BioScience Biz

How best to deal with neglected diseases?

In 2005, researchers coined the term "neglected tropical diseases" to refer to thirteen diseases primarily occurring in rural, poor areas that have been largely ignored by policymakers and public health officials. These diseases, including sleeping sickness, river blindness, hookworm infection and more, traditionally fall second in attention and funding to "the big three" -- HIV/AIDS, malaria, and tuberculosis. Steven S. Clark

Despite a recent increase in funding for NTDs from private and government sources, there is debate how best to use this money. Would it be more effective to focus on the socio-environmental roots of disease, such as sanitation, clean water, education, etc--or is it best to focus on developing new treatments? The problem with the former is that it is expensive and would take a very long time to accomplish world-wide. The problem with the latter is that drug treatment won't prevent later reworming of treated individuals.

Read more about this in The Scientist or read the debate recently published in PLoS Medicine. Steven S. Clark

Is there an advantage to Angel vs VC backing during an IPO?

For companies that go public, how do those that were backed primarily by angel investors fare against those primarily backed by venture capitalists? That was one of the questions addressed in a working paper recently published by two professors from the University of New Hampshire. They examined data related to the pre-initial public offering (IPO) shareholders of companies that subsequently went public. The conclusions from the study provide interesting information that should be considered for companies looking to go public as part of their long term capitalization plan.

Read more from the article by Matt Storms that was recently published by the Wisconsin Technology Network News.

Making the transition from academia into the world of bioentrepreneurship

It's the first day of class on a postgraduate program in engineering management, and the students, mainly engineers and life scientists, are looking anxious—mostly because the class has started with a metaphor: Alice's Adventures in Wonderland. Alice is an appropriate role model because her journey is similar to that experienced by scientists moving from the safe waters of the laboratory to the uncharted waters of the business world. Alice left a safe and familiar environment and set off down a rabbit hole on a journey full of ambiguities, complexities, and only later, realization. She survived her ordeal because she was willing to change perspectives when faced with new ideas or situations. In other words, she adapted—just what budding bioentrepreneurs must do.

How can an academic scientst make this transition into the world of entrepreneurship? Rochelle Young, a professor of management engineering at the University of Colorado give advice in her article, "Adventures in Wonderland," published recently in Bioentrepreneur.

The SBIR Clock is Ticking

Members of the Senate Small Business and Entrepreneurship Committee and the House Small Business, and Science and Technology Committees are meeting, yet again, to see if this time they can resolve the impasse of two very different SBIR reauthorization bills, (Senate S.1233 and House H.R.2965).

You will recall that Rep. Nydia Velazquez (D-NY), chairwoman of the House Small Business Committee, holds the very anti-small business view that VC-owned technology companies should be able to participate fully in SBIR/STTR competition. Amazingly, she has for the last two years, prohibited any testimony on behalf of small businesses in her committee and also on the floor of the House. In contrast, the Senate’s bill preserves most of the SBIR program for small company by capping participation of VC’s, a compromise that last year was agreeable to both the VC and small business lobbies. But the Velazquez would not budge from her position.

Will this year be different?

When the full House considered its SBIR reauthorization bill, Velazquez got the Rules Committee to prohibit consideration of a Edward Markey (D-MA)-led amendment that would have made the bill similar to the Senate version. She did this because it was widely expected that the Markey amendment was favored by most members of the House and would have passed.

Several House members, led by Markey, who disagree with the obstructionist Velazquez and do not like her bullying, are trying an end run around her by sending a letter to Senator Mary Landrieu (D-LA), Chair of the Senate Small Business and Entrepreneurship Committee, expressing their support for the Senate’s SBIR reauthorization bill. This letter represents an attempt to let the Senate conference committee members know that most Representatives disagree with Velazquez’s bill.

The more members of the House who sign the letter, the greater chance that the conference committee will approve S.1233 as the final version. You can help by emailing the Markey letter to your Representative and ask that s/he sign on this week. Time is of the essence since an acceptable compromise must be made by next Tuesday, July 28. While you are at it, ask your Rep to consider how they are going to explain to small businesses in their state why they voted against small businesses so that rich VC’s could have access to more Federal funds.

SBIR updates and links for contacting your Representatives and Senators can be found on www.SBIRreauthorization.com.

