Biotech's promise, delayed

Science Business: the Promise, the Reality and the Future of Biotech

• Gary P Pisano

Harvard Business School Press, 2006 256 pp., Hardcover, $29.95 ISBN 1591398401 | ISBN: 1-591-39840-1

The near-simultaneous publication of Science Business and the September/October 2006 issue of the policy journal Health Affairs underscores the complexity of the biotech sector: strikingly different conclusions about the sector can be drawn, based on one's perspective. Pisano, as the subtitle of his book implies, believes that the sector produces “disappointing financial results” and is not leading to “significant improvements in drug R&D productivity.” The editors of Health Affairs, who have titled their recent issue “Biotech Drugs Come of Age,” believe that topics of economics and insurance coverage regarding biotech drugs “are taking on increasing importance as company pipelines surge and products are approved”¹. From Pisano's financial and operational perspective, “the disappointing performance...reflects a fundamental and deep struggle between the conflicting objectives and requirements of the science of biotech and the business of biotech.” But from a public policy perspective, although the sector lost money in 2005, the promise of biotech is being fulfilled, as evidenced by its current and expected impact on healthcare costs. In fact, the Health Affairs editors write, “by now [it is] very readily apparent...that new, breakthrough biopharmaceuticals pose a difficult challenge...for financing care”².

Pisano's book is a useful introduction to the biotech industry from an operational perspective. He addresses what he believes to be the mismatch “between the anatomy of the sector and the nature of the science,” particularly with regard to “the fundamental business problems created by science [in terms of] risk management, integration, and learning.” But his inferences about the poor fit between the two—illustrated by graphs of firm entry by technology type, pipeline diversification and interfirm collaborations—rely heavily on a Darwinian evolutionary model.

Although an examination of the population ecology literature is beyond the scope of this review, it should be pointed out that “models of vital rates work extremely well when organizations are dividing a fixed pie.... The further one strays from that context...the less illuminating models of birth and death rates [that is, firm entry and exit] are likely to be.”³ Moreover, the concept of self-organization, especially when one is examining firms under rational management, means that evolutionary selection processes have “only to choose between the variations that self-organization has left over.” In short, the model Pisano draws on, albeit “heuristically rather important...must not be taken in a literal manner”⁴.

What phenomena of interest look like depends on one's point of view. And given the varying inferences that can be drawn about biotech's promise, the sector's complexity appears much more confounding to observers than the elephant of the Buddhist canon. Chapter 6, entitled “Promise versus reality,” contrasts the expected profitability, because of the expected superiority of the technologies, with actual (i) returns to venture capital (VC) funds (“hardly stellar”); (ii) industry sales and operating income (“sustained steady losses” when the largest firm, Amgen, is not included in the total); and (iii) time from initial public offering to positive cash flow (about 11 years, but “some firms have been in the industry for close to 20 years without generating positive cash flows”). Pisano contends that it is “virtually impossible to find other historical examples [of an industry]...for which the vast majority [of firms] may never become viable economic entities.”

Similarly, he states that the flow of biotech drugs from R&D (“a direct long-term driver of financial performance”) also fails to meet expectations. Based on R&D cost per new drug launched, big pharma and small biotech firms appear to share a “productivity problem.” He suggests that, because big firms “choose to focus on 'big market' [chronic disease] therapies” and biotech firms concentrate on “smaller, more specialized therapies,” revenue differences between types of companies may be “largely due to choice rather than 'bad performance.'” In contrast, observers from the public policy perspective, such as Health Affairs' editors, believe there is an increase in the number of biotech drugs and—in contrast to Pisano's inference—their therapeutic scope, “as more products enter the market for common chronic conditions”⁵.

Readers who are familiar with its history know that, since the 1980s, biotech has been considered and treated as a strategic technology by most industrialized nations. The US National Science Foundation noted that the benefits of investing in strategic technologies accrued not just to the firms conducting R&D, but more importantly, “returns to society overall are estimated to be even higher.”⁶

Pisano finds it “surprising...[that] investors have tolerated years...of losses by individual firms.” But the larger context at least partially explains why, despite Pisano's conclusion of promise not fulfilled, both equity and private venture markets keep investing in biotech. Whether investors remain starry-eyed or financial markets are accurately reflecting the global view that biomedical science and biotech provide a crucial foundation for modern economies, it seems quite probable in any case that markets are appropriately valuing the promise of this science.

Pisano ends by acknowledging that “we are still learning what such science-based enterprises might look like, how they will work, and what kind of management skills will be needed to lead them.” From one perspective, he has made an important contribution to that effort.