By Rosemarie Truman
Product development in the Life Sciences industry is generally a risky business…for every 25,000 compounds tested in the laboratory, 25 will enter clinical trials, 5 will be approved by regulatory authorities, and only 1 is likely to recoup the investment made.
To see how the industry and the risks involved have become so daunting, let’s examine what has occurred over the past 10 years:
a) Lack of Incentive to Invest:
- a. Biotech: A cumulative operating income statement over the last 10 years for publically traded biotech companies (excluding Amgen) illustrates a loss on average of 12%
- b. Biopharma: On average, over the last 10 years, large biopharma companies have lost 50% of their market cap (even with the large number of ongoing M&A deals)
b) Herculean Effort Required to Get a Product to Market:
- a. Clinical Trials: The number of clinical trials required to get one drug approved has risen by 80-100%, going from 8 clinical trials to 15-16
- b. Product Development Cost: Over the last 10 years, it has nearly doubled, going from $1 billion to $1.8 billion
c) Margin Compression:
- a. Growth rates in product demand are largest in China, where a biopharma can only command a fraction of typical prices
- b. Where prices used to be “healthy” in places like the US and the UK, the US healthcare reform has also driven down prices and, in the UK, Pharmaceutical Price Regulation Scheme delivered cuts of 3.9% in 2009, followed by 1.9% in 2010
- c. In addition, health care authorities and payers are seeking significant “real life” value of drugs to justify paying a premium (e.g., they require true differentiation vs. basic efficacy)
d) Pipeline: For all major biopharmas, with the exception of Amgen, the replacement ratio of new products coming out to those coming off patent is ~50% (“the patent cliff”), indicating possible further compression in revenues (“the patent canyon”)
e) Workforce: Over 300,000 jobs have been lost in the Life Sciences industry since the year 2000; ~235,000 of these jobs have been lost in the last 6 years. In many areas where companies pledged to hire more people in exchange for tax breaks, many like NeuroMetrix Inc. (NSDQ:NURO), GTC Biotherapeutics Inc. and Genzyme Corp. (NSDQ:GENZ) agreed in January 2011 to return $6.6 million in incentives after realizing they could not meet their job creation numbers
We have all heard of the “perfect storm” in Life Sciences. We believe the above describes a tsunami. When a tsunami occurs, a series of mass disturbances follow. There is a lack of incentive to invest due to a lack of shareholder returns. If investment does occur, it is more cumbersome to develop — R&D continues to lose efficiency as demand from R&D increases, thereby increasing costs. When a product does reach the market, it is difficult to command a premium price to recoup the cost. As a result, the net-net is reduced, the pipelines are smaller, and the workforce is cut. That brings us back to the beginning: the lack of incentive to invest. Even the government has a lack of incentive given the fact that Life Sciences companies are having a difficult time creating jobs.
Does this leave the whole industry to doom and gloom? This isn’t the case everywhere. In China, the environment in the Life Sciences industry is “almost too hot” with not enough people to fill the jobs! A similar phenomena is happening in India where the Life Sciences industry accounts for 82%of the overall revenues of publicly listed companies. Private equity funding of $1 billion went to India as well, but, based on the year over year growth rate of 15% over the next 20 years, this is still $1 billion short and represents only 2.6% of funding that private equity is making in India.
While there is so much more to say, what does all this mean for the industry? Some have hypothesized that there is a need for a revolutionized regulatory framework surrounding patents as well as a need for a framework for clinical trials to enable drugs to get to market faster. Others have suggested that a new paradigm for getting into and conducting clinical trials could help solve the woes of the industry. Or, what if public companies were no longer allowed to develop drugs/medical products to address the same disease area, but, instead, the government created a mechanism for centralizing discovery and development? This would lead biopharma companies, as we know them today, to shift even further by becoming steadfast marketing machines…which leads to a whole new set of risks and regulatory scrutiny.
Stay tuned for our next blog, where we will share our opinion of what lies ahead!
About the Author
Rosemarie Truman is the President and CEO of RHT Consulting, a leading provider of strategy consulting services in the Life Sciences industry. She has 19 years of global strategy and transformation experience working with C-suites and Boards of Directors as well as senior leadership teams. She has worked for the leading companies in nearly every industry segment. One of Ms. Truman’s specialties is “growth breakthrough innovation” (GBT), where she has three patents pending. A few of the foundational capabilities required in identifying and driving GBTs include strategic marketing, innovative use of digital channels and an understanding of how to grow “share of voice.” As such, Ms. Truman has led many integrated digital media strategy engagements that include the creation of viral social media platforms and subsequent execution of campaigns that lead to increased market share. Her engagements have consistently resulted in >200% increase in share of voice, which has led to an increase in market share capture of >50%.
Ms. Truman completed Ph.D. work in Software Engineering from Oxford University. She also earned an Executive “Mini-MBA” Program, sponsored by Booz Allen & Hamilton, with instructors from Harvard Business School and INSEAD, and graduated Magna Cum Laude from Smith College and Princeton University while earning undergraduate degrees in Mathematics, Economics, and Industrial Engineering and Operations Research.
