MassBio Investors Forum keynoter G. Steven Burrill makes predictions for industry
In preparation for the MassBio Investors Forum, we set out to ask G. Steven Burrill for his thoughts on the state of the industry, healthcare reform and profitability of biotechnology.
Q: If you had 30 seconds to advise a biotechnology entrepreneur looking to start up a company today, what three tips would you give them?
A: First, be tenacious, and never give up. Second, finance, finance, finance. You'll never have enough capital, and never fear dilution. And third, understand healthcare reform and its impact on who your customer is and how your product is paid for.
Q: Are those tips any different than they would've been a year ago?
A: Yes, because I think healthcare reform is more substantive today.
Q: As biotech companies continue to face turbulent times, what advantages and strengths do you think the industry has in Massachusetts?
A: I think certainly the fact that Massachusetts has a cluster just defined within itself is a very positive environment. There are 500 companies or so in Massachusetts so there are lots of experienced people, lawyers, accountants, builders, and all the infrastructure that makes building a company easier. Proximity to Europe both in terms of time zones and relationships is very helpful. The industry is probably 30 years old in Massachusetts so it's not like we are just starting to discover how to build these companies today.
Q: What are some weaknesses the industry has in Massachusetts?
A: There is never enough capital, and I'd say there are more Venture Capitals out west that invest in biotech than there are in the Boston area.
Q: What do you think the venture landscape looks like for the rest of this year and 2010?
A: I think there is plenty of capital. It is clearly more expensive than it used to be. I think to understand the VC environment you have to understand the public market environment. If public companies with 50 or 100 million in cash are worth 50 to 100 million in cash, then that does set up pricing threshold for privately held companies and earlier stage companies. With a significant implosion in value in the public equity markets many of the venture financings that happen are done at far less favorable terms to the entrepreneur than they are used to. Those are more favorable to the investor but less favorable to the companies. I think the VCs will continue to be active and fund. This is a little bit of a deep pockets with short arms scenario where there is capital there and it's up to entrepreneurs to dig it out and accept the pricing that comes with it but there is no shortage of venture capital.
Q: What do you think has been the model or drivers for success for smaller biotech companies that have been able to raise funding during this financial crisis?
A: No, I don't think there is any secret sauce or magic formula. I think every company stands on its own; it's a function of technology and the barriers to entry. It's function of market, market opportunities and pricing. It's a function of state of development and the clinical and regulatory pathways of the marketplace. It's a function of the management team and their skill and experience. I also think it's a function of the financing strategy that recognizes not just the financing you are doing but ultimately how much capital may be necessary to get to the marketplace.
Q: 2008 was the first year that the biotech industry was profitable. What does that mean for the industry?
A: First of all, there is a definitional issue that will pervade any discussion of that. Certainly a large chunk of that was driven by Genentech. If you take the top 5 or 10 companies, they drive most of the industry's profitability. If you now take Genentech out, the biotech industry is not likely to be profitable in 2009, just because you took the biggest piece away and didn't replace it. On the flipside, an industry that has spent 30 years building value has significantly more companies that are profitable today than ever before. But profitability hasn't been the most important measure of success. It is products being developed, products being partnered to big pharma, products into the marketplace. It has been the value creation side, and not necessarily derivative of profitability.
Q: In your opinion, why haven't we seen more M&A activity, more large pharma scooping up biotech companies this year?
A: It is cheaper to rent than buy. If, through partnerships, you can acquire access and the rights to the assets why would you pay a 50% premium on the stock of the company to buy it? I think a lot of the value that biotech has that pharma desires they can access through partnering. Generally the transactions are takeouts where the cost of the ongoing partnering is higher than owning the company. So the control issues are more evident through an acquisition than through a partnership. It is a rent/buy issue and usually partnerships precede acquisitions. If you look at any of the last 100 acquisitions you usually find a partnership in front of them with the acquirer that build the working relation and economics that came out of the back end of the merger are usually more favorable to the small company, and so the large company bought it to improve the economics for them. If you take Genentech/Roche, Roche owned 50% of it but it was going to be more successful if they owned 100%.
From a biotech company standpoint not a big pharma standpoint, it is not altogether evident it's a good answer for biotech. You take Genentech as a company and look at their productivity over the last 30 years; it has probably been the single most productive company over the last 30 years. But if you look at the next 30 years and you bury it within Roche, the question is can they sustain it? Probably not. Most of the people in the Genentechs of the world leave and start new companies and the industry rebuilds itself from within.
