Does the U.S. biotech industry deserve a bailout? (2)

I do not believe that companies engaged in early stage drug, device or diagnostic discovery should be "bailed out" as has been attempted with the financial and auto industries. What is really needed is a rescue of these companies, in which they are liberated from the destruction wrought by current financing approaches (VC funding, IPOs, public stock market speculation).

Since the early 1980s there has been a steady, catastrophic decline in the productivity of the innovative part of this industry, such that it now produces 1/20 as many drugs per dollar invested as it did pre-1980s. A big part of this decline is due to the mismatch in time and outcome expectations between the expectations of virtually all investors and the realities of early stage research. This in turn has led to good ideas being abandoned too early, bad ideas being advanced too far too fast and now, unprecedented job losses for tens of thousands of highly educated, innovative and motivated scientists.

Simply bailing out biotech, only to return it to the hands of those who have so badly managed it thus far will only create more of the same thing. In my opinion, early stage biotechnology research must be funded by institutions that better recognize the importance of research in and of itself, rather than in terms of meaningless net present value calculations or the fad du jour, which is what is used by the financing systems we have today. Such institutions include governments, NGOs and not-for-profits. This is how such research was funded back when it was 20-fold more productive for decades at a time.

I agree with this article, but think the means of selecting "survivors" among small biotech companies needs much thought.

While venture capital funds and willing biotech investors have made hundreds of biotech start-ups possible in the U.S., more than in any other nation, these VC’s and investors have often proven poor judges of the promise of a new company’s underlying science or of novel ideas for new therapies. More emphasis has often been put on companies’ “management team” than on the underlying scientific and technical platforms, which are more difficult to evaluate. Often the original VC investors recoup their investment with a handsome profit after an initial public offering, leaving shareholders on the hook for those companies without long-term prospects.

Over the years this has stuck biotech stock investors with losses for a host of unsustainable small companies. “There has been lipstick put on a lot of biotech pigs” says one Maryland biotech CEO, “the market hasn’t been very good at sorting out the good, the bad, and the ugly.” The hard fact is that progressing an innovative discovery to an approvable new treatment takes many years and tens of millions of dollars in continuing investment. And to progress a product from the relatively inexpensive initial tests through the larger treatment studies that clearly demonstrate its promise, these companies must navigate the “valley of death”, where major long-term investments are required and yet the data needed to partner with large profitable pharma companies or to market a drug is still being gathered.

Prior economic downturns have pruned the biotech industry, eliminating the less promising companies. One can argue this represents the efficiencies of the market. But the current economic storm may well capsize the entire small company sector of the industry, historically the most productive source of new diagnostics, treatments, and medical devices. We all know there is a difference between “pruning” and digging up the entire plant by the roots. The first process shapes and controls, the second usually fatal.

H.R. 1, the American Recovery and Reinvestment Act of 2009, is meant to create and save jobs, and will spend billions of dollars on infrastructure investments to do so. I would argue that some of that funding should go to the state government agencies in almost every state which already have funding programs to encourage and sustain their small bioscience companies. Unlike the VC and equity markets, these programs carefully evaluate the underlying scientific and technical feasibility and the research track record of companies competing for state investment. However in their existing form, the programs could never provide sufficient funding to help the most competitive of their state’s small companies which now are desperate for investment. State governments, extremely hard-pressed in the present recession, are themselves seeking federal aid. Therefore only the federal government has the funding power, as part of a job preservation program, to expand these lifelines to small biotech companies.

Global pharmaceutical companies, such as Lilly, Merck, and Pfizer, have already invested hundred’s of millions of dollars into centers for R&D, manufacturing, and clinical trials in India and China, taking advantage of the large number of trained scientists and of lower costs. But small U.S. companies have always fostered a unique environment where scientific and technical innovation flourished and laboratory advances sparked new businesses. In this area, unlike many traditional manufacturers, US companies are extremely competitive. But the forces of globalization could move this industry as well to foreign shores.

The vast bulk of the manufacturing of pharmaceutical ingredients, once a high-value industry here, has already been outsourced to low-cost plants abroad. As the New York Times reported in January, the ingredients for all antibiotics are now made almost exclusively in China and India. The same is true for other crucial medicines such as metformin for diabetes or amlodipine for high blood pressure. Beginning in the 1980’s the Chinese government invested huge sums in antibiotic fermenters, forcing most western producers from the market. Not only is labor cheaper abroad, but manufacturers there face less scrutiny and plant inspections by the FDA.

Thus the US no longer has its own manufacturing base for many of the most critical drugs required for treating common chronic diseases, for public health emergencies, or for biodefense threats. (And we no longer control the quality of the drugs we use.) It now appears very likely that drug development, with the challenging and highly-paid jobs it creates, could also follow manufacturing offshore.

England, the EU, and even Norway have proposed government funding mechanisms to ensure that their most promising biotech companies do not fail over the next year or two. The Financial Times reports that the biotechnology component of the Norwegian stimulus package, of about 300 M euros,should prevent half the country’s biotech companies from going bankrupt during the current mega-recession and allow some promising research to continue.

The federal government may not address this crisis as the UK, EU, and Scandinavians now have plans to do. This means that the bulk of innovative small companies will no longer leverage the taxpayers’ massive investment in basic biomedical research. US companies may no longer provide our hospitals and clinics with a steady stream of better products with which to prevent, diagnose, or treat disease. We may look to China and India for many of tomorrow’s drugs. While highway construction and cement and asphalt plants will never be off-shored to Asia, as their proponents frequently note, these industries hardly represent the cutting edge of American scientific and technical expertise. If we allow our small biotech companies to fail over the next few years, the Chinese and Indian economies will take up the slack, with generous financing from their governments and from the large multinational pharma companies. And even if we build or repair more roads than any other nation on earth, America will have taken one more step from being a first-world to a third-world economy.