Most private biotechs today areill-equipped to survive inde-pendently in today’s risk-averse world. With venturecapital so scarce, partnerships

with big pharma and consolidation are tworoutes that seem likely to play an increas-ingly important part in their development.Investors and management will thereforeneed to be more creative in finding paths tosustainability. Could biotechs form part ofa supply chain model to pharma, for exam-ple, as is seen in other industries? Such amodel may require detailed analysis, butthe rewards of sustainability and profitabil-ity seem ample justification.

Biotechnology will always be inherentlyrisky – 63% of compounds in developmentfail in Phase I, 31% in Phase II and 63% inPhase III, according to CMR International.Furthermore, the rigour of the regulatoryprocess stretches out developmental timeto more than ten years. The challenge,therefore, is for biotechs to find a businessmodel which secures the long-term devel-opment of their pipelines.

A survey of some 200 private biotechcompanies, which make up the portfoliosof the top 35 European life sciences ven-ture capital funds, suggests that this is nowfairly urgent. The companies wereanalysed for their ability to achieve sus-tainability and rated on Bionest Sustain-ability Index criteria, which includes man-agement experience, years of cash,maturity of the product portfolio, businessmodel, and external collaborations signed.

And it revealed that only a small minor-ity of the survey had the elements thoughtnecessary to reach maturity. Moreover, thecompanies that scored highly may still failto grow because, as said, the biotech worldis inherently risky.

Investment t rendsThe relative merits of business models

are complicated by cycles of investmenttrends. For instance, interest in the humangenome spawned a growth in valuations ofgenomics companies such as Millenniumand Human Genome Sciences in the late1990s, followed by a similar fashion forfunctional genomics, proteomics and func-tional proteomics companies later on. Inearly 2002, however, the hype dried up,valuations largely declined and emphasisstarted shifting towards top-line revenuesand bottom-line earnings. This was thesame path that followed the discovery ofmonoclonal antibodies in 1975. Companiesrushed to develop them but hopes werecrushed and valuations dropped when highallergic responses associated with chimeric

or mouse-derived antibodies were seen in humans.

There is a real danger that companiesbecome chameleons, fitting in with the lat-est trends in order to raise finance. If thisprocess is limited to creative marketing withthe goal of pleasing venture capitalists andraising valuations, then it may be relativelyharmless. If, however, companies go as faras to modify their business models, thenthey could lose sight of their core skill-set,which could be disastrous for their long-term viability.

If investment trends induce biotechs todilute the focus on their core skills, theywill probably also lose sight of fundamen-tals such as competitive advantage andprofitability. When the investment climateis not favourable for a company’s businessmodel, rather than moving away from itsarea of expertise, a better strategy would beto join forces with another company in thehope that two areas of activity – both basedon core skills – would be more appealing toinvestors. In the long run, there is far morechance of making money by creating thanby following trends.

Plat forms vs productsSome business models are less sustain-

able than others. The so-called platformcompanies that emerged in the 1990s toprovide technologies that can improve theoverall drug development process are anexample of an idea not working out as wellas planned. While a new technology caninitially produce a handful of lucrative con-tracts with big pharma companies, in thelong run, it can quickly become obsolete,significantly cheaper elsewhere and/or cus-tomers find ways to perform it in-house.

Classic business models based on drugdevelopment remain the most attractive –and sustainable – in biotech. Few venturecapitalists will raise new funds for biotechinvestments, and those established ones arelikely to be with companies with productsalready in the clinic and with collaborationssigned.

Moreover, because of the increased pop-ularity of product companies with candi-dates in Phase I or II, there will be evenfewer biotechs who can count on(re)financing as a component of their plansto reach profitability. These short-term (andthus critical) difficulties in raising financefor early-stage companies are potentiallyharmful for private European biotechs.

