Five Reasons Science Is Good Business
Although there is hope that biotech markets are improving, the life science sector still feels like it’s very much in the doldrums. Biotech is traditionally the canary in the coal mine for economic downturns and often the last to recover.
Nevertheless, the industry is not going anywhere and there are many reasons to be optimistic about its long-term potential. The biotech industry, as a whole, is not becoming fragmented and disjointed. Quite the opposite. It is becoming more optimized, efficient, and predictable; all characteristics of a highly investible sector.
Since the mid-2000s, shifts in collaboration models between academia, startups, and Big Pharma have optimized the strengths of each, reshaping the industry's anatomy into a more efficient and robust system. Academic medical centers, once isolated as the source of basic research, now actively extend their effort and bridge the translational research gap. Biotech startups remain the lifeblood of the biotech industry, bringing novel therapeutic ideas into a system eager for fresh approaches to human diseases.
Let’s take a look at five reasons that demonstrate biotech is, indeed, good business.
1. The Biotech Anatomy has matured and optimized.
Since 2006, the way academic institutions, biotech start-ups, and large biopharma companies work together to create medicines has significantly changed and optimized around each of the players strengths and capabilities.
Academic medical centers move technologies over the valley of death.
The launch of the Clinical and Translational Science Awards (CTSAs) by the National Institutes of Health in 2006 marked a significant boost in translational research funding. Today, over 60 leading medical institutions each receive approximately $10 million annually through this program. The primary objective of these grants is to enhance the efficiency and quality of clinical and translational science, aiming to expedite the development of new treatments. These institutions are now better positioned to bridge the so-called "valley of death" in drug development, where promising discoveries often stall before reaching clinical trials.
Leveraging these and other translational research-targeted grants, academic medical centers (AMCs) can advance scientific programs, making them more appealing to industry partners. This increased appeal can lead to strategic academia-industry alliances and more favorable terms for out-licensed assets.
A notable example of an AMC leveraging such opportunities is the HOPE Portfolio Fund, established in 2013 at the City of Hope (COH). The fund benefits from the expertise of external advisors from the venture capital, biotech, and pharmaceutical sectors, who provide review of potentially funded programs and share insights on market success factors, industry attractiveness, and technology commercialization. The HOPE Portfolio Fund supports projects in the late preclinical phase, generally post-target validation, lead identification, and after demonstrating proof of concept in animal models. It specifically does not support discovery-phase research.
Biotech startups remain the pioneers of innovation.
As we wrote about before, biotech startups remain the lifeblood of innovation, as evidenced by their high contribution to creating novel therapeutics. By focusing on high-risk, high-reward projects, startups inject novel ideas into the biotech ecosystem, many of which are spun out of academic research. These companies often rely on licensing deals and partnerships with academia to navigate early developmental hurdles, benefiting from the foundational research and initial funding facilitated by academic grants and programs. As these startups mature, they often become attractive candidates for acquisition or collaboration with larger pharmaceutical companies, further integrating the biotech ecosystem.
Big Pharma is no longer vertically-integrated within the virtual biotech ecosystem.
Just as Big Pharma has shifted its early drug discovery and development to biotech startups and academic medical centers, it has also moved away from traditional in-house Contract Research Organization (CRO) tasks such as therapeutic drug manufacturing, toxicology safety, DNA sequencing, and, to some degree, regulatory support.
Many professionals from these Big Pharma divisions have transitioned to new, independent specialty CROs and consulting firms that offer virtual support to both biotech startups and Big Pharma alike. This shift is particularly noticeable in Europe and the Midwestern United States, while countries like China and India have established substantial CROs to facilitate early-stage drug development.
Approximately a decade ago, virtual drug discovery startups began to flourish, utilizing global CROs and partners and assembling expertise as required. With the advent of on-demand lab spaces like UC Berkeley’s QB3 and BioLabs, a hybrid model has emerged, combining virtual and physical resources to support modern biotechs.
Now well established, this virtually-enabled drug discovery ecosystem is set to continue expanding and accelerating.
2. Many more biotechs are now profitable.
In 2006, profitability within the biotech sector was a rare achievement, with most companies struggling to generate positive cash flows. Among the few success stories, only a select group of established players—such as Amgen, Biogen Idec, Genentech, and Genzyme—managed to secure substantial profits. Notably, Amgen and Genentech stood out by ascending to the ranks of major pharmaceutical companies, distinguishing themselves within a field where financial success was the exception rather than the rule.
Below, we conducted our own analysis of biotech financial performance over the last decade (2014-2023) of publicly-traded biotechs. We had two general questions: 1) how have biotech revenues changed over time and how are these revenues distributed across companies, and 2) are there more profitable biotechs today than there were in 2006?
Defining pharma vs. biotech is a squishy process. While pharma was traditionally considered small molecule, and biotech was large molecule manufacturers (e.g., proteins, antibodies), it’s not really a fair element to distinguish companies as many Big Pharma now do biotech work and many startups focus on small molecule development. We simply chose age of the company to distinguish between the two as we felt maturity and longevity vs. relatively new player was a better comparison.
