According to a new report by a Washington, DC advocacy group, "the US Government each year contributes around 45% of all investment in global health R&D and 70% of all government investment worldwide."
Also from the same report: “The US government’s investment in early basic (global health) research is so great that it now provides nearly two-thirds (62%) of global funding in this area,”
The report put out by the Global Health Technologies Corporation (GHTC) seems to define "global health" as communicable disease (and not, for example cancer or diabetes), so I'm a bit suspicious that the math behind the conclusions may be cherry-picked, but just accepting the figures my first reaction is that the high level of government support is BAD news for global health, and that the best thing that could happen would be for the US government to step back. Here's why I think that:
-Global health R&D is intended to benefit poor 3rd world patient populations, yet the bulk of the global health research is targeted to very a commercial market. According to the report, HIV R&D constitutes 57% of the global health R&D budget, as monitored by GHTC, so parsing the numbers would lead to the conclusion that there is already significant private sector research in HIV, just as there are very significant therapies having been discovered and commercialized by the private sector. Indeed, while the largest patient population for HIV therapies may be among very poor in Africa, this seems to me to be as much a distribution/manufacturing problem, and not an R&D challenge so much. If private sector HIV research were leading the way, the global health resources could be devoted to other research areas (cancer, etc.) and non-R&D assets like USAID could assume a bigger role in HIV treatment, especially in delivering HIV therapies.
-I don't like the idea that global health research strategy is largely driven by one large customer (the US Government.) Not to knock the people and funding process of the NIH/DoD/etc - and I know their research strategy isn't monolithic - but I would much, much rather see global health research strategy driven by a plurality of voices. Science doesn't progress as fast when one R&D catechism is dominant. Historically, much of our progress in life science is due to researchers with quirky or contrarian strategies swimming against the majority of researchers. No government body is very flexible in this regard.
(The best example I can think of here is Dr. Judah Folkman's pursuit of anti-angiogenesis. Once cast into the wilderness of cancer research by the cancer research establishment, Folkman's strategy is now an integral part of cancer therapy, as embodied by drugs such as Sutent and Avastin.)
-Likewise, unfortunately US global health policy is in part driven by politics, at least as significantly as the best scientific rationale or the aim of the most significant scientific impact. I'd rather more wise people steer global health R&D than the jokers in Congress.
-I favor global health R&D being driven by the private sector, with the government as a ultimate backstop, with the goal that global health R&D could be more market-oriented, but in an untraditional way. Market-oriented would traditionally be defined as financial demand tied to the patients' (or other payers) ability to pay. In the case of global health R&D, I think market-oriented would reflect (non-financial) patient demand, to include the amount of charity resources being devoted to a particular disease. I think by weighting R&D by this metric, we're more likely (for example) to place greater weight of clean water than TB, as the number of people with poor health due to a lack of access to clean water is many times greater than those at risk for TB. (The fact that clean water may be less of a biotech R&D issue and more of a civil engineering challenge underscores the point that the US government tends to mis-allocate R&D assets.)
-Finally, I'm annoyed by the idea that much of the first world is free-riding on America. The US accounts for ~27% of World GDP, and with US government being approximately 1/3rd of US GDP, this means that roughly 9% of world GDP funds 45% of global health R&D. I'm pointing the finger here at other first world powers to pull their weight. Unfortunately, to react to this point by cutting US federal global health R&D to equalize efforts puts others in jeopardy, but I highly doubt that other governments will spontaneously decide to pull their own weight in this area.
Showing posts with label RandD productivity. Show all posts
Showing posts with label RandD productivity. Show all posts
Monday, May 7, 2012
Thursday, May 3, 2012
Cash-equity equivalence for pharma.
Pfizer says they're looking for acquisitions around $4B. They've had a bit of success buying assets of that size, but that buyout space is becoming crowded - every big pharma would be happy to acquire meaningful but not humongous assets of that size to pave over their patent cliff.
But why is it that PFE or any other big pharma is willing to splash out billions for acquisitions when internal R&D budgets are under pressure? Here's why big pharmas have more incentive to buy innovation externally than fund it internally:
1. Risk/reward & timing: An investment in internal R&D might pay-off in ~5 years, whereas acquiring assets (particularly approved products) are a "sure thing." Until R&D becomes more predictable or higher reward, pharma will always be oriented to lower-risk, shorter term rewards.
2. Financial expectations: all big pharmas are sensitive to the almighty EPS (earnings per share.) An investment in internal R&D has a current cost to EPS and uncertain rewards, while an acquisition often has (understated) current costs and overstated future rewards. (Depending on synergy, more broad distribution, etc.)
