Saving the U.S. Small Biotechnology Sector

Saving the U.S. Small Biotechnology Sector

Rick Blake, Principal, Strategic Health Resources LLC, Arlington, Virginia

rblakeva@verizon.net

Millions of patients in the U.S. are in need of a new generation of drugs to treat a wide range of infectious and chronic diseases from HIV, AIDS and cancer to a wide range of cardiovascular conditions, stroke, sickle cell, neurological conditions, gastrointestinal, infectious, autoimmune, and mental illness diseases especially in areas with high proportions of under-served and under-resourced populations.  The companies that produce a preponderance of these new drugs have been hard hit by the economic downturn, by burdensome and costly Federal regulations and by the lack of private venture capital needed to meet Federal guidelines and get through clinical trials to commercialization.  

This summary guidance proposes the outlines for a Federal guarantee that underwrites a proportion of private equity investment to stimulate the return of private investment in the small cap biotechnology market.  This benefits millions of patients who need new drug regimens, the small cap biotechnology companies that produce them, and the Federal government that can make a profit by underwriting the investments.

Small cap biotechnology firms discover 56 percent of all new drugs and undertake 70 percent of new therapeutic research and development.  Among drugs granted priority review because they have substantial therapeutic benefits over currently marketed drugs, small cap biotechnology firms conducted 54 percent of the new drug research.  Big pharma largely invested their drug research dollars in follow-on drugs that are variations of older drugs rather than new drug research. 

The Brookings Institution did an analysis of the biotechnology sector entitled, “Signs of Life.” (2002) in which it said, “…the critical factor in the development of the biotechnology industry is not only the availability of pre-commercial medical research but also the availability of continuing private sector investment in product development.”  The private equity market for small cap biotechnology firms has largely dried up and the Federal government and Congress needs to fast track interventions before millions of Americans are bereft of a new generation of therapies and the U.S. loses its international position as the leader in biotechnology.

Last year, FDA Commissioner Margaret Hamburg told the Personalized Medicine Coalition that “Biomedical research will not result in opportunities for cures unless they are married to advances in regulatory science.”  This has not occurred. There have been no targeted national efforts to streamline the regulatory barriers to new drug development by small cap biotechnology firms, no Federal partnerships to ensure the return of private investment to this sector as in the underwriting of Wall Street investment brokerages and no matching by Federal authorities of the therapies developed by this sector with the needs of patients, domestic security and physicians and hospitals.  

In the small cap biotechnology sector, early and mid-stage funding for new drugs and therapies and for the firms that produce them has been in a steep decline especially for those firms concentrating in the HIV/AIDS sector.  Price Waterhouse Coopers (PWC) has reported that “early-stage funding contracted for the third quarter of 2010, while late stage funding grew and the percentage of contraction was also more severe among early stage companies.  (PWC November 2010). More recently, Venture capital (VC) funding in the life sciences sector, which includes the biotechnology and medical device industries, fell steeply during the fourth quarter of 2010, dropping by 2 percent in real dollars from 2009.  Compared with the fourth quarter of 2009, life sciences venture funding decreased 4 percent in Q4 of 2010.  This decline marked the largest year-over-year decrease since the first quarter of 2009 and the lowest level of funding for the sector since the first quarter of 2003.  (Money Tree February 2011).  

The high cost of clinical trials has hit small cap biotechnology firms especially hard.  Life Sciences World (2006, 2007) and Drug Discovery and Development magazine(2008, 2009, 2010) have said that clinical trials in Phase One safety studies cost on average $15,700 per patient; in Phase Two $19,300 per patient; and in Phase Three $26,000 per patient.  On average, bringing a new drug to market costs over $800 million per drug with total costs annually spent over $30 billion; and a predictability of the effect of drugs in humans of about 70 percent.  These astronomical costs and the lack of venture capital in this market segment present high barriers to new drug development and prevent access to new therapies by millions of patients with infectious and chronic diseases.   

The small cap biotechnology sector also has an identification challenge.  The large biotechnology sector has total revenues of around $60 billion not equal to any one of the top ten large pharma companies; the small cap biotechnology sector has direct revenues of less than an estimated few hundred million and these are ancillary revenue activities from adjunct business sectors, not from the drugs they are attempting to take through clinical trials.  

However, the sector’s benefits to the economy and to millions of patients with infectious and chronic diseases make it urgent that the Federal government bring private sector investment back by guaranteeing private sector investment in the small cap biotechnology space.  The Archstone 2009 report shows that the sector has a beneficial impact to the economy.  Every dollar from this sector has a ripple effect of 2.3 dollars in their local economies and supports almost 700,000 jobs nationally and 3.2 million more in supported jobs.  