For our analysis, we labeled companies as “Big Pharma” if they maintained consistent operating income and were incorporated many years ago (average year of Big Pharma founding was 1887), whereas profitable “Biotech” have positive operating income, on average, over the last five years and were founded after the beginning of the biotech revolution (average year of biotech founding was 1998).
While revenue certainly doesn’t mean profit, revenues of public biotech has grown from approximately $83B in 2014 to nearly $214B in 2023. For reference, biotech revenues in 2006 were estimated at $73B. While Covid vaccines are responsible for much of the revenue boost of 2021-2023, there is also a clear increase in and diversification of the number of biotech companies generating revenue over time.
Even as Genentech (acquired by Roche in 2009) and Genzyme (acquired by Sanofi in 2011) were absorbed by what we call “Big Pharma” and, as a function of these acquisitions, were not included in our analysis, many new Biotech players joined the ranks of the majors since 2006, including AbbVie, Gilead, Regeneron, Biogen, and Vertex. In fact, when taking the average profit/loss (as measured by operating income over the last 5 years), we counted 27 stand-alone, profitable biotechs compared to estimated 4 in 2006. In fact, if you take the average operating income of the top 100 biotech by revenues that are publicly listed, they are generating approximately $445M in profit each year.
3. The vast majority of innovative medicines are created by small biotechs.
Today, small biotech companies are at the forefront of pharmaceutical innovation, responsible for 63% of all new prescription drug approvals in the past five years. A detailed analysis by HBM Partners illustrates this shift by tracking the origin of new molecular entities (NMEs) developed by different sized pharmaceutical firms. In 2009, small biotechs contributed to 31% of NMEs; by 2018, this figure had surged to 64%, marking a doubling in their contribution to drug approvals compared to the previous decade.
Moreover, early-stage biotech firms are increasingly dominating the R&D landscape. Recent figures from IQVIA highlight that emerging biotech companies now make up over 70% of the entire R&D pipeline, a significant increase from 52% in 2003. This growing influence underscores their pivotal role in shaping the future of drug development.
In a comprehensive study assessing the contributions of small biotech companies to first-in-class oncology innovations, small biotech emerges as the clear winner. Small biotech is the sole originator of more than 3X the number of first-in-class-approved drugs compared to Big Pharma, with small biotechs accounting for 46% of such innovations versus just 14% from their larger counterparts.
When considering collaborative efforts, small biotech firms played a role in 62% of all drug discoveries, either as the sole inventor or as a co-originator. In contrast, Big Pharma companies were involved in only 14% of these innovations, while medium-sized pharma and academia accounted for the remaining 24%.
It’s also worth noting that, based on this same study of oncology innovation, the proportion of drugs originating solely from academic research equals that developed by Big Pharma, each accounting for 14% of the total dataset.
It's important to clarify that these 'origins' do not refer to the identification of targets, mechanisms, or pathways—areas typically explored by academia—but to the actual discovery or development of the therapeutic compounds themselves.
Furthermore, some of these academia originated therapies are among the most significant advances of the past decade, including the first-ever approved chimeric antigen receptor (CAR) T-cell therapy, tisagenlecleucel (Kymriah) for B-cell malignancies, which originated at UPenn, and the multi-billion dollar prostate cancer endocrine therapy, abiraterone acetate (Zytiga), originated at the Institute of Cancer Research, UK.
4. Traditional biotech financing has evolved.
Over the past two decades, the venture capital (VC) market, specifically within the biotech sector, has experienced a profound shift. The traditional approach of investing in early-stage companies and guiding them through successive funding stages has transformed into a more dynamic and involved strategy. Today, VCs are not merely investors but also founders and architects of companies, propelling innovation through strategic guidance and substantial financial backing, and illustrated by investors such as Flagship Pioneering and Atlas Venture.
Historically, venture capital would focus on identifying unique life science opportunities, usually emerging from academic labs, and supplying the capital necessary for startups to refine their innovations. This typically meant smaller, seed-stage investments distributed among a broader array of companies. However, the evolving landscape has seen venture capital taking on a more influential role right from inception. By actively forming companies themselves, VCs can now reduce risks, more effectively steer the growth trajectories of the biotech startup, and finely tune the development processes. This model allows them to assemble a tailored team, define the strategic focus, and leverage their industry connections more effectively. The implications of this approach are profound, enabling VCs to streamline the path to clinical and commercial milestones with greater efficiency and control.
These changes have also resulted in a change of how capital is allocated by venture capital firms. The emergence of much larger Series A rounds is a testament to this change. These substantial initial investments allow new companies to hit significant early milestones, including proof-of-concept or early clinical trials, which are critical in the biotech industry. This scale of funding was rare two decades ago but is becoming commonplace as VCs seek to fast-track development and reduce the time it takes to bring a product to market.
Big Pharma funding Small Biotech
Over the last two decades, Big Pharma has increasingly engaged in research collaborations with early-stage biotech companies, especially those with platform technologies. This trend has been driven by the strategic need to innovate and maintain competitive edges in the rapidly evolving pharmaceutical industry.