3. Access to excellence: No offense to (internal) pharma researchers, but by buying assets, big pharma can buy from the top research efforts in the world. An acquisition likely has a tremendous concentration of focused expertise - be it in the target or disease of interest. Who knows more about diabetes, BMS, or Amylin, or who knows more about transgenic expression systems, Protalix or Pfizer? Internal R&D efforts can of course be high-quality, but most are very, very broad, and by definition somewhat dilute.
4. Internal inefficiencies. Pharmas have expensive structures and high legacy costs. Take another look at this chart from my February post "R&D Efficiency," indicating that pharma spends ~$5B in R&D per FDA approved drug.
In contrast, every biotech big or small is targeting a cost per drug approval in the hundred of millions, not billions, indicating their efficiency advantage. (As an example, Amylin - rumored as an acquisition target of BMS for ~$4B - probably spent between $500m and $750m in developing Bydureon, suggesting that they, if representative, are ~8X more efficient than BMS' historical internal efforts.
5. M&A accounting: this is the big one - our tax laws have a massive preference for equity-based M&A. Pfizer has ~$70B in cash on hand and generated an additional $20B in operating cash in 2011, while investing ~$10B in R&D (which includes cash payments to development partners, so this figure is not entirely internal R&D.) PFE has ~7.5B shares outstanding
Consider 2 scenarios for PFE:
-PFE increases cash R&D spending by $10B/year.
Financial result: EPS falls by about $1 per share.(-80%). (Assume $10B more in R&D is offset by $2.5B less (ballpark) in taxes.)
-PFE buys 2 companies (such as 2 x Amylin) for $5B in PFE stock. (Each.)
2 x Amylins would contribute ~$1.3B in new revenue (using 2011) figures, and while Amylin loses a small amount of money, Pfizer would likely assert that they would cut some overhead, and increase sales using PFE's sales force, eliminating the annual operating loss in the short term. Longer term, PFE grows sales (@ a profit margin in excess of 90%), and cuts Amylin overhead and R&D by $750M per year.
To fund the deal, PFE issues 442,000,000 new shares at current prices, or a roughly ~5% increase in shares outstanding, slightly diluting EPS in the near term. However, the acquired assets could increase PFE's annual earnings by $1B roughly in the second year (assuming ~20% increase in revenues, with the costs detailed above, making the deal quickly accretive (=~12% EPS). Also: post-merger accounting may lead PFE to write-off half ($5B) of the M&A value as "goodwill." This is a hit to book (GAAP) earnings, but has, in effect, a cash benefit, as corporate taxes are reduced by the write-off of goodwill. End result: small near-term share dilution, medium term EPS increase due to the acquired assets and a lower tax bill, without spending much/any cash.
M&A is even more advantaged by the tax rules that reward share repurchases. If PFE repurchased $10B in stock (tax-free) instead of spending the same amount on R&D, EPS would be increased as the denominator shrinks.
My original goal was to calculate an equivalence between cash and equity ("$1 cash = $10 in equity spent in M&A," or something like that, but it seems that the ratio is more like $1 to infinity., advantage M&A.
With math like that, and the other advantages outlined above, it is almost surprising that Big Pharma does ANY internal R&D.
But why is it that PFE or any other big pharma is willing to splash out billions for acquisitions when internal R&D budgets are under pressure? Here's why big pharmas have more incentive to buy innovation externally than fund it internally:
1. Risk/reward & timing: An investment in internal R&D might pay-off in ~5 years, whereas acquiring assets (particularly approved products) are a "sure thing." Until R&D becomes more predictable or higher reward, pharma will always be oriented to lower-risk, shorter term rewards.
2. Financial expectations: all big pharmas are sensitive to the almighty EPS (earnings per share.) An investment in internal R&D has a current cost to EPS and uncertain rewards, while an acquisition often has (understated) current costs and overstated future rewards. (Depending on synergy, more broad distribution, etc.)
3. Access to excellence: No offense to (internal) pharma researchers, but by buying assets, big pharma can buy from the top research efforts in the world. An acquisition likely has a tremendous concentration of focused expertise - be it in the target or disease of interest. Who knows more about diabetes, BMS, or Amylin, or who knows more about transgenic expression systems, Protalix or Pfizer? Internal R&D efforts can of course be high-quality, but most are very, very broad, and by definition somewhat dilute.
4. Internal inefficiencies. Pharmas have expensive structures and high legacy costs. Take another look at this chart from my February post "R&D Efficiency," indicating that pharma spends ~$5B in R&D per FDA approved drug.
In contrast, every biotech big or small is targeting a cost per drug approval in the hundred of millions, not billions, indicating their efficiency advantage. (As an example, Amylin - rumored as an acquisition target of BMS for ~$4B - probably spent between $500m and $750m in developing Bydureon, suggesting that they, if representative, are ~8X more efficient than BMS' historical internal efforts.
