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Have you ever wondered how much money is involved in
developing life saving drugs? What does it take to
convert innovative research discovered at the
National Institutes of Health (under grants from the
U.S. government) into a drug compound that is later
proven to be a medicine of therapeutic value for
something like diabetes, colon cancer or glaucoma?
That’s a question often discussed within circles of
investors in Southern California. Here, more than
250 biotech companies are steering living organisms
toward a broad mix of therapeutic indications. Some
of these same indications are solely intended to
improve the biotech’s chances of survival with a
relatively quick path from development to clinical
trial. Sometimes the choice of target therapeutic
indication is driven as much by the need to show a
partial success to the investment community as it is
to provide the possibility of a valuable medicine
for mankind.
Strategic drug development is not always as straight
forward as matching compounds to target indications.
Survival of the research effort is just as important
and that means obtaining funding year after year
for, at times, as many as ten years before revenue
from drug development can supplement outside
investment. A ten person research team can burn
through $10 million annually while a thirty person
biotech organization can require annual funds of
between $30 million and $50 million. Drug
development is without a doubt one of the most
expensive ventures to finance from a burn-rate
perspective. It even rivals burn-rates of start-up
companies during the dotcom era.
Investment dollars for the biotech community come
from several sources. In the beginning, a young
biotech will transition research efforts from an
institution like the NIH, or perhaps a university,
to an offsite lab with little more than grant money
or a few hundred thousand dollars from an Angel
investor. Just as in the high-tech start-up model
where the founding technologist must secure initial
financing, continue the development and continue to
evangelize the business model, the biotech
entrepreneur must continue to raise money.
Considering that five in 5,000 compounds discovered
in the biotech community ever reach human trial and
only one of those five will ever reach the market,
the biotech founder will probably continue raising
money every year for the next 10 to 15 years.
The biotechnology industry also draws financial
support from venture capitalists and drug-industry
partners seeking access to promising experimental
drugs. But in most years, it raises far more from
public offerings. Even venture-capital investments
are tied to stock-market sentiment, since venture
capitalists ultimately hope to take profits by
publicly offering the shares of the start-ups they
fund.
In 2003, U.S. biotechnology firms raised almost $4
billion by selling new stock issues to institutional
and individual investors... Also in 2003, U.S.
biotechs as a group managed to post almost that much
in aggregate net losses. Only 12 of the 50 largest
biotechs, measured by market capitalization, turned
a profit in 2003.
For 2000 there were more than 50 biotech IPO’s
followed by three years of fewer than five per year.
According to the Wall Street Journal, almost
one-sixth of the more than 350 U.S. biotechs that
have gone public over the past two decades either
were bought out for pennies on the dollar, dissolved
themselves or had filed for bankruptcy protection by
the end of 2003. Names that once raised hopes of
medical miracles are now forgotten: Escagenetics,
Advanced Tissue Sciences, ImmuLogic, Gliatech.
Biotechnology research spending now consumes roughly
$18 billion a year, more than the federal National
Institutes of Health spends on heart disease, cancer
and infectious disease, and close to two-thirds of
the pharmaceutical industry's research spending.
Taxpayers fund the NIH, while buyers of profitable
prescription drugs pay for the billions that
companies such as Merck & Co. and Pfizer Inc. plow
into research.
While it is clearly a sizable risk for any category
of investor, biotechnology companies are devoted to
continuing selling their scientific and medical
"story" to investors and spending the resulting cash
on laboratory studies and clinical testing. Some
companies survive as long as two decades on investor
sentiment without developing a revenue-producing
drug. Like the dotcoms that populated the landscape
during the late 1990s, the vast majority of biotechs
have neither profits nor meaningful revenue and no
guarantee they'll ever have either.
Even with the high financial risk they do serve an
important function in the drug creation cycle as the
crucial research arm for companies such as Merck and
Pfizer. Today, biotechnology research has yielded
more than a hundred new drugs and vaccines since the
first biotechnology company went public a
quarter-century ago. |
