Fortune favours the brave

Rediscovering an appetite for risk – funding and fuelling biotech innovation

Over the past decade, both biotech and pharma have increasingly seen a tendency to research, fund and develop products that largely could be considered ‘variations on a theme’, or more particularly, a few, highly developed but low-risk areas of focus.

This has not only locked venture and development capital into a limited number of funding targets – the so-called ‘target herding’ effect. More worryingly, it also discourages exactly the kinds of risk-taking that usually lets American firms to stay on the cutting-edge of research and retain their global competitive advantage.

As the Chinese government continues to grow its direct and indirect subsidies for drug research, the need to be forward-thinking only increases.

There are three significant factors impeding biotech risk-taking – they must be understood to be counteracted.

First and foremost is capital concentration. As drug development costs have continued to escalate in accordance with Eroom’s Law, the market has responded by concentrating capital in fewer start-ups.

Moreover, biotech investment firms themselves have been shrinking in size and growing in size. All of this tends to concentrate drug development decision-making in the hands of fewer hands. This is a recipe for groupthink.

Moreover, from anecdotal reports it seems that many more of these decision-makers tend to come from finance backgrounds, which favours an investment approach rather than science or medicine.

This might be expected to yield decisions that are more focused on mitigating the kinds of risks that can be captured in spreadsheets rather than bold scientific or medical intuition.

In some ways, it is evocative of the ‘financialisation’ transformations of General Electric (under Jack Welch) or Boeing (under Harry Stonecipher).

Both transitions involved a cultural transformation from proud engineering pedigree to financial modelling and near-term financial returns, to disastrous effect. The engineering-first mission of SpaceX offers an obvious contemporary counterpoint.

A second issue is the phenomenon of target herding – the increasing tendency of both big pharma and biotech investors to concentrate investment in fewer and fewer disease targets.

Given the high and rising cost of clinical failure, it’s perhaps understandable that financial decision-makers might seek to reduce perceived clinical and scientific risk by going after biologic targets that other groups have already proven to work.

However, this creates a sort of tragedy of the commons: rather than reducing a programme’s overall financial risk, it instead converts it from scientific risk into commercialisation risk by increasing post-approval competitive pressures.

Recent examples include COVID-19 vaccines, TL1A antibodies for IBD, and GLP-1 analogue drugs for obesity. While the payouts for early adopters can be significant, companies often double down on what they consider to be proven positions in the market rather than assessing if the markets are saturated.

The sheer number of competing statins and arthritis drugs helps to illustrate this issue. Companies are more inclined to create permutations on existing products than to truly innovate.

Lipitor, seventh to market in the 1990s but the ultimate winner in the statins race, is often cited to justify this strategy, so there are reasonable arguments in favour (particularly for the fastest moving and best funded groups).

But the commoditisation of most aspects of drug development and the lengthening of development timelines mean that the world of drug development is very different now, 30 years later.

Data shows that even first-in-class drugs have shorter average remaining patent life at launch, and the time to non-generic market entry by a competing molecule against the same target has shrunk to just 3 years.

Worse is coming with the biotech Cambrian explosion of innovation happening in China now. The astonishing speed and creativity of this new competitive ecosystem is likely to further compress competitive timelines, at least for the well-worn therapeutic modalities and targets.

The third major issue is an increasing reluctance to invest into breakthrough delivery vehicles and other transformative technologies and shifts. One of the most noteworthy examples is mRNA vaccine technology, which, prior to COVID-19, struggled for recognition and funding.

As is often the case, caution asserts itself in being willing to assess the actual risk/reward on truly breakthrough systems. If the expedited funding and approval of a pandemic had not been available, the technology might still be struggling.

Biotech founders are responding to these challenges in a variety of ways. Most important is to think clearly and holistically about all forms of programmatic risk – including market size and saturation risk – not just scientific and biology risk.

Biopharma productivity researcher Mike Rea has been advocating exactly this view for years, and we ourselves have written about the need for more rigorous modelling. Just as importantly is to think more creatively about the potential for transformative platforms and markets.

This is the path pursued by companies like Lumen Bioscience in two ways: a foundational biomanufacturing platform technology that unlocks new therapeutic modalities (oral biologics), that in turn unlocks larger, more valuable markets (preventive biologics drugs).

A third strategy is best illustrated by a big pharma: Eli Lilly. In a wide-ranging podcast interview, Lilly CEO David Ricks explained how Lilly came to offer its best-selling GLP-1 analogue drugs directly to consumers over the internet.

In a surprising passage he notes that Lilly now sells more to cash-paying customers over its LillyDirect portal ‘than our insured business in new patient starts, and more than all of Wegovy.’ This consumerisation and globalisation of biopharmaceuticals arguably began with COVID-19 but has exploded with the GLP-1 phenomenon, and is likely to change the industry beyond all recognition in the coming years.

Putting these three new strategies together yields a compelling alternative: products made on novel platforms (protected by novel IP) that are designed to prevent disease and selected and purchased directly by patients themselves (even if still gate-kept by physicians) at a price affordable to a far larger pool of patients around the world.

From this perspective, the current disruption facing biopharma and its investors may in fact be the best thing to happen in decades: far from the highs of COVID-19, biopharma is now almost as widely loathed as the legal profession. It’s likely that the government drug price-setting rules of the 2022 Inflation Reduction Act may be only the first of a series of political reactions.

Finding ways to make more affordable medicines that help everyone (worldwide) live better lives might be the best thing for the industry’s social contract. Pharma and biotech innovation does not need to ‘break the bank’ or be especially high risk to provide real, lasting returns.

But it does fundamentally need to involve real innovation and risk assessment in its products. China has raised the bar for US and European biotech firms, and they’re unlikely to rise to this challenge by relying on derivative products in crowded target areas with diminishing returns.

Forward-thinking involves both assessing the market as well as effective cost management. The time is right for US firms and investors to seize their innovation advantages.