One response to this lack of venture capi-tal before Phase I or Phase II is to seekalternative sources of finance – includingpublic funds, business angels and pharmacompanies, many of whom have internalventure funds. Biotechs will therefore needto learn how to align themselves to theinterests of these multiple shareholdergroups that are now entering the financingbusiness.

Time for act ionThe difficult climate will inevitably

result in casualties. In the absence of addi-tional financial resources, the choices arerelatively simple: a partnership with anestablished pharma player, a combinationwith another biotech…or bankruptcy.

RiskybusinessWhat will make European biotechsustainable? Last month, ClaudeAllary and Catherine Pichereau

examined factors preventing theindustry’s consolidation. This concluding article by

Alain J Gilbert and Mark Larkindiscusses how it can prosper nonetheless

In these turbulent times, can biotechs afford to go it alone?Photograph from Corbis

September 2004

Pharmaceutical Issues in Perspective

File supplied with permission of © PJB Publications 2004 www.scripmag.com Scrip Magazine September 2004

The Bionest study mentioned earlierunderlined not only the immaturity of theprivate European biotech sector but alsoconfirmed the need for imminent action,either through partnerships with bigpharma or M&A. But most merger activityin Europe is still usually motivated bypragmatism (cost reductions from infra-structure and facilities can represent up to30-45% of the cost base of small firms).Strategic consolidation, with its financialand strategic logic based on business syn-ergies, is what the sector needs – and lacks.

So is there a different business modelwhich could provide a mechanism forsmall biotechs to reach maturity? As sooften happens when an impasse is reached,inspiration can come from the reapplicationof ideas developed in other sectors.

Perhaps the problems of the immaturebiotech industry could be viewed as a sup-ply chain problem: a dwindling number ofdominant pharma players being serviced bya huge number of biotech suppliers.Whether the biotechs supply services (R&Dtechnologies) or products (therapeutic mole-cules), the current model requires some ofthe biggest companies in the world to sign amultiplicity of often tiny (a US$1milliondeal is a drop in Pfizer’s ocean) contracts.

In the automotive industry, however,the big players such as General Motors andBMW have long since stopped dealingwith individual suppliers for the myriadcomponents that make up a car. In the1980s, suppliers began to consolidate toincrease their negotiation power with themajors. Even if the latter had to go throughtougher negotiations, the overall processwas far simpler as they had to deal withonly a handful of suppliers.

A preliminary consideration of the logicof this type of supply chain in the life sci-ences industry seems appealing. Beyondsynergies, small biotechs organising them-selves into larger entities based around, say,a therapeutic area or a particular metabolicpathway could present a number of advan-tages. Typically, in a merger or an acquisi-tion, only the best products and technolo-gies are kept, thereby enhancing bothcompanies’ product offerings. With a betterand broader portfolio, the conglomerate’sinternal risk is lower than each company onits own and attempts to raise funds or reachdeals with big pharma are thus likely to bebased on better financial terms. A singlesupplier offering a number of productsspanning, say, GPCRs or RNAis, wouldhave greater power in negotiating contracts.

This more client-focused approach hasbeen lacking in biotech’s dealings with bigpharma. The smaller company often strug-

market issues

Scrip Magazine September 2004 www.scripmag.com File supplied with permission of © PJB Publications 2004

Apreliminary analysis of the private European cardiovascular biotechs was carriedout, encompassing six development stage companies (Paion, ProCorde, Speedel,Thrombogenics, Trigen, and Zealand Pharma), and four earlier stage companies

(ConoGenetix, Kourion, Larnax, and Vasopharm Biotech). The analysis focused ontheir pipelines and shareholders. An additional consideration of the likely deal synergiesand impact on cash burn would be a vital component of further analyses, but impossiblehere without more complete information.

Two European cardiovascular suppliers are suggested: Newco1, based on the cluster-ing of Paion, Thrombogenics, and Trigen, in thrombosis and stroke; and Newco2, basedon the combination of Procorde, Speedel and Zealand, principally in hypertension andcongestive heart failure (CHF), as shown below.