© 2009 Steven S. Clark, PhD, some rights reserved.  Articles contained herein, are meant to be distributed freely to interested parties. However, any use, including excerpts from any article, must credit Steven S. Clark and provide a link to the original article published in BioScience Biz.

Disclaimer: The authors used their best efforts in collecting and preparing the information published herein. However, neither Steven S. Clark, nor other authors, assume, and hereby disclaim, any and all liability for any loss or damage caused by errors or omissions, whether such errors or omissions resulted from negligence, accident, or other causes.

Science and ethics in the embryonic stem cell debate

The Medieval philosopher, Boethius, tackled the esoteric question of what is a human and came to the conclusion that “human is born of human”. There is a certain circular, facile truth in this conclusion that reminds one of the modern right-to-life refrain that “life begins at conception”—an argument that seems as unsatisfying as any argument that has been reduced to a cliché. It is repeated so often and so glibly that the basis of the argument goes unexamined and unchallenged. 

This “life begins at conception” reasoning, leads to a casuistic rhetoric where harvesting embryonic stem cells (ESCs) from a five day old human embryo called a blastocyst, for the purpose of treating human ailments, is akin to killing a living adult in order to harvest his organs to transplant into someone else.  But how do we cross the chasm of logic to believe that a blastocyst is the moral equivalent of an adult human?  This is an unexamined and unspoken conclusion that looks very different in the light of modern biology.

Before exploring the premises underlying the right-to-life position let me acknowledge that at this point, some will ask, why revisit this debate?  Haven’t embryonic stem cells been rendered unimportant in the face of the research success of adult stem cells and in view of the fact that we can now reprogram adult cells to become stem-like, thereby avoiding the destruction of embryos to harvest ESCs?

Not so fast.

The fact is that we are rapidly driving, some would say careening, toward the day when ESCs will be used to treat patients. Despite the exciting advances in stem cell alternatives, ESCs still play a role that adult and reprogrammed adult cells cannot supplant—yet.

"...FDA recently approved the first ESC clinical trial..."

The FDA recently approved the first ESC clinical trial to treat patients with spinal cord injuries. The California Institute for Regenerative Medicine that oversees the $3 billion stem cell investment that came out of Proposition 72 in 2004, recently awarded grants specifically for supporting research leading to FDA applications to use ESCs for experimental therapeutics. A medical doctor in India claims to have treated a quadriplegic with human ESCs, with modest results.  Doctors in other countries make similar claims, raising the specter of unregulated “stem cell” tourism and unfettered treatment of patients with insufficiently tested ESC therapies—unregulated clinical trials in reality.

As we rapidly approach the era of stem cell therapy, or regenerative medicine, if in fact we are not already there, the debate over whether this technology represents a “brave new world” or a Faustian bargain will only intensify and I believe it will do so very soon. At the moment, this debate seems to be in a latent period due to the recent discovery that adult cells can be reprogrammed into stem cells. Opponents of ESC research hope that this advance will negate their ethical concerns about destroying human embryos in order to obtain stem cells. After all, if you can pluck a skin cell from someone’s arm, put it in a broth and, presto, pull a stem cell out, why would anyone need or want to do research with stem cells obtained from an embryo? But, the inconvenient truth behind these reprogrammed cells has not been fully explained. The fact is that they, too, have the potential to develop into persons. A scientist at MIT reprogrammed a mature mouse blood cell into a stem cell and used it to derive a whole new mouse. Very recently, two groups in China reported doing the same thing beginning with mouse fibroblasts and ending up with cloned animals. Let us consider how this ability of these so-called induced pluripotent stem cells (iPS) affects the whole stem cell debate.

Unpacking the right-to-life argument

I’ll begin by unpacking the right-to-life argument that “life begins at conception. It is abundantly clear that when a sperm fertilizes an egg cell, a cellular entity is created that can grow into a fully developed person. So, in a sense one can indeed claim that “life” begins at fertilization. But this argument assumes, and leaves unstated, that society is, therefore, obligated to give the same level of respect to a fertilized egg as it gives to an adult human. 

"...when is society obligated to give full respect to human life."

Thus, the underlying ethical argument here really is not about “when life begins” (indeed there is no precise time where this happens—it is a process lasting a couple of days), but about when is society obligated to give full respect to human life. This is the essential ethical issue on which the whole debate should focus. 