A Federal intervention also will impact state economies as well.  States with large numbers of small cap biotechnology companies in them like Michigan,  Ohio, Pennsylvania, Florida, North Carolina, New York, Colorado, California and others will benefit from increased jobs and economic activity.  In addition, there are biotechnology research facilities either university-based or privately held in almost all states and many cities with Chicago, Detroit, Houston and St. Louis having robust biotechnology sectors.  (Brookings 2001) 

Biotechnology has an even broader economic impact.  California, Colorado, New Jersey, New York, Pennsylvania, Illinois, Texas, North Carolina, Indiana, Massachusetts, Michigan, Minnesota, Florida and Ohio have robust biotechnology sectors hard hit by the lack of private investment in the sector.  These are the states with the greatest level of total supported economic output in the biotechnology sector.  Total supported economic output equals the number of jobs that currently exist and the projected of jobs to be created annually, the direct economic contribution to a state’s economy including taxes and dollars spent , investment in research and development and the The Brookings study concluded that, “A critical factor in the development of biotechnology appears to be the flow of venture capital to new biotechnology businesses.”  That same study says that more firms are competing for a smaller share of NIH funding and that there is also little coordination between research funding and the commercialization of biotech products.  

What Can Be Done?

In the interest of public safety and security, we have reached a critical point where the Federal Government needs to intervene to ensure the development, commercialization and availability of a new generation of drugs, medicines and therapies to ensure the lives and well-being of millions of American citizens.  We must simplify and in some cases remove the expensive and serpentine tangle of rules that prevent patients from the opportunity to improve their quality of life, while at the same time restoring private sector investment that has died because of the expense of meeting the web of regulatory requirements that prevents innovative medicines and therapies from reaching the marketplace.  These efforts need to go hand-in-hand to restore innovation and new drugs into the drug development pipeline, private investment into the small cap biotechnology sector and to increase the availability and accessibility of new therapies for the millions of patients who need them.

The Federal Government needs to intervene to protect innovation in biotechnology because patients in HIV, HEP C, cardiovascular disease, cancers and other ailments are too important to be left alone.  This was the opening statement of HRES 1179, originally sponsored by Cong. Danny K. Davis (IL-7^th). HRES 1179 put Congress on record in terms of support for small cap biotechnology firms and the new medicines and therapies that they produce for millions of patients suffering from infectious and chronic diseases.  This legislation called for the protection of the intellectual property of these firms, comprehensive, prompt, direct and effective review of these products by all Federal agencies of jurisdiction; gave a listing of the diseases most affected by the lack of new drugs in the pipeline and gave particular notice on the effects of the lack of access to new therapies in areas with high proportions of underserved and under-resources populations; and asked for Federal assistance to commercialize new and promising biotechnology therapies.

A Proposed Federal Remedy

The Federal Government must guarantee private investment in the small cap biotechnology sector to resuscitate a new generation of drugs and drug development. The Federal Government needs to develop, coordinate and fund what was described in the 111^th Congress Second Session in HRES 1179, originally sponsored by Cong. Danny K. Davis (IL-7^th) and extend beyond the limitations of a technical small business ceiling because of the cost of clinical trials and that no companies in the small cap range in this sector make revenues despite the enormous up front capital investment requirements needed to bring a new drug or therapeutic regimen to market.  In addition, the enormous capital investment requirements have led panicky boards of directors to replace many Chief Executive Officers in small cap biotechnology firms often losing stability, company history, value and connection to a way out of their funding dilemmas.

Funding the Federal Investment in the Small Biotechnology Sector 

While the details need to be worked on by the Administration, Congressional Committees of Jurisdiction, the Congressional Budget Office, the GAO, and industry-related think tanks, $8.6 billion in fines and penalties have been collected by the U.S. Justice Department and other Federal agencies between 2001 and 2006 for settlements with the pharmaceutical industry.  The level of a variety of these fines could be raised and a significant portion of these dollars could be used for a Federal stake in a variety of innovative biotechnology companies. These investments could later be cashed in as the companies commercialize their products and taxpayers could see a significant return on Federal investment.  

Alternatives for Structuring the Federal Response

Who will intervene?  How much should the Federal government guarantee?  How will the process go forward? The following pages summarize some of the possibilities.
The Rand Institute, the Government Accountability Office (formerly the General Accounting Office) and the Congressional Research Service provide basic guidance from which to choose a structure and process from which a Federal guarantee for small cap biotechnology firms can be made.   