5. M&A accounting: this is the big one - our tax laws have a massive preference for equity-based M&A. Pfizer has ~$70B in cash on hand and generated an additional $20B in operating cash in 2011, while investing ~$10B in R&D (which includes cash payments to development partners, so this figure is not entirely internal R&D.) PFE has ~7.5B shares outstanding
Consider 2 scenarios for PFE:
-PFE increases cash R&D spending by $10B/year.
Financial result: EPS falls by about $1 per share.(-80%). (Assume $10B more in R&D is offset by $2.5B less (ballpark) in taxes.)
-PFE buys 2 companies (such as 2 x Amylin) for $5B in PFE stock. (Each.)
2 x Amylins would contribute ~$1.3B in new revenue (using 2011) figures, and while Amylin loses a small amount of money, Pfizer would likely assert that they would cut some overhead, and increase sales using PFE's sales force, eliminating the annual operating loss in the short term. Longer term, PFE grows sales (@ a profit margin in excess of 90%), and cuts Amylin overhead and R&D by $750M per year.
To fund the deal, PFE issues 442,000,000 new shares at current prices, or a roughly ~5% increase in shares outstanding, slightly diluting EPS in the near term. However, the acquired assets could increase PFE's annual earnings by $1B roughly in the second year (assuming ~20% increase in revenues, with the costs detailed above, making the deal quickly accretive (=~12% EPS). Also: post-merger accounting may lead PFE to write-off half ($5B) of the M&A value as "goodwill." This is a hit to book (GAAP) earnings, but has, in effect, a cash benefit, as corporate taxes are reduced by the write-off of goodwill. End result: small near-term share dilution, medium term EPS increase due to the acquired assets and a lower tax bill, without spending much/any cash.
M&A is even more advantaged by the tax rules that reward share repurchases. If PFE repurchased $10B in stock (tax-free) instead of spending the same amount on R&D, EPS would be increased as the denominator shrinks.
My original goal was to calculate an equivalence between cash and equity ("$1 cash = $10 in equity spent in M&A," or something like that, but it seems that the ratio is more like $1 to infinity., advantage M&A.
With math like that, and the other advantages outlined above, it is almost surprising that Big Pharma does ANY internal R&D.
Tuesday, May 1, 2012
Back-seat driving AstraZeneca
Just for fun, here's some quick thoughts on how AZ can get back on track after the reign of CEO David Brennan, who announced his early retirement last week while being water boarded by the AZ BoD:
(btw: I really wanted to label Brennan's tenure as disastrous, but that's not fair. Compared to the return on the S&P 500 and PPH (a big pharma ETF) over Brennan's reign (Jan '06 to now), AZN was very bad, but not atrocious. Take a look:
During Brennan's tenure, (as of the day of Brennan's retirement announcement,) AZN was down 5.5%, vs +11.4% for the S&P and +6.8% for PPH. I expected the AZN relative performance to be much worse.
Comparable figures since the Astra-Zeneca merger in 1999:
AZN: -10.3% (total)
S&P: +8.2%
PPH: -14.4%
So, you could say that the AZN merger didn't destroy (relatively) as much value as the pharma industry did over the same time period, but I still can't bring myself to say that it was a worthwhile deal.
In case you're wondering, AZN is <5% of the composition of PPH.
Back to the backseat driving. Here's 8 ideas to get AZN back on track:
1. R&D strategy: go big, or go home. AZ's annual R&D spend is $4.5B, which is only ~40% of the amount AZ annually spends on SG&A. For all of AZN's problems, they still have $11B in cash on hand and throw off nearly $8B in annual operating cash flow. It is time for AZ to either double down on their R&D, or dismantle it.
Everyone knows AZ's pipeline is thin. If it is because the $4.5B of R&D is unproductive, shut down/shrink R&D.
For the last decade the trend in pharma has been to shrink R&D, but the only way that AZ is going to reverse their fate is swim against the tide and massively expand the R&D budget. This option is especially attractive to AZ because of the European R&D assets shuttered over the last decade, and now available for a song. For example, AZ could re-open Pfizer's former R&D facility at Sandwich, UK, attract a very talented team, and likely win government financial assistance in doing so.
There are two counter-arguments to "going big" in R&D - the fact that payoff from the increased R&D is years off, and the fact that EPS would take an immediate hit. I'd argue, though, that the benefit of the increased R&D investment would be felt pretty quickly, as much of the investment would be in downstream clinical development, and not necessarily in basic discovery.
As for EPS, yes, it would take a hit, though not as bad as the gross increase in R&D, as the tax authorities would be paying roughly a third of the gross increase. I'd also argue that perversely, the R&D spend would INCREASE the amount of economic value added annually by AZ, as you'd be replacing the meek interest income from the $11-19B cash on hand with (hopefully) dynamic returns from R&D.