Let me illustrate the idea this way: We all agree that a living woman deserves our full moral consideration; society cannot legitimately take her life or deny her other life-related freedoms without good cause, such as committing a crime. On the other hand, neither a live dog nor a clearly dead human elicit the same level of consideration from society. This means that simply being alive, as in the case of the dog, or simply having a human body, as in the case of the corpse, do not provide a sufficient basis for assigning the full moral consideration that we give the woman. It follows that there is something inherent in the adult woman that we all readily recognize, but that we, equally readily, do not see in a live dog or a dead person, which tells us she deserves a greater level of moral respect.  This inherent worth in the woman that we all innately recognize is the crux behind making sense of the embryonic stem cell debate.

Viewed in this way, the question with ESC research becomes this: does a blastocyst that was created by a human (through in vitro fertilization) and that lives in a petri dish and lacks a brain, personal history, personality or any recognizable human trait is the moral equivalent of a living adult human that enjoys all these attributes?  Do we innately recognize something in the blastocyst, like we do in the woman, which compels us to assign full moral recognition to a five-day old sphere of cells that is no larger than a period at the end of a sentence?

At this juncture, some will argue that the fertilized egg possesses a completely novel human genome that denotes a unique genetic human being, and that this makes it deserving of full moral consideration by society. But, this argument has this major problem; certainly, genetic makeup is necessary and sufficient for determining that an embryo is Homo sapien, but genetic makeup, no matter how unique, is not sufficient for determining moral standing. If it was, then skin cells, which have the same genes as the fertilized egg from which they came, should also have equal moral standing with the fertilized egg.  

"...to acknowledge that a fertilized egg has potential to become a person means
that, in fact, it is not a person at that time."

It also could be argued here that an important difference between a fertilized egg and a skin cell is that the former has the "potential" to develop into a mature human person, while the latter does not. But there are problems of both semantics and logic with this contention.  For instance, "potential" describes something that can, but has not yet come into being. In other words, to acknowledge that a fertilized egg has potential to become a person means that, in fact, it is not a person at that time.

Furthermore, it is not logical to assume that “potential” confers any a priori obligation--while I may have the “potential” to become President, that obligates no one to play “Hail to the Chief” when I enter a room. So, based on potential, there is no compelling reason to afford a blastocyst the same obligation we offer the adult woman.

Conditional potential of stem cells

It also is important to understand that a thing’s “potential” can be altered by circumstance. Thomas Aquinas, the great Catholic theologian and philosopher, made this argument about “potential” many years ago. He explained that for potential to be present, a thing must have the capability of realizing that potential. Thus, a piece of paper has the potential to be burned, because it is burnable. Conversely, a bucket of water does not have the potential to be burned because it is not capable of being burned.

Certainly we now know that water can be given the potential to burn, but only under specific electrolytic conditions that separate oxygen and hydrogen from the water molecules. So, the conditional circumstances in which water exists determine its potential to be burned.

In the laboratory, human ESCs are harvested from a blastocyst that has only lived in a tissue culture dish. As long as a blastocyst lives in the petri dish, it has zero potential to become a person. This can only happen if someone intentionally inserts it into the womb of a woman who has been hormonally manipulated to mimic pregnancy. Only after these human efforts, like the human efforts needed to make water burnable, can the tissue culture organism then acquire the potential to become a person. 

From animal cloning, which is now a common practice, we know that under the proper conditions, we can reprogram adult cells back to an embryonic state where they acquire the ability to grow into an embryo and a fully functioning animal. Therefore, modern science tells us that, like a blastocyst that lives in a petri dish, a blood cell that lives in your veins has conditional potential to develop into a person. Since we do not confer any special moral status to a blood cell what then compels us to confer such status to the blastocyst that was created in a laboratory and that lives in a petri dish or frozen in a liquid nitrogen tank? After all, they both have similar conditional potential to become a person.

Thus, like genetics, “potential” is not a sufficient basis to compel us to confer the same moral status to a fertilized egg that we reserve for a living person. 

At what point do we give a developing embryo full moral consideration?

It, admittedly, is very hard, if not impossible, to know when we ought to bestow full moral protection to a developing human embryo. But, I submit that we can know when the embryo does not enjoy the same consideration we give to an adult. To illustrate this point, consider this thought experiment—you walk past a building and see a fire raging inside.  Moreover, you also see a man struggling to get off the floor and escape the conflagration. You see that he is lying next to a tank that you know contains thousands of frozen human embryos.  What would you do if you only had time to make one trip into the burning building? 