Pharmaceutical companies have grown comfortable with the idea of investing in platform technologies even in their earlier stages, recognizing the potential for these platforms to revolutionize treatment paradigms across various diseases. For instance, partnerships like those formed by Kite with Amgen and Juno Therapeutics with Celgene demonstrate Big Pharma's interest in accessing innovative CAR-T technology platforms while allowing the biotech firms to continue their own development efforts independently. These strategic alliances help Big Pharma tap into cutting-edge research and potentially lucrative advancements without the need for outright acquisitions at the early stages.
Moreover, companies such as Moderna have exemplified the successful leveraging of platform technologies in multiple therapeutic areas, engaging in numerous deals with large pharmaceutical companies. These collaborations have been structured creatively to benefit both parties, providing early-stage funding and support to Moderna while allowing pharmaceutical partners to co-develop and co-market the resulting products (Nature).
The willingness of Big Pharma to invest in early-stage platforms is also reflected in their approach to deal structuring, often involving significant upfront payments and milestone-based funding, which are indicative of their commitment to these collaborations.
Overall, the trend suggests a growing recognition of the value that early-stage biotech platforms bring to the pharmaceutical industry, making these collaborations not only more common but also more strategically important over the past two decades.
5. New models of biotech company building are being created.
The diversified portfolio model of biotech creation
Historically, biotech firms have often been established around a single technology or biological pathway, exemplified by early pioneers like Genentech. However, recent trends show a move toward a more diversified portfolio model, creating multiple biotechs under the same roof using a hub and spoke approach.
In this emerging model, a central portfolio manager oversees a collection of companies, each focused on distinct technologies or disease areas. This approach allows the leveraging of broad expertise in areas such as fundraising, investment, and strategic management across multiple ventures. Companies like BridgeBio and Roivant Sciences, along with others like Biohaven Pharmaceuticals and ElevateBio, have been at the forefront of adopting this model, raising significant capital and achieving substantial valuations.
The advantages of the portfolio model are multifaceted. It mitigates risk by diversifying investments across a range of projects, which contrasts sharply with traditional models where the focus might be on a single, high-risk area. The portfolio approach enables sustained investment in management teams with specialized expertise, allowing investors to support multiple endeavors under a single operational umbrella. This model not only diversifies financial risk but also appeals to a broader range of investors, including those less familiar with the intricacies of biotech. Additionally, it promises more streamlined governance and potentially more accurate asset valuation, as each entity within the portfolio focuses intently on a specific asset or small group of assets.
For employees, the portfolio model can offer clear career paths and incentives, as their compensation and career progression can be closely aligned with the success of the specific projects they are involved with. This model also fosters a dynamic environment where talent from various sectors, including finance and consulting, can transition into biotech, bringing diverse expertise to the field.
Despite its benefits, the portfolio model isn't without challenges. There are inherent risks of spreading resources too thinly or mismanaging a diverse set of companies. The necessity for strong, centralized management and clear strategic direction is paramount to avoid dilution of efforts and to ensure that the companies within the portfolio can thrive without stepping into inefficient competition for resources.
This shift towards a portfolio-based approach reflects broader trends in the business world, where flexibility, diversification, and integration of expertise across disciplines are increasingly seen as crucial for innovation and sustainability.
The venture studio model of biotech creation
Over the past two decades, the venture studio model has significantly evolved, particularly in the biotechnology sector, reflecting a strategic shift in how companies are built and funded. Venture studios, or startup studios, focus on systematically creating new companies by providing initial capital, expert advice, and hands-on management services. This model diverges from traditional venture capital by being more operationally involved in the early stages of a startup's life cycle, often building companies from scratch.
In the realm of biotech, this evolution is evident with the rise of specialized studios like Alloy Therapeutics' 82VS, Curie.Bio, and Xontogeny, which leverage deep scientific expertise and industry networks to foster innovation specifically in life sciences. These studios not only provide capital but also offer scientific infrastructure, regulatory guidance, and business development support, addressing the unique challenges of biotech ventures such as long development cycles, regulatory hurdles, and high capital requirements. By doing so, they mitigate the inherent risks and increase the speed to market for scientific breakthroughs.
Moreover, the venture studio model has adapted to foster a more collaborative approach with academia and other research institutions to bridge the gap between scientific discovery and commercial application. This integration is crucial in biotech, where cutting-edge research often sits within universities or specialized research labs. Studios like Foundery Innovations and the nonprofit Station 41 in Birmingham, Alabama, exemplify this trend, focusing on translating academic research into commercial opportunities by forming strategic alliances and facilitating technology transfer.
The venture studio model in biotech has also influenced how investments are viewed and managed in the sector. Investors are attracted to the studio model due to its potential to de-risk the inherently uncertain business of biotech by validating concepts and building seasoned management teams before significant capital is deployed. This shift is likely to continue as the successes of this model become more apparent.
Conclusion
The biotech sector continues to evolve. Looking ahead, the role of biotech in pioneering next-generation therapies and medical devices promises not only to fundamentally improve patient outcomes, but enhance shareholder value. The synergy between innovative startups, strategic partnerships, and evolved funding models is crafting a blueprint for sustainable success, making biotech an indispensable pillar of how therapeutics are created.