2. Sell Iressa to NVS or another interested party. Iressa (EGFR inhibitor) probably never got enough corporate attention once it landed in regulatory limbo. There's still value to Iressa to to unlock, though, and I think NVS could make the most of the product amidst their other successful targeted cancer therapeutics. (Of which they lack an EGFR inhibitor.) I also think having a new set of eyes to look over Iressa's clinical results would be beneficial.
3. Focus the MedImmune/biotherapeutics group on biosimilars. The combined MEDI and Cambridge Antibody assets are formidable though underutilized engines, both in terms of capabilities and capacity. Why not leverage both in pursuit of biosimilars, as Pfizer is doing with some of their bio-production assets? This is an area where AZ could take the lead, based on their MEDI investment, and an area with a modest capital demand. It would certainly be cheaper to spend another $500M on additional MEDI R&D to develop saleable products than to spend $5-6B in capital to acquire Amylin - a good, though one-market (diabetes) company that doesn't match well with AZ's existing portfolio.
4. Seek more big-big partnering, as exemplfied by the deal with AMGN. (See "AMGN & AZN get creative.") Points #1 and #3 are all about refilling the product pipeline with internally developed "upside." Another route to the same outcome is to buy large chunks of upside to augment the weak AZ pipeline. Combining points 1, 3, and 4 would diversify the R&D risk for AZN and fatten the pipeline, with good cost control.
5. Avoid the urge to make late-stage acquisitions to fill the pipeline. Congrats on the Ardea deal, but please don't think a string of acquisitions is the cure for what ails AZ. Any acquisition right now would represent paying full price, as every other pharma company is shopping hard for late stage products. AZ isn't big enough to outbid PFE, not specialized enough to win many niche acquisitions, and is too desperate at this point to NOT overpay sooner or later. Instead:
6. Climb the risk curve and make early (-er) product development partnerships. Whereas EVERY big pharma has the financial wherewithal to make a bid for a late-stage clinical candidate, many pharmas are too risk-averse to pursue partnering early programs. This represents an opportunity for a big pharma willing to take on more risk AND represents the best return on R&D dollars. Why spend $5-6B on an acquisition like Amylin or $1.2B on a late-stage deal like Ardea when AZN can probably sign and fund 10 early stage partnerships for a fraction of these amounts?
One other consideration: AZ's new CEO probably has 3-4 years to make an impact at AZ, which is enough time that a Phase I lead gained through partnership now can become an exciting Phase III product.
7. Recognize that there is a historically massive opportunity for AZ, and concurrently cut the dividend. There has never been a better time to be in the drug discovery & development business. Incomes are rising around the world while populations are aging. At the same time, medical knowledge has exploded over the last decade, and emerging technologies (e.g. in silica screening) are making drug discovery easier, less costly, and less risky.
It has been a long time since AZ or most any pharma was a growth stock, but with the context above, why wouldn't you want to transform AZ into a growth stock, and increase investment in R&D, as funded by reducing or eliminating the dividend? Yes, changing the dividend will set off alarms in the financial community, but better to do it proactively as part of a growth strategy than reactively once everything goes off patent.
8. Quit pretending that AZ decisions aren't heavily influenced by geography and political concerns by relocating corporate HQ to……….Dubai. AZ's HQ is in London. Except R&D, which is based in Sweden. And except UK R&D, based in NW England. And except biologics, based in Maryland. And except their biggest office in their biggest market, in Delaware.
Some tech companies see geography as a competitive necessity, such as the growing big pharma labs in Cambridge, MA (PFE, MRK, NVS….) AZ goes so far in the other direction, that you wonder if they are intentionally avoiding tech hotspots. UK R&D in Cheshire, UK instead of Oxbridge? Swedish R&D not near the Karolinska Institute? Weird.
You just know that decisions aren't made at AZ solely on their merits and without considering the geo-political ramifications. One way to negate this is to relocate corporate HQ to a "neutral" territory, and publicly commit that future UK & Swedish investment will be tied to leading academic locations. I'm not saying that AZ's weak R&D productivity is due to their location in NW England, but I believe that one way to boost the R&D productivity is to gain more exposure to leading labs in Oxbridge and the Karolinska. Watch AZ's R&D be reinvigorated.
Dubai is a silly answer to "what's a neutral country roughly equidistant to the UK and Sweden?" but I'm sure Dubai or other countries would provide a huge economic incentive to support the corporate relo. Not only would Dubai or others pay a bounty for the influx of meaningful jobs, but you could probably find a country that would be convinced to pay BIG $$$ so that AZ could become the cornerstone of their nascent pharma industry. If Boeing could relocate their corporate HQ from Seattle to Chicago, AZ sure could move to Dubai, or Singapore, or Bangalore.
(not to mention that there could be a substantial savings in corporate taxes for AZ.)
