Bigtime losses, but cash still flows in
It’s a poorly kept secret: Biotechs rarely make money. But their potential keeps investment dollars flowing.
Biotechnology proponents rarely talk about the fact that the industry loses huge quantities of money. According to a new report from accountants Ernst & Young, the public biotechnology companies in New England collectively lost $1.3 billion in 2006, the highest loss of any region in the country.
Harvard Business School professor Gary Pisano, author of the recent book ‘‘Science Business: The Promise, the Reality, and the Future of Biotech,’’ set out to answer a question that had long intrigued him: How could an industry invented and staffed by brilliant, capable people have such a dismal long-term financial record? And why do investors keeping throwing money into the ring? Pisano spoke to Globe biotechnology reporter Stephen Heuser.
You took a hard look at the long-term profitability of the biotechnology industry. What did you find?
It loses money. Revenue has gone up over time, so clearly there are firms creating products and selling products. But the industry runs cash-flow negative. And if you take out a firm like Amgen, which is the 800-pound gorilla, the thing just drops below zero for most of its history. There’s only really a handful of companies that are profitable.
You write that ‘‘the promise of biotech is not reflected in the reality.’’ What’s the promise?
There’s the financial side — it has attracted several hundred billion dollars in capital with a view that it would earn high rates of return, and it has not. Then also, there was quite a bit of promise in terms of unleashing new therapeutics, a new golden age of drugs. But the data analysis that I did shows that biotech hasn’t been any more productive than big pharma.
What’s at stake with the industry getting it right?
There’s still an enormous amount of potential here. The science is just cruising along, there’s phenomenal stuff happening, but we’ve still got to make a lot of investments to get drugs on the market. So I’d be worried that if we don’t sort it out, we could wind up with just a really disappointing situation where the sector is not able to really be viable, won’t get the capital, and then we won’t get the promise — we won’t get the drugs.
It’s a very cash-hungry industry?
Yeah, it consumes a lot of cash. That’s one of the key problems.
Where does the money go?
This is a fairly labor-intensive business. There’s some capital cost in terms of the lab equipment, and some, obviously, as you get into manufacturing, but it goes a lot into salaries. And the whole clinical-trial phase — recruiting patients, running clinical trials — hospitals don’t do those studies for free. That’s huge.
And the further you go in, the bigger the bet becomes, so a phase 3 trial is much more expensive than a phase 2 trial. It’s like a poker game, where the bet keeps getting higher as you get deeper into the hand. If you’re a small enough company, you’re going all-in.
If the failure rates of new drugs are so high, why does the investor money keep coming?
There’s a view that if a firm can do well against extremely high odds, it will do extremely well, so people look at an Amgen, look at a Genentech, they look at a Genzyme. But it’s really hard to pick those winners.
Massachusetts places a lot of hope in this industry. Is that a mistake?
We have a very healthy ecosystem here, a very vibrant one, and it’s one that I think other regions would love to create. The secret sauce is really tricky — it’s a combination of history, luck, and some incredible talent. But at the end of the day, it’s not just about getting the science into early development, it’s about getting drugs, because ultimately that’s what’s going to bring in the returns that are going to continue to fund the thing.
I think we’re in good shape here because there’s so much here in the scientific infrastructure that gets [National Institutes of Health] funding and other kinds of funding, but that’s not enough. Ultimately we need to start to see these companies become successful.
You’ve described biotech as ‘‘30 years old and still in its infancy.’’ Does that young-company mentality work against biotech?
While I think entrepreneurialism is great, and new firms are great, there’s a trade-off. Genentech has 30 years of experience developing drugs. The new firms, you don’t replicate that kind of capability.
You know, every idea shouldn’t have its own firm. I think we’ve historically erred a bit in the direction of new idea, new firm, and that’s not necessarily the most effective way to organize the sector.
You like this industry?
Yeah. I stumbled into it by accident in 1984, doing my graduate work at Berkeley. For the price of a bus ticket I could visit a lot of emerging biotech firms at that time. The longer I followed it the more I became intrigued by it as a series of experiments.
Business and science have historically lived in two different worlds. This was like a merger of these two sectors, and I found that to be very intellectually interesting and maybe the shape of things to come for the US economy.
We have great science in the US, and how do we build economies based on great science? It’s going to become a template for industries that are going to emerge in 20 years’ time. There’s more than just biotech that’s at stake.
Stephen Heuser can be reached at sheuser@globe.com. 