You have to look at values for a minute. People get confused about values. If you look at Genentech as a biotech company, at the time it was acquired by Roche it had $100 billion of market value. Pfizer only has about $90 billion. So it was significantly larger than the largest pharmaceutical company. If you look at the second largest biotech company Amgen, Amgen has about $60 billion of market value. Somebody like Bristol Myers has about $45 billion or $40 billion. The third biggest biotech company is Gilead; Gilead has $40+ billion of market value. Somebody like Lilly has only has about $30 billion.
So if you look at market value, what you see is the three largest biotech companies are significantly larger than most or all of the largest big pharma companies. People often don't realize how big biotech is from a market value standpoint and that doesn't make it necessarily easy for the pharma companies to buy them. The pharma companies are smaller companies so they can't just buy say, Amgen, because Amgen is larger than all but one or two of the largest pharma companies. So there are a lot of people in the press that write articles every time they see an acquisition and say that everyone is going to be acquired and that's not going to happen. So the MBC may lose a big player like Biogen Idec, and replace it with 10 or 15 spinouts from Biogen Idec after someone acquires them. You end up with a fertile field but you tend to lose some of your most senior players. Now, the Biogen Idecs don't disappear when they are acquired. They are still there and still employ people and still a vibrant part of the biotech industry event though they are technically absorbed by the pharma industry, but from an MBC standpoint you might lose one and gain 10.
Q: What impact has the Obama administration had on the biotech industry so far?
A: It's probably bad in respect to Medicare and Medicaid power, probably bad in respect to cost and access to capital. It's probably good with respect to the funding R&D especially in the stem cell area and healthcare IT. It's probably going to be some negative with patents and patent reform. I think the entire health care reform package being discussed is not positive to our industry.
Increased power of Medicare and Medicaid will drive some drive some profitability out for the industry. The move to have more generic biopharmaceuticals or biosimilars is probably negative to the industry, and the cost of capital is negative to the industry. We are a capital-dependent industry. The things at the highest level of the healthcare reform and the dialogue in Washington are not positive. Even things like increased stem cell funding, by the time you follow the dollars and go through the restrictions, it is not a significant change.
Q: How can Massachusetts companies prepare for the increasing shift to personalized medicine?
A: Well if you just stand at 30,000 feet and look down, there is no question that we are dramatically reforming the healthcare system to one that will increasingly pay for things that work for individuals so the move is toward a more personalized medicine world. We are also driving healthcare to where we are moving from a sickness care system to ultimately a wellness care system, where prediction and preemption are significantly more important than the one-size-fits-all world we live in today. So personalized medicine at some level will happen and it must happen, and it is the technology that is changing both regulatory approval and reimbursement, obviously to patient benefit. So it is not something that is a little piece of terminology or a little piece dialogue that people are having at a moment in time; it is a significant change.
About 55% of drugs consumed in America don't work for the patients they are prescribed for and most everything we do--80 something percent in cancer care-- is ineffective or maybe even harmful. And so as the system moves to one that increasingly pays for value as opposed one that reimburses for cost, personalized medicine becomes a fundamental driver for much of that.
Q: Your 2009 report was called Navigating the Sea Change. Given that we're just over half way through the year, any thought on what you might call your 2010 report?
A: I was just thinking about that as a matter of fact. We are amid the sea change, so I was right on the impact of it. The predictions I've made have all come true. There are signs today that we are beginning to pull out of a crisis mode. There are those who think that the economy is kind of like a V, it drops and comes right back up in a hurry. I happen to think it is more of a W where it dropped pretty fast comes up and it goes down and comes up and sputters along for a while. So I'm probably going to wait another 2-3 months before I figure out what I really want to talk about. Notwithstanding all of the apparent improvement in the economy, the world really hasn't gotten better for the biotechs. Capital is largely unavailable and expensive, and healthcare reform is somewhat challenging and maybe even devastating to some parts of the industry. So I think we have to be careful that we don't suddenly get so optimistic that we get a little bit carried away with where we are as an industry. I think a lot of people thought that significant amounts of the industry were going to fail and go out of business. Obviously that didn't happen as much, although there has probably never been as much failure and consolidation as we have had in the last year. The stimulus money has been important and the stimulus money is not a U.S. phenomena; it has happened all over the world. I am not sure what I am going to talk about yet, we are not quite far enough along to make the call.
It has got to be catchy right? It's interesting-- if you look back over the last 20 some years of books I've written, the very first book from 1986 I wrote was called Industry at a Crossroads. Many of the things I talked about in that book are similar today. Questions of will the industry will persevere and be as robust an industry in the future as it has been. Will it just be acquired by pharma? What are the business models for the future? Where does partnering fit in? If I go back and read that book, we were at a crossroads 20 some years ago, and we are certainly at an important crossroads today. I don't think I'll borrow that title again I'll have to update it, but I might play with that.