So there's my quick, under-informed ideas to get AZ back on track. Unfortunately, to make real backseat driving recommendations, you have to ignore certain realities, such as the holiness of the EPS expectations, and the tax advantages of filling the pipeline via acquisitions rather than increasing the R&D cash expense. But, you read this far, which means that there's some value in my backseat-driving recommendations…….
(btw: I really wanted to label Brennan's tenure as disastrous, but that's not fair. Compared to the return on the S&P 500 and PPH (a big pharma ETF) over Brennan's reign (Jan '06 to now), AZN was very bad, but not atrocious. Take a look:
During Brennan's tenure, (as of the day of Brennan's retirement announcement,) AZN was down 5.5%, vs +11.4% for the S&P and +6.8% for PPH. I expected the AZN relative performance to be much worse.
Comparable figures since the Astra-Zeneca merger in 1999:
AZN: -10.3% (total)
S&P: +8.2%
PPH: -14.4%
So, you could say that the AZN merger didn't destroy (relatively) as much value as the pharma industry did over the same time period, but I still can't bring myself to say that it was a worthwhile deal.
In case you're wondering, AZN is <5% of the composition of PPH.
Back to the backseat driving. Here's 8 ideas to get AZN back on track:
1. R&D strategy: go big, or go home. AZ's annual R&D spend is $4.5B, which is only ~40% of the amount AZ annually spends on SG&A. For all of AZN's problems, they still have $11B in cash on hand and throw off nearly $8B in annual operating cash flow. It is time for AZ to either double down on their R&D, or dismantle it.
Everyone knows AZ's pipeline is thin. If it is because the $4.5B of R&D is unproductive, shut down/shrink R&D.
For the last decade the trend in pharma has been to shrink R&D, but the only way that AZ is going to reverse their fate is swim against the tide and massively expand the R&D budget. This option is especially attractive to AZ because of the European R&D assets shuttered over the last decade, and now available for a song. For example, AZ could re-open Pfizer's former R&D facility at Sandwich, UK, attract a very talented team, and likely win government financial assistance in doing so.
There are two counter-arguments to "going big" in R&D - the fact that payoff from the increased R&D is years off, and the fact that EPS would take an immediate hit. I'd argue, though, that the benefit of the increased R&D investment would be felt pretty quickly, as much of the investment would be in downstream clinical development, and not necessarily in basic discovery.
As for EPS, yes, it would take a hit, though not as bad as the gross increase in R&D, as the tax authorities would be paying roughly a third of the gross increase. I'd also argue that perversely, the R&D spend would INCREASE the amount of economic value added annually by AZ, as you'd be replacing the meek interest income from the $11-19B cash on hand with (hopefully) dynamic returns from R&D.
2. Sell Iressa to NVS or another interested party. Iressa (EGFR inhibitor) probably never got enough corporate attention once it landed in regulatory limbo. There's still value to Iressa to to unlock, though, and I think NVS could make the most of the product amidst their other successful targeted cancer therapeutics. (Of which they lack an EGFR inhibitor.) I also think having a new set of eyes to look over Iressa's clinical results would be beneficial.
3. Focus the MedImmune/biotherapeutics group on biosimilars. The combined MEDI and Cambridge Antibody assets are formidable though underutilized engines, both in terms of capabilities and capacity. Why not leverage both in pursuit of biosimilars, as Pfizer is doing with some of their bio-production assets? This is an area where AZ could take the lead, based on their MEDI investment, and an area with a modest capital demand. It would certainly be cheaper to spend another $500M on additional MEDI R&D to develop saleable products than to spend $5-6B in capital to acquire Amylin - a good, though one-market (diabetes) company that doesn't match well with AZ's existing portfolio.
4. Seek more big-big partnering, as exemplfied by the deal with AMGN. (See "AMGN & AZN get creative.") Points #1 and #3 are all about refilling the product pipeline with internally developed "upside." Another route to the same outcome is to buy large chunks of upside to augment the weak AZ pipeline. Combining points 1, 3, and 4 would diversify the R&D risk for AZN and fatten the pipeline, with good cost control.
5. Avoid the urge to make late-stage acquisitions to fill the pipeline. Congrats on the Ardea deal, but please don't think a string of acquisitions is the cure for what ails AZ. Any acquisition right now would represent paying full price, as every other pharma company is shopping hard for late stage products. AZ isn't big enough to outbid PFE, not specialized enough to win many niche acquisitions, and is too desperate at this point to NOT overpay sooner or later. Instead:
6. Climb the risk curve and make early (-er) product development partnerships. Whereas EVERY big pharma has the financial wherewithal to make a bid for a late-stage clinical candidate, many pharmas are too risk-averse to pursue partnering early programs. This represents an opportunity for a big pharma willing to take on more risk AND represents the best return on R&D dollars. Why spend $5-6B on an acquisition like Amylin or $1.2B on a late-stage deal like Ardea when AZN can probably sign and fund 10 early stage partnerships for a fraction of these amounts?
