Further to the point about funding innovation, who pays for process design and accompanying improvements to enable companies
to target the right patients?
Blumberg: This is potentially a very fertile area for private equity investors, if only because a targeted therapy is likely to find
its appropriate audience relatively quickly. It also lowers risks around efficacy and even safety. The more we unravel the
molecular pathway and figure out targets that are amenable to diagnostics, the more it could spark venture capital interest.
Garen: Smaller companies gain from a targeted biologic therapy because it lowers marketing and promotion overhead. A good companion
diagnostic could lower the investment needed to identify appropriate patients.
Is the market getting more sensible—a better word might be sophisticated—about asset valuations?
Stewart: A decade ago the approach in valuing a target incorporated a lot of material that frankly is irrelevant, such as the number
of patents on file, the number of employed scientists, or the square footage of lab space. None of this necessarily correlates
to output in terms of real products. Valuation has since become more rational.
Ryan: Any attempt to link the number of compounds in development with productivity and returns is not credible. Such information
is irrelevant. Pfizer consistently spent the most money on R&D and employed the most scientists, yet the return from its effort
was poor. R&D is not a numbers game. It is true, however, that companies are valued on the basis of their strong cash flow,
and little credit is given for development stage assets. Such assets are seen as little more than a lottery ticket—if you
hit the jackpot, so be it.
Blumberg: The early 1990s saw enormous valuations for "ideas" with early stage IPOs, but with investors unable to sort through the
good from the bad and value assets appropriately. Many companies subsequently failed. Investors know more today because there
is a strong track record where we can see how the game played out commercially, after a Phase II asset has proof-of-concept
data. There are many examples like MedImmune, which had a market cap of only a few hundred million dollars after the Phase
II Synagis data, then hit the therapeutic jackpot with a definitive Phase III data set and commercial success, which led eventually
to it being acquired by AstraZeneca for upwards of $15 billion. An enormous amount of value was also unlocked by that pipeline.
Ironically, a lot of value now gets baked in to companies post Phase II as investors have a sense of how big the product can
be. The pool of potential investors has also evolved somewhat with the participation of hedge funds as private investors,
who tend to be less valuation-sensitive than the traditional private equity players. The challenge remains getting the true
innovation to Phase II.