders. More than 163,000 people in 151
countries across our network share their thinking, experience and solutions to develop fresh perspectives and practical advice.

This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication
without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to
the extent permitted by law, PricewaterhouseCoopers does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in
reliance on the information contained in this publication or for any decision based on it.

© 2010 PricewaterhouseCoopers. All rights reserved. “PricewaterhouseCoopers” and “PwC” refer to the network of member firms of PricewaterhouseCoopers International Limited (PwCIL). Each
member firm is a separate legal entity and does not act as agent of PwCIL or any other member firm. PwCIL does not provide any services to clients. PwCIL is not responsible or liable for the acts or
omissions of any of its member firms nor can it control the exercise of their professional judgment or bind them in any way. No member firm is responsible or liable for the acts or omissions of any other
member firm nor can it control the exercise of another member firm’s professional judgment or bind another member firm or PwCIL in any way.