One other consideration: AZ's new CEO probably has 3-4 years to make an impact at AZ, which is enough time that a Phase I lead gained through partnership now can become an exciting Phase III product.
7. Recognize that there is a historically massive opportunity for AZ, and concurrently cut the dividend. There has never been a better time to be in the drug discovery & development business. Incomes are rising around the world while populations are aging. At the same time, medical knowledge has exploded over the last decade, and emerging technologies (e.g. in silica screening) are making drug discovery easier, less costly, and less risky.
It has been a long time since AZ or most any pharma was a growth stock, but with the context above, why wouldn't you want to transform AZ into a growth stock, and increase investment in R&D, as funded by reducing or eliminating the dividend? Yes, changing the dividend will set off alarms in the financial community, but better to do it proactively as part of a growth strategy than reactively once everything goes off patent.
8. Quit pretending that AZ decisions aren't heavily influenced by geography and political concerns by relocating corporate HQ to……….Dubai. AZ's HQ is in London. Except R&D, which is based in Sweden. And except UK R&D, based in NW England. And except biologics, based in Maryland. And except their biggest office in their biggest market, in Delaware.
Some tech companies see geography as a competitive necessity, such as the growing big pharma labs in Cambridge, MA (PFE, MRK, NVS….) AZ goes so far in the other direction, that you wonder if they are intentionally avoiding tech hotspots. UK R&D in Cheshire, UK instead of Oxbridge? Swedish R&D not near the Karolinska Institute? Weird.
You just know that decisions aren't made at AZ solely on their merits and without considering the geo-political ramifications. One way to negate this is to relocate corporate HQ to a "neutral" territory, and publicly commit that future UK & Swedish investment will be tied to leading academic locations. I'm not saying that AZ's weak R&D productivity is due to their location in NW England, but I believe that one way to boost the R&D productivity is to gain more exposure to leading labs in Oxbridge and the Karolinska. Watch AZ's R&D be reinvigorated.
Dubai is a silly answer to "what's a neutral country roughly equidistant to the UK and Sweden?" but I'm sure Dubai or other countries would provide a huge economic incentive to support the corporate relo. Not only would Dubai or others pay a bounty for the influx of meaningful jobs, but you could probably find a country that would be convinced to pay BIG $$$ so that AZ could become the cornerstone of their nascent pharma industry. If Boeing could relocate their corporate HQ from Seattle to Chicago, AZ sure could move to Dubai, or Singapore, or Bangalore.
(not to mention that there could be a substantial savings in corporate taxes for AZ.)
So there's my quick, under-informed ideas to get AZ back on track. Unfortunately, to make real backseat driving recommendations, you have to ignore certain realities, such as the holiness of the EPS expectations, and the tax advantages of filling the pipeline via acquisitions rather than increasing the R&D cash expense. But, you read this far, which means that there's some value in my backseat-driving recommendations…….
Tuesday, March 20, 2012
"The gravy days are over." (WSJ)
This just in: financing for biotech companies is scarce.
The WSJ article reporting this has in-depth analysis and loads of figures. Depending on your view, any and all of the following are responsible for a general decline in biotech financing:
-big pharma being more selective
-FDA intransigence
-trouble getting liquidity/the difficulty of IPOs. (Due to Sarbox.)
-better options for investors in other industries, especially the internet
-generics and the threat of biosimilars.
-economic difficulties (and US budget pressures) are increasing pressure on basic R&D budgets.
The truth is, with a few very rare exceptions (1999-2000), biotech financing has almost always been scarce, and to think otherwise, or plan otherwise is just plain stupid. There's a high technical barrier to entry for investors, long turnaround times for investments, and enormous technical risk with any drug development effort. Revenue-generating companies - which more investors understand, and therefore have an expanded pool of investment capital for them - take 7-10 years to build in this industry.
This is a sector that SHOULD have a high cost of capital, and probably an undersupply of capital.
But I'd say that this is just about the best time to have a great idea to develop, because:
If anything, biotech may suffer from an abundance of good - new drug targets, under-validated lead compounds, and interesting but not bulletproof diagnostic technologies are very easy to find these days. Just walk into any university's tech transfer office - they probably have some promising target IP just waiting for the right investor/believer.
The scarcity of investment capital is probably a good thing, culling the herd such that (on average) only the best ideas go forward.
This is all small consolation to the team at a small company struggling to raise their next round, but it definitely seems that better days are ahead, and it'll be a Molecular Future.
The WSJ article reporting this has in-depth analysis and loads of figures. Depending on your view, any and all of the following are responsible for a general decline in biotech financing:
-big pharma being more selective
-FDA intransigence
-trouble getting liquidity/the difficulty of IPOs. (Due to Sarbox.)
