Adapt or Die, Biotechies: Steve Burrill on the Transformation of the Health Care Business

3/16/10Follow @xconomy

[Updated: 5:15 pm, 3/17/10] Biotechies, of all people, ought to relate to an old quote often attributed to Charles Darwin. It’s the one about how the strongest and most intelligent aren’t necessarily the ones who survive—it’s the ones who are most adaptable to change.

That was the closest thing to a single theme running through a blazing fast industry overview from Steve Burrill, the industry maven who gave a keynote talk this morning at the Life Sciences Innovation Northwest conference at the Bell Harbor International Conference Center in Seattle. Burrill talked about how healthcare entrepreneurs can survive a financial crisis, regulatory uncertainty, the coming disruption of genome-based personalized medicine, and a transformation in how insurers and governments will pay for new drugs, devices, and diagnostics.

Even with all those waves of doubt washing over people who create those new products for a living, there is still plenty of reason to keep doing what they do, Burrill said. The biggest problems facing the world today—climate change, national security, food production, and health care—are all problems that biotechnology seeks to address.

“We are lucky to be alive today and to be part of this revolution,” Burrill said.

Burrill brought his trademark industry overview to Seattle this morning as part of his deal to co-sponsor the Innovation Northwest conference with the Washington Biotechnology & Biomedical Association. He has been analyzing, prognosticating, investing, dealmaking, speaking, and writing about biotech since the industry got going in the 70s. He reminded everybody that he had a role—how big, who knows—in some of the industry’s pioneering companies like Genentech, Cetus, and Amgen. But he was quick to note that if entrepreneurs today tried to build companies like people did in those days, they would certainly fail.

This was a ridiculously fast talk—146 slides spread over 40-some minutes, according to Burrill. I’ll just highlight a few themes that stood out. The slides are available here in PowerPoint if you’d like to look for yourself. [Updated: 5:15 pm, with proper working link to Burrill's slides, sorry for the earlier link, which didn't work.]

Politics. Healthcare reform is only just getting started, Burrill says. The healthcare sector accounts for $2.5 trillion of the U.S. gross domestic product, but that will swell to $4 trillion by 2015 as populations keep aging, and society continues to turn once-deadly diseases into chronic illnesses that get treatment. It’s not sustainable, and governments in the U.S. and all over the world are going to have to start clamping down on costs, hard. Healthcare reform may pass Congress soon, but governments will not be able to afford to keep everybody alive in their country for as long as medical technology will allow.

“No matter what you do, the rich are going to pay and the corporations are going to pay for the health care costs of 30 million people to get coverage,” Burrill said. “There’s a tremendous conflict in this country between the demand for more access and lower cost.”

“This is changing the nature of who we are and what we do,” Burrill said.

The financial crisis. Biotech, with its decade-long product development cycles that cost hundreds of millions of dollars, is especially reliant on the whims of investors who allocate capital. The IPO market has shown—with Cambridge, MA-based Ironwood Pharmaceuticals and Hayward, CA-based Anthera Pharmaceuticals as a couple recent examples—that even though the broader market indexes have improved, the appetite for biotech speculation hasn’t returned.

Why? Only about 20 of the 105 IPOs of the past six years are trading above their initial share price, Burrill said. What’s worse is that only 56 out of about 10,000 life sciences companies (that sounds like an awfully big denominator) are worth more than $1 billion in market cap. That means that 95 percent of the industry is considered microcap, and completely off the radar of big institutional investors, and investment banks like Goldman Sachs and JP Morgan.

“We have been marginalized by the investment community,” Burrill said.

Hard as it may be for biotechs to raise money, things are even worse for Big Pharma. Those giants have resorted to merging among themselves to prop up their short-term earnings. And biotech has made a lot of people rich. He noted that Genentech was valued at $100 billion when it was fully acquired by Roche a year ago, at the same time as Pfizer, the largest pharma company, was worth $90 billion. Amgen is now worth more than Bristol-Myers Squibb, and Gilead Sciences is worth more than Eli Lilly and Bayer, he added.

“We have created extraordinary value, and we need to remember that and tell people that,” Burrill said.

Regulatory uncertainty. Ah, this isn’t an industry where you can throw a Version 1.0 product out on the market with lots of bugs and still make a ton of money. You need approval from regulators like the FDA and European Union to certify it’s been demonstrated as safe and effective.

Even though Burrill said he’s known FDA commissioner Peggy Hamburg for a long time and respects her, he sees the political climate at the FDA working against biotech companies. The FDA will continue to be under pressure to take drugs off the market rather than put new drugs on the market, he said.

“We can wish away the complexity of the regulatory world, but it will be tougher over time, not easier,” Burrill said.

Personalized medicine. The traditional biotech model said that drugs were high value, high profit margin products, while diagnostics have been low value commodities with low profit margins. That’s going to reverse over time as payers see much greater value in diagnostics that can predict which patients are likely to benefit from a drug, or those that can reduce other healthcare costs over time like hospitalizations.

Redwood City, CA-based Genomic Health has been an early leader in this trend, by proving it can sell a $3,200 test that predicts whether women have a form of breast cancer that’s likely to relapse after a tumor is surgically removed.

“When Genomic Health came out with a $3,200 test, people said there’s no way in hell you’re going to get $3,200 for a diagnostic test that usually costs a few hundred bucks,” Burrill said. “We’re in the middle of a massive value shift from the Rx (prescription drugs) to the Dx (diagnostics) side.”

Burrill also flipped up some quick slides about how all sorts of medical tools will be able to plug and play with handheld devices, from blood pressure monitors to microscopes to ultrasound tools. Remote readouts on our personal health data can be taken, sent at electron speed, and stored somewhere in a computing cloud where our doctor can ultimately monitor our wellness.

Plenty of people object to this vision, saying that people won’t be willing to share this stuff because of privacy objections. Fat chance, Burrill said.

“If you look at social networking, 350 million people are out there, spilling our guts to people we don’t even know,” Burrill said. “There’s a massive business in managing health online.”

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