Now more than ever, a healthy dose of perspective may prove the most prudent medicine. New Jersey birthed, built, and now hosts the leading share of the nation’s pharmaceutical industry. And our state stands among the top three in the ceaselessly innovating biotechnology field.
Today both industries are striving to weather recessional storms, as capital everywhere seems to have run for cover. Burrill & Co. investment bank surveys show a 54 percent drop in biotech investment in 2008, from 2007. How we got here can teach us a lot.
Presenting insight on this perspective is Frederick Frank, vice chair of Barclay’s Capital in New York and featured speaker at the annual BioNJ dinner meeting on Thursday, January 22, at 5 p.m. at the Hilton Hotel in East Brunswick. Cost: $180. Visit www.bionj.org. Also speaking is James Greenwood, president and CEO of the Biotechnology Industry Organization. In a slightly less ebullient tone than previous years, the 2009 theme is “Come and be Inspired.”
Frank has witnessed and helped shape much of the pharma and biotech growth for the past 40 years. A native of Salt Lake City, Utah, and son of a retail clothier, Frank came east to attend Hotchkiss Preparatory School, then Yale University. He graduated in 1954 with a bachelor’s in philosophy — a study he says he employs every day. He then served two years in the Army, then earned an MBA from Stanford.
In addition to his vice chair at Barclays, Frank also serves as director and chairman of EPIX Pharmaceuticals in Lexington, Massachusetts; director of synthetics manufacturer Landec Corporation in Menlo Park, California, and director of Pharmaceutical Product Development in Wilmington, North Carolina. He also chairs the National Genetics foundation.
The traditional healthcare industry, notes Frank, is being endlessly recast into a “dynamic, global ‘gamish’ we call the healthcare products and services industry.” And in examining it today, he merely shakes his head and quotes Yogi Berra, “The future ain’t what it used to be.”
Faces of pharma. Although one of the oldest trades, pharmaceuticals have only become a major, and much-favored, investment arena since the 1950s. Frank characterized the first 25 years — 1950 to 1975 — as normal. New drug discoveries were coming in, profits were being made. But the larger drug companies were generally selling at price/earnings ratios below the national average. Compared with the many straight manufacturing and production investments available at the time, backing a research-intensive industry, with long term drug development seemed a comparatively risky venture.
Then, with a gush in 1975, a lot of that risky, long term research began paying off. Pharmaceuticals burst forth with a whole series of blockbuster drugs that enticed every investor onto the bandwagon. SmithKline & French launched the surge with Tagamet — a medication for the hundreds of millions of heartburn sufferers. Such blockbusters alleviated a host of ills afflicting massive percentages of the global population. Markets and profits exploded.
Realizing the potential, other companies quickly followed up with a best-in-class medications that would take advantage of these rich markets. Getting in line behind SmithKline & French, Glaxo introduced Zantac to combat heartburn and ulcers. Their revenues reached $3 billion annually. Two years later, Astra begot Prilosec, a heartburn helper that helped its maker bring in $6 billion annually.
For the next 25 years, the era of “everyone” markets and blockbuster drugs flourished. The new “normalized” capitalization rates soared to a sustained 100 percent. Captivated, investors began doubling their money and growth spiraled on. Then with the new millennium came a deluge of patent expirations. This has ushered in a third, slower, more erratic phase. “Growth has often fallen short of investor expectations,” says Frank, “and we can look for a reversion to the historical mean of valuations.”
Meanwhile, biotech. Still the new kid on the block, biotechnology only got its start in the late 1970s. In part, it began with biochemist Herbert Boyer and venturist Robert Swanson, who founded Genentech. But many new labs and established big pharma ones were concurrently pioneering recombinant DNA technology.
When biotech finally moved into the public arena, it was the emerging market of the late 1980s and early 1990s. Long-teased investors crouched, ready to leap. In 1989 Genentech made its initial public offering with a common stock priced at $35 a share. Before the day’s final bell, it had shot to $77.
Others followed suit. Frank cites eight companies raising more than $100 million, and two others raising more than $200 million, swiftly in the same period.
Who wouldn’t want to support firms that were bringing almost certain cures for diabetes, MS, Alzheimer’s, and even cancer? But no new invention soars ever upward. With the increasing caution of all investors since 2000, the heavily venturist-dependent biotech industry has joined the breadline with traditional pharma in what Frank terms “a return to the norm.”
Hanging together. During this squeeze Frank has watched several of the “young puppy” biotech firms desperately seek to stretch into the strides of their larger pharmaceutical elders. Genentech announced: “Our corporate strategy is to become a fully integrated pharmaceutical company.” A lofty goal, but maybe not the best suited to these times, nor to biotech’s specific strengths.
Frank suggests that biotech and pharma work to become better partners than competitors. “It’s a natural fit,” he says. “Large drug companies are very good at development, marketing, and manufacturing, but not research,” he says. “The biotechs, generally, are good at research, and weak in development, marketing and manufacturing.”
The days are long gone when venture capitalists and even banks are standing in line to shovel funding at biotechs. And traditional pharma is not feeling so very well itself. With a little adaptation and partnering, these two forces can point to a full chain of new, high volume product development. It’s a lure that may just pull investors out from under their beds.