-better options for investors in other industries, especially the internet
-generics and the threat of biosimilars.
-economic difficulties (and US budget pressures) are increasing pressure on basic R&D budgets.
The truth is, with a few very rare exceptions (1999-2000), biotech financing has almost always been scarce, and to think otherwise, or plan otherwise is just plain stupid. There's a high technical barrier to entry for investors, long turnaround times for investments, and enormous technical risk with any drug development effort. Revenue-generating companies - which more investors understand, and therefore have an expanded pool of investment capital for them - take 7-10 years to build in this industry.
This is a sector that SHOULD have a high cost of capital, and probably an undersupply of capital.
But I'd say that this is just about the best time to have a great idea to develop, because:
- pharma's need for new products has never been higher, and the aging US & European populations are increasing demand for pharmaceuticals
- start-up and operating costs have been driven down by outsourcing & virtual operations.
- the abundance of specialized CROs & consultants lets smallish companies rapidly access expertise and capacity.
- with big pharma continually restructuring, there is an abundance of talent and facilities available.
- the current FDA & NIH administrations are trying to streamline the regulatory burden. Also: more regulatory paths are opening. I've heard of plans to gain approval first in China by some companies.
- increasing globalization makes it easier to collaborate. (Design a molecule in the UK, synthesize in the USA, screen in China, on a faster AND more efficient basis than if you had a fully integrated operation at one site.)
- increased genomic understanding and lower sequencing costs are enabling more effective R&D.
- China, China, China: increasing the supply of capital, talent, ideas, and lab assets. And not just in China: I've been told by US & EU academics that it has never been easier to find talented, financially-supported post-docs, from China for their American or EU labs.
- increased IP clarity with the America Invents act, and probably lower patent friction, given developments in gene patenting court cases.
- a growing generation of successful firms and alumni to incubate, mentor, and lead new ideas. (Guys like Patrick Soon Shiong (Abraxis founder, among other ventures) Henri Termeer (ex-Genzyme CEO), and RJ Kirk. (Not that this is exclusively a new development (think Alejandro Zaffaroni), but their numbers are growing. I can't wait to see what emerges from the Genentech alumni in years to come.)
If anything, biotech may suffer from an abundance of good - new drug targets, under-validated lead compounds, and interesting but not bulletproof diagnostic technologies are very easy to find these days. Just walk into any university's tech transfer office - they probably have some promising target IP just waiting for the right investor/believer.
The scarcity of investment capital is probably a good thing, culling the herd such that (on average) only the best ideas go forward.
This is all small consolation to the team at a small company struggling to raise their next round, but it definitely seems that better days are ahead, and it'll be a Molecular Future.
Sunday, February 26, 2012
Read this!
Will New Business Models Enhance or Endanger Drug Discovery?
A great thought piece by Stewart Lyman at Xconomy, well worth a read. Lyman analyzes the business models that have generated biotech "wins," and concludes that the current vibe is that VCs are oriented towards creating limited, focused companies (tending towards virtual) instead of the ambition a decade or more ago to built fully integrated drug discovery operations.
This reflects the fact that the end consumer (in this case the pharma companies that buy successful or promising therapeutic programs) wants to buy specific assets and nothing else. Lyman doesn't mention it, but this is as much due to the fact that the public markets are closed for any venture with less than half a billion in valuation.
(This is mostly due to 2 reasons:
-the fact that Sarbanes-Oxley imposes costs on smallish companies that make it impractical for companies of <$500M to be public. In yet another example of regulation trying to close the barn door after the horse has escaped (see also: Dodd-Frank Financial Reform), Sarbanes-Oxley has killed the US IPO market for small to mid-size companies.
-while $100M-$500M in capitalization for a young company may seem large to you and me, it is a tiny number to Wall Street, making analyst coverage unreasonable, and not profitable enough to justify underwriting efforts.
(end rant))
Since VCs can only get liquidity from pharma acquisitions of their investments, companies are not being built to last, but rather built to flip. At the same time, the size of seed VC investments has risen, so biotech start-ups need to have a quick use of $5-10M in seed capital AND a clear path to liquidity. Gone will be the days where therapeutic assets slowly incubate via SBIR funding (and other non-profit vehicles.)
(Luckily CROs now enable quicker and less expensive R&D. Young biotech companies don't need to build and staff non-core departments in order to progress a lead compound.)
The problem with this model as I see it (and not emphasized in Lyman's article) is that the smallish, asset-lite "disposable" biotech model now in vogue is absolutely terrible for anyone on the day-to-day team at the biotech company. Sign on to one of these "lite" companies and you take a GIGANTIC career risk.
Scratch that - it's not a risk if something is practically guaranteed - and unless you believe your compounds and company will smoothly grow and progress from discovery to phase III without a hiccup at any stage, you almost certainly will go through restructuring, replacement, or a reduction of one form or another.