"Most of would opt to rescue the man..."

Most of us would opt to rescue the man indicating that we recognize a greater moral responsibility to one anonymous living adult person than we do to a tank full of nascent persons. Indeed, most of us would opt to rescue a dog before the tank of embryos. In other words, we do not innately view thousands of five-day old embryos as moral equivalents to a single fully formed person any more than we view a live dog as the moral equivalent of the woman. To do so, we have to conjure up a special respect for embryos that is based on the imperfect arguments discussed above.

Unfortunately, poor Boethius, a Christian, ran afoul of the Visigoth rulers of Rome and was executed in an especially gruesome way. They wrapped a rope around his head, inserted a stout stick and twisted it until his skull burst. I suspect that when the right-to-life community becomes aware of the ability of reprogrammed adult cells to become people, the debate will flare once again generating Boethian-sized headaches on both sides.

© 2009 Steven S. Clark, PhD, all rights reserved. 

Disclaimer: The authors used their best efforts in collecting and preparing the information published herein. However, neither Steven S. Clark, nor other authors, assume, and hereby disclaim, any and all liability for any loss or damage caused by errors or omissions, whether such errors or omissions resulted from negligence, accident, or other causes.                                     

SBIR re-authorization update

The House just passed a controversial SBIR reauthorization bill with the usual shenanigans by Rep. Nydia Velazquez (D-NY). As in last year’s reauthorization debacle, Ms Velazquez completely stifled any testimony contrary to her preferences. The major point of contention is whether to allow companies that are majority-owned by VCs to be eligible for SBIR funding—currently they are not. Even though Velazquez chairs the Small Business Committee, through which the bill passed, the small business lobby was not allowed any input on the bill. Velazquez wants VC owned companies to share in the SBIR pool, which, as opponents point out will limit money available for not-as-well funded companies. The argument against doing this is that the earliest stage companies, which are not likely to attract VC funding will suffer the most from this diversion of funds.

Perhaps they ought to change the name of Velazquez’s committee to the VC Business Committee. She certainly is not representing small businesses here.

The devilish details

The following details of the House’s actions are modified from a posting by Rick Shindell, aka the “SBIR Insider”.

The SBIR Program was created by the Small Business Innovation Development Act of 1982. Every few years, the SBIR program must be “reauthorized” by Congress or it will cease to exist. Reauthorization was enacted in 1986, 1992, and 2000 and was slated again for September 2008; but, instead, the program was temporarily extended by a continuing resolution (CR) to March 20, 2009 and again to July 31, 2009.

Although H.R. 2965, "Enhancing Small Business Research and Innovation Act of 2009," passed on the House floor, any opportunity for discussion or vote on compromise amendments that Ms Velazquez did not favor were summarily dispatched by the House Committee on Rules. The rules committee, led by chairwoman Louise Slaughter (D-NY), under a "closed rule" allowed only 5 of 34 amendments to be ruled "in order" and brought to the floor. The amendments mostly spelled out small things like SBIR award preferences for minority and woman owned businesses and for businesses in economically depressed areas.

The big surprise was the committee's "out of order" ruling of the compromise amendment from Ed Markey (D-MA), Niki Tsongas (D-MA), Peter Welch (D-VT) and Paul Hodes (D-NH). The amendment would put a ceiling on VC awards (similar to what the Senate favors), and increase award sizes to $150K for Phase I, and $1M for Phase II. Reportedly, this amendment has strong bipartisan support in the House and would have passed if a vote was allowed. This would have been a major embarrassment to Velazquez, and perhaps the House leadership.

What next?

The bill now goes to the Senate which has passed its own version that was sponsored by Russ Feingold (D-WI). As mentioned, the Senate version contains several attractive features that Velazquez has not supported in the past. These include a significant increase in the award size and in the total SBIR set-aside, as well as the compromise cap on the number of awards to VC owned companies. Ultimately there will be a conference committee of the House and Senate that will either hammer out a compromise bill, or, once again, fail to reach an agreement, whereby the decision for another Continuing Resolution (CR) either will be considered, or the SBIR program will lapse (STTR is good through September 30, 2009). Something needs to be done by the end of this month.

You are encouraged to contact your congressional representatives to urge them to take action to ensure that the SBIR program does not die from neglect (or abuse). Here is an old template of a suggested letter you can update and send to your Representative and Senators. If you are worried about the SBIR grant application you plan to submit soon, you might consider sending a letter to every member of the House Small Business Committee.

Tell them what an important “stimulus” the SBIR program is for small business development and job creation. That ought to get their attention.

Slicing and Dicing SBIR Award Data

If you like numbers and acronyms, you will like this article. SSTI (State Science and Technology Institute), a national nonprofit network of practitioners and policymakers dedicated to improving the economy through science and technology, recently published SBIR Phase I proposal and award statistics by state for 2008. They also have similar data going back a few years. Being an Excel addict, I copied and pasted the data into a spreadsheet and was able to parse interesting tidbits from the larger meal of information. For instance, in 2008 the overall success rate for all Phase I SBIRs was just under 17%, somewhat better than research grant success rates at most NIH institutes, with which I am painfully familiar. The percentage of SBIR applications that were awarded ranged from a low of 9.4% at the DoT to a high of 24.1% at the NIH (more than twice the rate of RO1 investigator-initiated research grants in 2008).  Other agencies awarded grants at the following rates: DHS (9.6%), DoD (14.9%), NSF (15.4%), USDA (17.4%), NASA (18.4%), and DoE (18.7%). The raw data can be found on the SSTI web site.

Also interesting is the total number of SBIR grants awarded by the different agencies. In 2008 a grand total of 3555 Phase I awards were made by all participating federal agencies.  By far, the DoD made the most awards at 1825, more than half the total number of awards.  Trailing way behind were NIH (739 awards), DoE (280), NASA (276), NSF (224), USDA (77), DHS (28) and EPA (25).  Other agencies, such as NOAA, are not included here because they awarded so few SBIR grants they had minimal impact on these analyses.

State-by-state data

As I played with the spreadsheet and filtered the data in different ways, I learned a few other things. The top ten states with the most awards are the following in descending order and with the total number of awards in parentheses: California (688), Massachusetts (476), Virginia (224), New York (195), Colorado (182), Maryland (156), Texas (140), Pennsylvania (129), Ohio (120) and Florida (102). Wisconsin came in at a mediocre number 24 with a total of only 37 awards in 2008.

"...SBIR success pretty much follows Big 10 football and basketball success..."

If these data are taken as a measure of the success by which each state translates new technology into business, then Wisconsin (#24) is well behind Michigan (#12), Alabama (#13) and even New Mexico (#14). Illinois comes in at #18 and Minnesota at #22.  Compared to other Big 10 states, Wisconsin is just ahead of Indiana #25.  Iowa trails at #35. If you think about it, SBIR success pretty much follows Big 10 football and basketball success with Michigan and Ohio on top, while Wisconsin is in the second tier with Minnesota, Illinois and Indiana.  A cynical observer might conclude that sports success predicts technology business success. But, that seems to only work in the Big 10, since Massachusetts, with no sports powerhouses, is in the top two of SBIR grant winners from almost all agencies (more on that below).

At face value it may be surprising that states like New Mexico and Alabama are more successful than Wisconsin at winning SBIR grants (ok, so New Mexico also kills my sport’s success analogy).  And these states are consistently more successful than Wisconsin at winning SBIR grants.  From 2005-2008 Alabama won 103, 79, 72 and 73 grants—a declining trend. During the same period, New Mexico SBIR awards were more constant with an uptick in 2008, numbering 57, 60, 56 and 67. In contrast, Wisconsin enjoyed an upward trend from 2005-2007 with a downtick in 2008, with 36, 42, 49 and 37 SBIR awards, respectively. But, the reality that Alabama and New Mexico are more successful than Wisconsin in this regard needs to be tempered by the fact that different states focus on different technologies and may be more competitive in different areas. For instance, in Wisconsin, the number of SBIR awards from each federal agency in 2008, with the success rate in parentheses, is as follows: 1 award from NSF (6.7% success), 1 from USDA—surprising for an ag state,  (8.3%), 10 from DoD (14.7%), 2 from NASA (11.8%), 20 from NIH (29%), 2 from DOE (13.3%). Wisconsin is trending up in NIH supported SBIRs with 13, 19, 22, and 20 grants over the years 2005-2008.  Over the same period, DoD grants were fairly consistent in Wisconsin, numbering 8, 10, 13 and 10. Clearly, Wisconsin is spinning out more life science related tech business than technology business from other industries, with defense-related technology business springing up at about half the rate of biotech business.

Compare Wisconsin’s strong emphasis on life sciences to what is happening in Alabama and New Mexico. Alabama’s 2008 SBIR portfolio is as follows: 2 grants from USDA (40% success rate), 56 from DoD (16.7% success), 4 from NASA (10%), 7 from NIH (18.4%), 4 from DOE (30.8%).  Clearly Alabama focuses on defense and lags behind Wisconsin in biotechnology transfer.

In 2008 New Mexico also focused on defense as well as space and energy related technology transfer. This state won the following SBIR grants: 5 awards from NSF (19.2% success rate), 2 from USDA (40%), 1 from DOT (50%), 24 from DoD (14%), 13 from NASA (32.5%), 5 from NIH (14.7%), 14 from DoE (41.2%).  The state has consistently done well with energy grants since 2005, but the NASA grants awarded in 2008 represents a 2-3 fold jump from previous years.

One take home message from these analyses is that if you are an engineer or chemist, go to New Mexico, if you are a biologist, Wisconsin is a better place to find a job.

Room to improve in Wisconsin

Clearly, in 2008, biotech was the strength of WI SBIR success—with more NIH SBIR awards than awards from all other agencies combined. Wisconsin was 11th in the country in the number of NIH SBIR grants, behind the usual suspects. The top 10 in order were, CA, MA, MD, NY, TX, NC, PA, CO. MI and WA. But after CA (140 biotech SBIR grants) and MA (with 103), which together won 33% of all the NIH SBIR grants, there is a sharp drop in the number of SBIRs awarded by NIH. For, instance, coming in at number three, MD only won 43 SBIR grants from NIH. So, Wisconsin, while ranking near the top 80th percentile for NIH awards with 20 grants, is further behind the leaders than its ranking suggests. 

"...investment in quality research universities pays large dividends
in developing technology businesses..."

Interestingly, CA and MA are also in the top two for NSF, DoD, NASA, and DoE SBIR awards. It is no accident that many of the elite research universities in the US are found in these states and it is these academic elites that feed the new technology pipeline that leads to new business development. Together, these data point to the reality that investment in quality research universities pays large dividends in developing technology businesses—a lesson that Wisconsin cannot afford to forget, but sometimes tries to forget. This state has one elite research university and it pays huge dividends.  Without the UW-Madison, which spins off the lion’s share of biotech and health related (and other) technologies, we would be much farther down the line spinning out new technology businesses.  One question is how can the state get the UW-Milwaukee, Medical College of Wisconsin, Marshfield Clinic and other institutions to move up in R&D status to help make Wisconsin more competitive in generating life science technology businesses? Another question is what would it take to make Wisconsin more successful in translating engineering, energy, defense and agricultural technology into state businesses.

_________________________________________________________________________________

© 2009 Steven S. Clark, PhD, some rights reserved.  Articles contained herein, are meant to be distributed freely to interested parties. However, any use, including excerpts from any article, must credit Steven S. Clark and provide a link to the original article published in BioScience Biz.

Disclaimer: The authors used their best efforts in collecting and preparing the information published herein. However, neither Steven S. Clark, nor other authors, assume, and hereby disclaim, any and all liability for any loss or damage caused by errors or omissions, whether such errors or omissions resulted from negligence, accident, or other causes.

The Biotech Industry: Promise vs Reality

The Promise

Biotechnology as a business burst on the scene in 1976 when Genentech was launched to commercialize the new discoveries of how to clone and express human genes in bacteria.  This was soon followed by biotech companies commercializing monoclonal antibody technology, combinatorial chemistry and more recently “omics” technology (genomics, proteomics, metabalomics), high throughput screening and other continually emerging and commercializable technologies. 

"The lofty promise of all of this was that through improved technology and enhance understanding of biological activities, the process of drug R&D would become more efficient, faster, less risky and cheaper."

The lofty promise of all of this was that through improved technology and enhance understanding of biological activities, the process of drug R&D would become more efficient, faster, less risky and cheaper. This promise helped foster the perception that, compared to the pharmaceutical giants, smaller biotech companies are more agile, innovative and productive at R&D and, therefore, fill an important gap that the larger, ossified drug companies can not. It has been suggested by more than one industry observer that big pharma should focus on production, marketing and improving current products, leaving the innovative and cutting edge research to the more flexible and adaptable small biotech companies.

