For tough 2010, pharma cuts billions from R&D

Last week, analysts from Morgan Stanley issued a report advising large pharma companies to drastically cut back on their in house R and D spending in favor of "in-licensing" drugs that have reached later stage studies. The report mentioned pharma's such as AstraZeneca and Sanofi-Aventis which should turn from the costly high failure rates of their experimental drugs by expanding the pace of licensing agreements with small biotech firms that often provide experimental products at a fraction of the cost.

This scenario is also playing out with Pfizer, where the belief that partnering products from smaller firms would cut failure rates and boost profits while improving safety during the development stage is taking hold. These bloated pharma's spend approximately 1/3rd of their overall budget during the earliest stages of product development. Only 10% of these early experimental drugs make it to market, but the odds increase to 20% for drugs in Phase II testing. A drug candidate in Phase III testing has odds closer to 50%, and this makes the case as to why small biotechs with promising products in Phase II and Phase III testing may be worth a gamble by investors.

I am an investor in a small biotech (market cap $150 mil) that has a buccal insulin spray in US Phase III testing. The insulin spray has been approved in a handful of countries, and recently the FDA granted the first ever diabetes related Treatment IND approval to this potential blockbuster. The biotech is Generex Biotechnology and their buccal insulin spray is named Oral-lyn. Generex also has a wholly owned cancer vaccine unit, Antigen Express, that has a synthetic peptide vaccine for her2/neu breast cancer in Phase II testing with the USMCI. This vaccine just illustrated its efficacy in the interim results showing no recurrences for patients taking this vaccine at 13 months. This vaccine is named AE37 and the company is planning a Phase III study to start this year. There are zero safety issues for either of Generex's top two new drugs.

Since a small biotech such as Generex has fully funded their promising drug candidates to late phase trials, they have eliminated the main risk for any potential partner(s). The small biotech shouldered the full R and D costs, and as a shareholder I can tell you that process is often painful. Yet the trend towards large pharma partnering (and/or licensing) with similar biotechs is clearly increasing and the odds also have increased that a great reward will come our way.

Apparently thought leadership in BioPhrma is now following the same path of brilliance as the Financial Services Industry. We used to call this strategy "burn the furniture"; current management earns fat bonuses for asset stripping while the next generation is left destitute.
If all of the major BioPharma companies adopt the I- Bank's flavor of the minute strategy of acquiring late stage compounds, where will the next generation of drugs and medical devices come from?
Who will actually invest in discovery and preclinical development? This is a slippery slope for future generations. The end game of Life Science companies (via being run by MBAs and Wall Street types) seems at hand. Oh well, worse case the broke government will create a TARP plan for salvaging R&D. In the mean time all of the research talent and knowledge base will migrate from the US and Europe to the BRICs. ...to be continued