Editor’s note: CED President Monica Doss recently spoke with Vipin Garg, Ph.D., president and CEO of Tranzyme Pharma, about the state of the pharmaceutical and biotechnology industries.
Monica Doss: You have over 20 years experience forging partnerships with big Pharma and small biotech companies. How has the landscape changed over these 20+ years in strategic partnerships? Are there more or less deals being done than before? How have the deal structures changed?
Vipin Garg: The landscape has changed significantly over the past 20 years. Right now we are in an unprecedented time in terms of relationship between big Pharma and the biotech industry. The market environment is very different today. Big Pharma is increasingly more dependent on biotech companies for discovery research and for coming up with new drugs and therapeutic approaches for diseases.
It is not a secret that the pharmaceutical industry is struggling to maintain its traditional double digit growth rate. A number of the “blockbuster drugs” that big Pharma has been dependent on over the last 20 years or so are going off patent.
There are too few blockbuster products that are emerging to replace these older products that are coming off patent. This situation has created a lack of growth and is driving big Pharma to form partnerships with biotech.
There are far more partnership deals being done today than ever before. Last year was incredible for the biotechnology industry. There were almost 1,000 out-licensing deals between biotechs and Pharma. I would venture to guess that 20 years ago there were maybe five. On top of that there were more than 100 acquisitions of biotech companies in 2006, which is unheard of. I don’t think anyone would be surprised if these numbers go even higher in 2007.
Furthermore, out of the thousand deals last year, the average deal size was $40 million per deal, and the overall potential earn-out from these deals for biotech is projected to be somewhere around $30 billion. It is not likely that all that earn-out will be achieved, but on paper when these deals were signed, the overall earn-out to which the biotech is entitled is a much larger number than it was ever before. The same thing applies to acquisitions.
If you look at various industries out there, typically there is a 20 percent premium that an acquirer will pay over the trading price of a public company stock. In life sciences last year the premiums were 50 percent or higher, while it was around 20 percent for all other industries combined. There is fierce competition for innovative biotech products and ideas, and big Pharma is willing to pay up and bid up the price of these companies and technologies.
MD: What are the similarities and differences in the life science sector in the U.S., compared to your experience in Canada, Europe and elsewhere? Is one country more or less receptive to fostering the biotech industry’s growth?
VG: The country that has really driven the life science sector and the whole idea of venture investment in biotechnology is the United States. Unquestionably the best place to do business, build new companies, raise money and ultimately access liquidity is the United States.
The life science sector is largely driven by innovative science and access to capital. While both Canada and Europe have been able to produce good science, the availability of significant risk capital is still an issue in both of these places, although things are changing slowly.
The new emerging economies like China and India are also fostering biotechnology industry and could be significant players in R&D and manufacturing of pharmaceutical products in the years to come.
MD: How do international relations affect the biotechnology and pharmaceutical industries? What are the difficulties of international regulatory filing?
VG: Like most other industries, the biotechnology and pharmaceutical industries are becoming global businesses. People are going all over the world to develop drugs, to look for ideas, to access technology, to do manufacturing and ultimately access the growing purchasing power around the globe. Previously only North America and Europe were thought of as potentially large markets for health care. Then Japan became a very large market for health care.
Now many emerging countries are likely to also become major players in health care, in terms of their ability to pay for high-cost health care products. People are starting to pay attention to these markets. It is important that we as an industry are able to develop and sell our products all over the world at a competitive price.
International relations are critical so the industry is able to rely on the same kind of business practices all over the world as in North America and Europe. A major consideration is going to be patent protection in emerging countries.
International regulatory filing is also an important issue.
There is more harmonization that is coming into effect in international regulatory filing now. If a company wanted to file internationally 10 years ago, there literally had to be regulatory teams in each country.
There is now a centralized procedure for filing applications in Europe. Big Pharma typically has operations in various parts of the world, so it can handle this process more easily than small biotech companies. There are still significant hurdles for a biotechnology company to do business worldwide and file for approval worldwide.
The biotech industry looks for partners to get access to this kind of know-how and the ability to manage the regulatory process on a global basis. This is improving, and I believe it will continue to change for the better. The process is becoming more streamlined as we are able to expand the development of new drugs in different parts of the world.
MD: Both big Pharma and small life science companies are attracted to the Research Triangle. What makes the region so appealing to life science companies? What are the incentives to starting or relocating a business to the area?
VG: The Research Triangle has a wealth of resources and incentives for life science companies. With three major universities and many other fine institutions that train people in health care or biotechnology related professions, the workforce in the Triangle is well suited for the presence of pharmaceutical and biotechnology companies.
To successfully grow life science companies, you also need access to capital. Availability of venture capital has increased significantly in the last 10 years. Big Pharma did not need venture capital; it mainly needed access to technology and people. So GSK and other big players came to North Carolina many years ago.
The biotechs have really taken off in the last 10 years. The growth of the industry has been driven by the increased availability of capital in North Carolina, both local capital and also the ability to attract VCs from other parts of the country as well as other parts of the world.
Finally, you also need good support from the local government and support organizations. North Carolina has always been very supportive of the pharmaceutical and biotechnology industries. By creating the Research Triangle Park the Triangle region has helped to attract, and encourage the growth of many life science companies. In addition, Research Triangle has an excellent network of support organizations like the NC Biotechnology Center, CED, NCBIO and NC IDEA.
Quality of life and cost of living are also important considerations. North Carolina is No. 3 in biotechnology companies with nearly 100 companies.
The other two places are California and Massachusetts. One advantage the Research Triangle has is an excellent quality of life and a much lower cost of living. The overall cost of doing business here is lower than in the other two states.
