Does Biotech Need More Government Funding — Or A New Business Model?
By Louis Garguilo, Chief Editor, Outsourced Pharma
One more bite of this apple:
Should government financing appreciably recede – whether through policy shifts, budget pressures, or ideological bent – what would happen to the biotech business model?
To ascertain such a question, first we must make fundamental the existing model:
- Biotechs form skeleton organizations to advance drug/therapy candidates through discovery/development and into the clinic.
- This activity is funded by government largesse and capital from various public and private investors.
- Development assets are primarily advanced through outsourcing to CROs and CDMOs.
Next, we then consider whether the lessening of that single component (the government) might improve, or actuate an effective alteration of this biotech operational model as we know it today.
Most important to proceed with this discussion, though, we must waylay habitually triggered conclusions, such as, “Our industry would collapse without government benefaction!”
In fact, history teaches industries that continue to add value to individuals and society (What more than our industry?) do not simply collapse when faced with structural change.
They reorganize; they reconstitute.
But even these activities seem to feed into our predominant fear that industry adaptation would happen outside of the U.S. Other countries (China) would eat our lunch.
This trepidation is premised heavily by an ingrained thought process– which, frankly, is rather insulting – that our innovation and business-building prowess is actually predicated upon government funding.
Don't you think that attitude, at least, is ripe for a change?
No Funding, No Cry
Our present discussion follows an earlier one, featuring biotech founder, executive, and investor James Sapirstein ( What If The U.S. Government Stopped Funding Biotech?).
My assertion in both discourses is:
There is no shortage of capital in U.S. public or private markets. Abundant money for funding start-ups, no matter the industry, exists in the U.S., flows amply from abroad, and is predicated on investor risk/reward decisions.
Sources include venture and strategic funding: angel investors and venture capital (VC); private equity (PE); Big Pharma; in some cases public markets; banks and new forms of financial institutions; patient/disease advocacy and philanthropic organizations; etc.
The issue, then, is where it flows, and the argument is that the biotech business model is not competitive with others, for example today, AI-related businesses, cybersecurity, fintech.
If that is the case, it returns us to our opening gambit: Could we further alter the biotech business model so it is more investor competitive?
“Further alter” because we’ve been here before.
Beginning in the 1990s and accelerating sharply into the early 2000s, biotech turned hard to the outsourcing model.
No more asking investors to pony up hefty funding for labs, pilot plants and subsequently manufacturing facilities, to hire in scientists, analysts, engineers, etc., in a consolidated effort to bring drugs to patients.
We leaned aggressively into contract manufacturing first, but then external partners of all kinds proliferated to raze the old thesis of development.
Sure, outsourcing also requires a fair amount of funding, but not nearly as much as the hard assets and internal hiring models once did. Accordingly, the (relatively) lower funding needs and reduced capital risk did facilitate investor interests vis-à-vis other industries, and helped to grow our businesses.
Paradoxically, though, at the same time we began to assert that biotech needed larger infusions of government money to survive.
We have to question that logic. You can bet investors love the current thinking: They’ll come into a deal contingent upon a biotech’s ability to raise government funding, forcing the issue.
Biotech can do better than this.
Speaking of improvements, ask yourself: Does today’s model provide us a high batting average for turning innovation into commercial approvals?
Apparently not, based on the constant criticism of our high percentage of striking out when it comes to assets reaching patients. According to such sources as PitchBook’s Venture Monitor, around 10% of clinical drug programs entering Phase I reach approval; for oncology, around 3.4%.
That is not a knock on our professionals. Our advancing science and technologies are indeed laudable. Innovation has ushered in new methodologies, modalities, and capabilities.
In fact, broadly speaking, we have and continue to advance our "biotech business models."
As a prime example, hybrid drug developers/service providers run on productive platforms and new inventions.
Perhaps no evolutionary component of our industry has been more important than the one tracked in editorials such as With CDMOs Like This, Who Needs Biotechs?
We’ve documented how C(R)DMOs – those who have expanded to serve the entire drug discovery/development/commercial manufacturing life cycle – are beginning to generate scores of their own candidates.
These organizations own the advantage of recurring revenue streams. How much government investment do these organizations need to move assets to the clinic and commercial?
The optimistic answer is little to none.
Service providers that once helped drive the industry to a ubiquitous outsourcing model to solve the high costs of biotech operations are again on the cusp of helping us move into a new paradigm.
Tighter Strings, Fewer But Better Outcomes?
Yes, perhaps I have a strange habit of looking at biotech through the prism of our contract service industry.
Biotechs have been able to present to investors primarily as a scientific enterprise; manufacturing concerns remained downstream, to be addressed at some future point.
Increasingly, though, investors of all stripes want to know immediately, “Who is your scale-up and manufacturing partner?”
They view the quality of a biotech’s manufacturing partnership as a proxy for execution risk. The outsourcing decision itself becomes part of the investment thesis for a biotech.
How do we better weld all the above into a model investors will jump into? What other innovator-investor-scale up models can we bring into existence?
Biotech workers are smart. Investors are smart. CDMOs are, too. Less government funding does not have to mean innovation or shots-on-goal take a hit.
It may mean biotechs blossom on sturdier vines, those that don’t rely on government watering.
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The first part of this discussion is here: