It's autumn, the first bell rings, and it's back-to-school time for students. Some may say that biopharmaceutical companies
are returning to school as well. In the case of biotechs, they're going back not to further their educational degrees, but
to look for new drugs, such as Genentech's Rituxan (rituximab) for non-Hodgkins lymphoma, originally discovered at Stanford
University; Novartis' Gleevec (imatinib), indicated for chronic myeloid leukemia and discovered at Oregon Health and Science
University; and Roche's antiretroviral HIV drug Fuzeon (enfuvirtide), discovered at Duke University.
Indeed, those institutions are much-needed resources in the current environment. The pharmaceutical industry is on a circuitous
path that includes both high euphoria and deep disillusionment, as it spends an average of $800 million per drug candidate,
with only four out of 10 approved products reaching profitability. In addition, Big Pharma faces pipeline pressures—a shortage
of blockbusters, and product failures in late-stage development—and intense therapeutic competition in the marketplace, coming
from both branded and generic products. In order to survive and remain profitable during this period in time, companies will
seek to diversify their product pipelines through inter-company licensing.
According to a report from Deloitte & Touche, in-licensed products now account for 30 percent of pharma company revenues,
and the number of pharma-biotech alliances has risen from just 69 in 1993 to 502 in 2004. However, the number of deals are
misleading because emerging insights into more specific biological targets generally lead to drug candidates that target smaller
patient populations—in essence, more drugs are needed to create the same growth. Moreover, many drug candidates change hands
several times before approval—and like Rituxan, Gleevec, and Fuzeon, often start out in public-research organizations.
To win, companies need to find a way to mitigate their losses and generate innovative compounds. It sounds simple, but in
a high-risk, high-reward venture, challenges and obstacles await every company.
The Market is Watching
Most pharmaceutical and biotech companies know that Wall Street is watching pipelines closely.
The overall pipeline value of Pfizer, for example, is estimated to equal 52 percent, or $98 billion, of its total current
market value of $188 billion. On the other hand, 94 percent of Genzyme's total value—$17.9 billion—is attributable to its
pipeline value, not earnings on current products.
Further, the percentage of shareholder value attributed to pipeline value is highly correlated with price-earning ratios of
companies. In other words, the stock market appears to be quite efficient at discerning differences among the pipeline values
of biopharmaceutical companies. (See "Pipeline Value")
Thus, the adage that new product pipelines are the lifeblood of the biopharmaceutical industry is well-founded in historical
operating experience and value creation in capital markets.
With all this shareholder value at stake, one of large biopharmaceutical companies' biggest challenges is keeping its product
pipelines full of candidates. As a result, Big Pharma companies often turn to small biotech firms for alliances. To supply
that demand, biotechs are turning to universities and other public-research institutions.
In the last five years, nearly half of new molecular entities, or 42 of 86, came from in-licensing versus in-house research
and development, according to analysis by Windhover Information. While the increasing value of in-licensing is often spurned
as a failure of internal development, it frequently serves as a source of innovation and energy, because Big Pharmas can allow
internal and external programs to compete, then choose which initiatives and projects to move forward after the proof-of-principle
studies are complete.