Precise percentage shareholdings in the Newcos would not be known until full valua-tions and negotiations are complete. However, likely principal VC shareholders in theNewcos would be key drivers of instigating the consolidation process. For instance, theinputs of 3i (holders of Paion and Procorde) and Healthcap (holders of Trigen) wouldbe crucial.

This example only serves as a preliminary illustration of the type of entity that couldresult from clustering. The increased scale of the new entity is attractive, and would be apowerful calling card as a supplier to big pharma clients, and for other niche supplierswho could subsequently join, not to mention a likely facilitation of fundraising. Further-more, this example is just one of many possibilities – a wider analysis of other thera-peutic areas could produce more attractive examples. Clusters with more than one par-ent company concentrated in a particular region (eg the South East of the UK or theBerlin area in Germany) would simplify the merger transactions. Or, clusters based onparent companies with more shareholders in common could produce Newco ownershipswith one or more dominant shareholders that could instigate and drive the clusteringprocess. Although the necessary transaction would be complex, it need not be prohibi-tively so, and merits at least a closer consideration from VCs and biotech managementteams.

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gles to sign contracts because it cannotdemonstrate the competitive advantage of itsproduct offering: a new technology mayincrease accuracy in the R&D process, forinstance, but if accuracy is not a limiting fac-tor, who cares? However, if the offeringaligns products and services, is convenientlybundled and filtered for value-added poten-tial, this would make customers’ lives easier.One-stop-shopping has revolutionised manyother sectors, so why not life sciences?

This model would result in some busi-ness development activities becomingexternalised from big pharma. Supplierswould become the clearing houses for thecutting-edge technologies and therapeuticcandidates that had previously been offereddirectly to big pharma. These supplierswould be closer to the technology andtherefore better able to evaluate it, lettingpharma concentrate on its core skills withindrug development. Also, having establishedrelationships with pharma customers, thenew enlarged supplier would be in a goodposition to negotiate terms with companieswishing to join its consortium.

If this model is so compelling, why is itnot yet reality? The most important factormay be a lack of creativity among man-

agers and fund managers when consideringstrategic alternatives. Admittedly, the con-solidation model is not straightforward,with the initial consolidation deals likely tobe long and complicated. But there is scantalternative. Europe has yet to find a modelto transform its strong fundamentalresearch into a commensurate biotechindustry. Until it does, good ideas will con-tinue to die or get exported to the US.

Promoting consol idat ionAs at the birth of the biotech industry 20

years ago, perhaps visionaries are neededto overcome the scepticism of the main-stream and merit a more open-minded con-sideration of consolidation alternatives.One possible combination is outlined inFigure 1.

To begin the consolidation process,stakeholders (managers, venture capitalistsor public bodies) should assess thestrengths and weakness of their holdings inthe light of sustainability criteria. Howcould these holdings play a part in a one-stop-shop offering to pharma clients? Forventure capitalists or public bodies this maymean undertaking a thorough assessment oftheir portfolios from which the possible fit

into a supply cluster could be envisioned. Public organisations could also play a

greater role in supporting development. InEurope, governments (for example, in theUK and Germany) have played a promi-nent role in creating their biotech indus-tries. But direct grants are now switchingto indirect assistance, such as tax breaks.Other indirect measures such as advicecould help companies mature and alsoimprove the return of the initial publicinvestment at both country and EU level.

In short, stakeholders at all levels havea role to play in the maturing of thebiotech industry. And all biotechs –whether they are in pre-failure, performingwell, or negotiating contracts – shouldalways be thinking of ways to tailor prod-uct offerings to customers needs. This issecond nature in other industries, so whynot in biotech?

•Alain J Gilbert is managing partner andMark Larkin a senior consultant at Bionest Partners, a professional servicesand M&A boutique providing strategicand operational consulting services toinnovative healthcare companies. Bothauthors are based in France.

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