This response is based upon work done by The National Defense Research Institute, a report by Rand, entitled, “A Casebook of Alternative Governance Structures and Organizational Forms,” Hynes, et al; The Congressional Research, “A Report for Congress:  Congressional or Federal Charters: Overview and Current Issues,” Kevin R. Kosar, August 25, 2005; “Can We Save the U.S. Emerging Biotechnology Sector?  A Brief Review of the Current Circumstances,” Rick Blake, Strategic Health Resources LLC, March 2011; HRES 1179, 111^th Congress, Congressman Danny K. Davis (IL-7^th).

Why Should the Federal Government Invest in its Domestic Small Biotechnology Sector?


For the purposes of this guidance, we define this sector as those firms producing new medicines and drugs for chronic and infectious diseases, including for rural and underserved populations that have not completed U.S.-based clinical trials.  House Resolution 1179 specifically defined disease cohorts as HIV/AIDS, Hepatitis C, pandemic diseases and life threatening conditions including cardiovascular, stroke, cancer, sickle cell, neurological gastrointestinal, autoimmune, mental illness and the most virulent strains of tuberculosis.  The resolution also detailed specific therapies for which Federal assistance would be appropriate.  

A scientific advisory panel of national experts should be formed to advise the President and Cabinet officers, including representatives of the National Institutes of Health, the Food and Drug Administration, the Department of Agriculture, the Department of Commerce, the Department of Health and Human Services and others; and scientists working in the private sector representing the small cap biotechnology firms; to determine which disease cohorts and therapies would be most appropriate for Federal investment.  

Who Should Be Eligible for a Federal Investment?

In the private equity market, small cap refers to stocks with a market capitalization of between $300 million and $2 billion.  Most of the biotechnology firms that will be reviewed in this process have capitalization (venture capital and angel investing) of under $300 million with many between $50-$100 million; and some below $50 million.   An investment advisory panel of national experts shall be formed to advise the President and Cabinet officers and shall consist of the Treasury Department, the Department of Commerce, the U.S. Trade Representative and others; and members of the private sector representing the small cap biotechnology sector, venture capital funds investing in this sector and others as appropriate.

The Process of Selecting “Best of Breed” Life Sciences Companies

We suggest that Federal agencies and private sector advisors work together  to incorporate a process whereby companies already vetted by state life sciences centers, state life sciences associations and other state creditable life sciences associations are eligible for funding under this proposed Federal investment plan.

This proposed plan is not an opportunity for guaranteed seed investment for aspiring biotechnology firms. Companies needing seed funding should seek same from state sources like Pennsylvania (The Ben Franklin Technology Partners of Southeastern Pennsylvania), Texas (Texas Life Science Center), North Carolina (North Carolina Biotech Center) and many others.   Firms with promising life sciences technologies should view this proposed Federal investment into life sciences companies as stage two and three opportunity to bring them to commercialization.    

What Options Does the U.S. Have for Structuring a Federal Investment in Biotechnology?

The Rand Study the GAO Study and the Congressional Research Service have outlined options Federal and private sector structures and organizational forms.  Federal investment guarantees could come directly from the U.S. Department of Treasury, a cooperative partnership between government agencies, a joint venture between the Federal government and each private sector firm, a joint venture between Treasury and an existing Federal corporate entity or some combination of the above.  

There is urgency in terms of salvaging firms that produce needed goods and services in the public interest.  We suggest the simplest beginning in terms of vetting therapies and firms with short range, mid-range and longer range investment guarantees and other funding vehicles as firms make their way through this process and phasing in mid and longer term solutions.  Professional fund managers with private sector experience should be chosen to manage the fund to protect the public’s investment.  Some examples that have worked in different scenarios are the Commodity Credit Corporation, the Federal Crop Insurance Corporation, the Overseas Private Investment Corporation and a variety of public private partnerships or joint ventures. 

The Federal government could also develop a model based upon the Telecommunications Development Fund¸ a chartered Federal entity, or it could form a federal venture capital fund without a charter as in CRS Report RL30533 on hybrid federal and private organizations.
What size investment should the Federal Government make and how will the public recoup that investment?  We suggest a federally backed investment of 40-60 percent of private equity.  That means for every dollar of private equity investment, the Federal government will issue a federal guarantee of between 40-60 cents.  There can be other Federal financing vehicles and it would be part of the due diligence in this process if the investment advisory group set up by this process would review all of the financing vehicles appropriate for this sector.  

Observations

We are certainly aware of the tax incentives applied to this sector in 2010.  With the large number of firms applying and accepted, this equaled in the range of $250,000 per business.  Some firms applied and were accepted for multiple incentives.  The small amounts of these dollars were not designed to get a critical therapy through clinical trials to commercialization.  We believe that government guarantees of the range previously stated will stimulate private sector investment of the size needed to impact critical therapies for millions of patients, to expand new therapies in the drug pipeline and to recoup the U.S. global position as the number innovator and provider of quality biotechnology therapies in the world.