To the VC, each $5M biotech investment is a bet with a 1:20 likelihood of payout, but with a 50X payout with a win. The VC wants to take 40 "shots on goal" with their $200M VC portfolio, with the probabilities suggesting 2 "wins" worth a total of $500M.
To the scientific and business staff, though, that means that there's only a 5% chance that their specific efforts will result in a profit. With these odds, a career in academia, at a big pharma, or at a CRO looks a LOT less risky.
So until someone comes up with a business model for VC investment that ISN"T built to flip, start-up biotech's will have a hard time attacking the talent they need to run rings around big pharma. It seems strange to suggest it, but perhaps VC needs to be mindful of the business case for talent, not just for ROI.
Personal note: my opinion is also based on my experience starting a therapeutic discovery start-up. It was a great experience, but the risk/reward math is just not favorable for biotech employees, and I won't ever work in early stage therapeutics again, if I can help it.
Sunday, February 12, 2012
R&D efficiency
Forbes' Matt Herper takes a look at the cost to develop a new drug, and now current estimates put that figure at $1B-$4B.
While the current estimate is newsworthy, folks at places like Tufts have been conducting this exercise for years, and the numbers are always eye-popping (and debatable.)
What makes this particular article interesting is how you can also use the analysis conducted by Herper to compare pharma productivity over the last 15 years. Take a look at the R&D productivity of the top 12 pharmas:
While the current estimate is newsworthy, folks at places like Tufts have been conducting this exercise for years, and the numbers are always eye-popping (and debatable.)
What makes this particular article interesting is how you can also use the analysis conducted by Herper to compare pharma productivity over the last 15 years. Take a look at the R&D productivity of the top 12 pharmas:
Here's my takeaways:
-There's two tiers of productivity in the analysis: the "productive" cluster (AMGN, NVS, BMS, MRK, ABT, and LLY) all cluster between $3.7B and $4.6B in cost per new drug, while the "less productive" ranged from $5.9B to 11.8B per drug. While half of the companies studied, the "productives" account for 66 of the 135 drugs (49%) these 12 companies introduced in the last 15 years. So you can't say that higher R&D productivity is also a factor of scale - the productive and less-productive companies produced roughly the same number of drugs.
-The "less-productive" companies tend to be the product of mega-mergers. Each of these companies has done deals to one extent or another, but think of the "biggies" and you're generally thinking of the "less productive" group. Careful, though, when thinking about the time element here - MRK, for example, only did their big SGP acquisition in late 2009. This brings up the question: do mergers depress R&D productivity, or is it mostly companies with declining R&D productivity that have the urge to merge? (My guess: a bit of both, but considering that the 6 most productive companies are generally considered the least involved in the M&A game due to a bias towards internal efforts, it may be a moot point. M&A either distracts from focus, or results in sub-efficient R&D orgs.
(I'm being charitable to NVS, which is a product of a mega-merger (Sandoz and Ciba-Geigy), but that occurred in 1996 - prior to the analysis period. Either NVS did a much better job of integrating R&D, or it takes 15 years to overcome the M&A inefficiencies.)
-I think it would be appropriate to believe that these results also project future R&D efficiency and likely future stock performance. (e.g. over the next 15 years, AMGN is likely to be much more productive than AZN.) The 15 year period (and $75B in R&D spend) should account for short-term spikes and likely demonstrates which companies have the best R&D people and organizations. I am especially impressed with Novartis (21 products over 15 years) and most disappointed by AstraZeneca (5 products over the same period.) Perhaps this reflects one company choosing easier/harder targets, but I think it more likely reflects capabilities.
-For all of the news and criticism, Pfizer's R&D isn't too bad. The criticism that failures like torcetrapib reflect diminished R&D productivity due to repeated mergers seems misplaced, as Pfizer was almost middle-of-the-pack in R&D efficiency over the last 15 years.
-You might expect that the broadest R&D portfolios would have the smoothest results (success in one area, say cancer, making up for failures in another, say neuroscience.) However, the more productive companies are to me the least broad. Rightly or wrongly, I think of BMS & AMGN biased towards cancer research, while GSK and JNJ are the most diversified. Does this mean that there is R&D value in specialization?
Any other insights to be gleaned from the Forbes analysis?
A couple of caveats to the analysis:
-The best analysis would weight productivity with resulting product sales. (In other words: you'd accept lower R&D spending efficiency if the output were blockbusters.)
- I can't tell from the Forbes analysis exactly what is included in the figures. I suspect that Roche data includes historical Genentech R&D spending and output. I think DNA has been one of the most efficient AND effective R&D organizations, so I would be very curious to see DNA split out from pre-merger Roche.
Subscribe to:
Posts (Atom)