Author: Karl Simpson
The biotechnology sector remains a long-term outperform relative to other indices, with the Nasdaq Biotechnology Index having returned 382.73% over the 5 years to July 1st 2015. The sector has seen significant volumes of new public listings with many successful IPOs over that time, in 2014 alone, US and European companies raised $6.8bn, a rise of 93% and historically second only to that of 2000. In data from the EY Beyond Borders report (here), the number of US pre-commercial companies worth in excess of $1bn has risen from less than 5 in 2012 to over 25 by the end of 2014, by any measure this is substantial value creation. With such a robust financing market and venture capital firms continuing to deploy substantial capital in the sector, the industry is at last accessing innovation capital, a reported $27.6bn in 2014.
This liquid financing climate and value growth has roused a cacophony of commentary about the prospect of a ‘bubble’ (here). Many argue that we’re nearing the end of the cycle and frequent predictions of a market correction cause even the most avid supporters to question the sectors’ sustainability. Others simply believe it is ‘different this time’. Of course the market will go down, the question is more about timing.
So why, when the sector is predicted to be reaching its financial apex, are so many of the industry’s big-executive-names occupying senior posts in established companies, ditching it all for a world of start-up? In recent days we have heard that Doug Williams, Head of R&D at Biogen will be leaving for a new cancer start-up and John Hohneker, an R&D executive from Novartis, will join Forma Therapeutics. Notable others are also pursuing this path; Briggs Morrison, a senior lieutenant under Pascal Soriot at AstraZeneca has departed for Syndax, Rafael Amado departed GSK for Adaptimmune’s chief medical officer position, while Pfizer’s Jose-Carlos Gutierrez heads back to start-up world with Synlogic. The past 12 months have seen many similar moves at which people have expressed surprise. So what is going, why are people leaving big jobs in big companies, or even big jobs in small companies, to go and join small start-ups, other than the obvious and rather cynical view that it is for money?
Below I look at 5 reasons why heavyweight executives are fleeing for the embryonic companies.
- Capital Flows
Firstly, many of the VCs have done well out of the recent frenzy, so they’ve gone back to their LPs with good performance metrics and raised new funds that will provide a softer landing for private biotechs if all goes pop tomorrow. This capital provides a decent assurance that the sector will not drop off a cliff and that access to capital will remain for companies with compelling technologies addressing high unmet needs.
Start-up companies need capital, usually lots of it. The flow of capital now generally available inculcates a confidence among executives that investors are prepared to support a venture and that tight capital constraints are not their biggest near term challenge. Also, it is not always just about the capital, but instead the cost of the capital – supply and demand changes this landscape.
- Innovation on Many Fronts
The sector is experiencing incredible levels of innovation across multiple therapeutic areas and modalities. The hottest of which is unquestionably in immuno-oncology and the vast investment in this sector (here) is particularly driving a very strong demand curve for R&D executives (here) capable of translating these development assets into mono or combination cancer therapies.
Rare diseases is benefiting from the advances in genomics and our understanding of disease biology presents scientific opportunities across the 7000+ estimated rare diseases.
All things Gene; from sequencing to editing to therapy, are really gaining scientific maturity. Then there are opportunities in ageing related diseases, anti-infectives, neuroscience, and diagnostics. Plus a whole layer of innovation around what to do in finding the right business model, using big data, eHealth and real-world outcomes data to drive the value proposition – more effectively targeting and managing patients.
- More Collaboration, Not Less.
The symbiosis of biotechnology and pharma has grown stronger and stronger. For the sector to continue to achieve the innovative outcomes required to sustain investor returns of private risk capital as well as public market investors, the constituent companies must become even more deeply entwined than at present. The characteristic boundaries historically applied to pharma and biotechnology continue to diminish as the sector transforms towards what many describe as an open-innovation sector.
Celgene probably stands out as the sector’s most prolific deal-maker and below is a chart from the Financial Times which shows what a complex array of alliances and acquisitions they have cemented to build an innovative pipeline. Others too recognise that innovation now often lives outside the company.
GSK (Avalon and Index), J&J (Index), Novartis (Atlas), Amgen (Atlas), even Celgene (Versant), have all entered into arrangements with VCs from San Diego to London in an attempt to get a first look at exciting new technologies across the ecosystems. It is clear for now, the innovation game for many is being played out in the small biotechs among the bio-clusters of Boston, San Francisco, London and elsewhere.
- The Entrepreneurial Journey is a Long One.
In a recent article in the Boston Globe, Genzyme pioneer Henri Termeer (here) talks about the battalion of entrepreneurs that Genzyme gave rise to. As companies of scale address their strategic opportunities, they cultivate skills in extremely capable people which are highly transferable to the start-up world. Building a biotech of course requires a certain tolerance to risk but people mistakenly think of this being the overriding credential. Businesses, large or small, need people who can exercise the strategic and operational capabilities to execute a plan. The qualities executives from pharma and big-biotech bring are incredibly valuable and many of them want to show what they can do in a different setting, either as a CEO or as part of an entrepreneurial team, and presently biotech is highly enticing. While historically many have found the receptiveness hostile to ‘big company’ execs, this is far too simple of a characterisation and more intelligent team selection is now been deployed.
- Influence and the Desire for Something Different.
Building a career in big pharma comes with incredibly interesting dimensions. The industry remains extremely capital intensive and so having a substantial war-chest and an organisation of scale, gives you the potential to do things with real commitment and resource. Despite these privileges, big-pharma’s innovation plight is well documented, they simply haven’t shown that innovation is scalable. Most pharma executives are in the business to make a difference, to discover and develop innovative new approaches to help patients. If you’re been presiding over an enormous behemoth and you see some of your most exciting pipeline assets (in some cases over 70%) coming from external innovation (here) by smaller biotechs, your attention is switched to the prospects this sector might now offer. Once certain conditions present themselves; money, management and technology; if you have the financial security to take increased levels of risk, you find very compelling reasons to change code and go biotech native.
Building a company fresh out of the box is as challenging as it gets; you have no preordained right to be successful. But the journey is highly rewarding, whether you succeed or fail; only the rewards come in different guises. Having the chance to test your mettle in this highly exposed start-up environment is often a temptation that successful and confident pharma executives find too hard to resist. To not try at least once, leaves a lingering sense of the unexplored. Expect more big pharma defectors.