MD: Why are some big Pharma companies facing failing growth? What kind of strategic options are available to these companies to regain their growth trajectory? What role do emerging growth biotech companies play in the equation with big Pharma?
VG: Even though R&D spending by the big pharmaceutical companies has increased over the last decade, the productivity from their R&D effort is not as high as it used to be. At the same time the biotech industry has become more productive in coming up with new therapeutic approaches for treating diseases. The Pharma industry has not been able to keep up with creating replacements for its drugs that are going off patent. Obviously this is affecting its bottom-line and the ability to grow.
Increasingly, big Pharma is looking to the biotech industry to be the “innovators” in drug discovery and act as their early development arm to take some of the risk out of new technologies. Big Pharma can acquire these technologies either through partnerships or buy the companies outright and do further development and commercialization on its own.
Twenty years ago pharmaceutical companies had discovery effort in almost every area—from cancer to inflammation to infectious diseases to diabetes to metabolic diseases and so on. One thing that is happening in the industry is that a number of pharmaceutical companies are focusing their R&D efforts to fewer disease areas. Many companies are shutting down their R&D operations in therapeutic areas where there has not been much success and refocusing their R&D effort in selected areas.
Over the last several months many of the big Pharma companies—from Johnson & Johnson to Pfizer and AstraZeneca—have announced the reorganization and more defined focus for their R&D efforts. This is one of the strategic moves that the industry is making to get more out of their R&D investment by increasing productivity.
Another strategic move is the acquisition of innovative biotechnology companies by big Pharma. This way they can acquire novel platform technologies that could become the future growth engine for big Pharma.
Finally, big Pharma is also merging with other big Pharma and large biotech companies as a means to increase their growth potential through larger critical mass and rationalizing operations.
The emerging biotech companies have found a very special place in their relationship with big Pharma. The biotech companies are able to pursue many more ideas than the big Pharma could alone. By pursuing these innovative ideas the biotech industry is able to de-risk some of the new technologies for big Pharma.
In other words biotechs are able to pursue these new ideas in the lab, come up with new drugs and test these drugs in early human clinical trials to establish what is called “proof of concept in man.” The main role of biotechnology industry is to provide the “proof of concept in man.” The biotech industry has really become the R&D arm of big Pharma.
MD: What explains the new urgency and competition over partnering?
VG: It is really the lack of the pipeline in the pharmaceutical industry. In order to grow the pharmaceutical industry needs more “blockbuster drugs.” Typically “blockbuster drugs” refers to a drug that has more than $1 billion in market potential. The number of “blockbuster drugs” is decreasing, and the ones that are still out in the marketplace are going to go off patent in the next few years, so there is a renewed urgency.
If the pharmaceutical companies are to survive and continue to grow as a business, they will need access to more “blockbuster drugs.” This need drives the pharmaceutical industry’s renewed urgency and motivation to acquire or partner with companies that have discovered potential “blockbuster drugs.”
MD: What will the life science pipeline look like in 2010? How will it compare to today’s climate, and how will both big and small life science companies adapt to these changes?
VG: Today obesity, metabolic diseases and central nervous system (CNS) disorders are the three major areas where the life science industry is focused. Cancer therapy has recently been a big area of research and new drug development.
Ten to 15 years ago it was AIDS research, which is not talked about as much today because the industry has been very successful in coming up with effective treatments for HIV. Today a patient with HIV can be kept alive through their normal life, which is a very significant advancement.
Ten years from now I expect that there will be many more drugs to treat obesity and metabolic diseases. The other area where significant progress should happen is the treatment of CNS disorders, like Alzheimer’s disease and Parkinson’s disease, where there has not been as much progress as in other areas.
More of the population will be affected by the diseases of the CNS as people continue to live longer. They are essentially diseases of aging. New drug discovery is an important part of figuring out how to maintain our quality of life as we live longer.
There is a lot of opportunity in the biotechnology and pharmaceutical industries for novel drug discovery and development. There would be continued interest in life sciences companies from private and public investors around the world. Over the next decade the biotechnology industry will play a major role in coming up with new therapeutic approaches for treating many important diseases.
MD: What are your thoughts on the FDA pushing through new drug approval without finalized research?
VG The FDA is taking a very cautious and prudent approach to the approval process. The FDA wants to approve therapies for life-threatening diseases as quickly as possible, especially when there is indication that a drug for life-threatening disease will have an impact on either the longevity or the quality of life in a specific patient population.
On the other hand the FDA is very deliberate and cautious about approving new drugs where there is not a life threatening situation. The drug has to be absolutely safe before it should be approved. I believe there is going to be continued pressure from Congress to look at the two sides of this equation to find a balance between managing the safety aspect of new therapeutics and determining how critical the needs of the patient population are.
MD: How important is it for you to be involved in the Research Triangle community?
VG I have always enjoyed being involved in the life science community. Having lived in Philadelphia, San Francisco, Boston, Research Triangle and other parts of the world, I have developed a global perspective on business. I enjoy being part of the local community through my involvement in various activities conducted by the NC Biotechnology Center, CED and other organizations. It has been particularly exciting to be a part of the growth of RTP as a life sciences hub in the past decade.
Garg Vipin has more than 20 years of biotechnology industry experience in both technical and management positions. Garg will be speaking on featured panel discussion, “Trends from Big Pharma: Looking Beyond the End of the Decade,” at CED’s Biotech 2007 conference (www.cednc.org/biotech) on May 14-15 at the Durham Marriott at the Civic Center in Durham, NC.
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