The biotech industry has certainly bought into this hope—it is rife with optimism that it can transform the pharmaceutical industry. The expectation has been that the biotech industry would follow a trajectory similar to that of the more mature semiconductor sector where the advent of solid-state technology stimulated fundamental product improvements and reshaped the whole electronics industry.

It is hard to dispute the notion that since genetic engineering technology first appeared in the early 70’s, we have seen the greatest scientific revolution in history.  By all measures—publication rates, patent activity, growth of biological databases—biomedical information has exploded.  This success has greatly increased the number of potential therapeutic targets and new molecular entities (NME) that represent potential new drugs. All of this has bred wide optimism by scientists, investors, Wall Street, policymakers, and others, that this life science revolution would lead to a trove of new drugs and ultimately to enormous financial rewards.

A further, related promise of the biotech revolution is that enhanced understanding of biological processes will allow more intelligent selection of new drug candidates and drug targets, thereby making drug R&D more efficient, less risky and less costly.  

The Financial Reality

Indeed, there have been impressive biotech success stories, such as Amgen, Genentech, Genzyme and a handful of others, but, how has the sector as a whole lived up to this lofty promise?  Thirty years after the launch of the biotech industry, Gary Pisano, a professor at the Harvard Business School, decided to empirically test how well the biotech sector has lived up to its potential.  He collected and dissected financial and productivity data for 293 publicly held biotech companies and from 20 large pharmaceutical companies that existed between 1975 and 2004 and his results, published in the book, Science Business, are sobering.

"...over the years, income has been flat, hovering close to zero..."

Here is what he learned about investment returns on public equity: A hypothetical investor who purchased all 340 biotech IPOs between 1979 and 2000 and held those shares until January 2001, or until company acquisition, would have realized an average annual return of 15%.  Not bad, but not stellar for such a high risk sector.  If the same investor purchased a diversified biotech portfolio in 1981 and sold it at the end of 2003, he would enjoy an 8-fold return, or about a 10% compounded rate of return per year.  Compare this to the more risk-adverse investor who invested in Treasury Bonds; he would have realized a 12-fold total profit and the same investment in the Dow Jones would be worth 21-times more.  Clearly, the return on biotech investment is disappointing when compared to alternative and less risky investments. To be fair, this comparison pits the entire biotech industry against other investment vehicles.  An individual investor who was more selective in the biotech companies he invested in, could have done much better (or worse) depending on his portfolio.

More revealing, however, was Pisano’s analysis of revenue and earnings for the whole biotech sector between 1975-2004. To measure this, he created a yearly aggregate income statement for the entire biotech industry. In other words, he combined the income statements of the 293 companies into one industry-wide income statement. 
   
His analysis showed that over time, total sales for the sector increased exponentially, as one would expect.  However, over the years, income has been flat, hovering close to zero until about 2000, when total sector income actually began to decline.  By 2004, however, the industry showed its first positive income of about 7% of total sales.  But, this is misleading since the most profitable firm, Amgen, heavily skews the results.  Excluding Amgen from the analysis reveals that the remaining biotech sector sustained steady losses throughout its history and never has been profitable. Pisano points out that since this analysis does not include privately held companies, the situation for the biotech sector is even bleaker since almost all privately held biotech companies lose money.

Pisano also noted that positive economic performance is concentrated in only a very few biotech firms—the vast majority of biotech companies have never been profitable.  When considering only those companies with positive cash flows, just fifteen firms account for 93% of the positive income for the sector and two, Amgen and Genentech, accounted for 53% of the total income of these profitable companies.  Some firms have existed for close to 20 years without ever generating positive cash flows.

The Productivity Reality

In simple terms, the raison d'être of the biotech and pharma industries is to turn financial resources into drugs, which in turn should drive profitability.  But, it is no secret that over the last few years, the big pharma R&D productivity has slipped dramatically. Even though R&D spending has increased, the rate at which NMEs are introduced has steadily decreased. Many industry observers argue that biotechnology will be the cure for this malaise and that big pharma companies ought to outsource its novel R&D to the leaner, meaner biotechs. 

Pisano also investigated this promise that the biotech industry is the answer to the productivity crisis in the pharmaceutical industry.  As a measure of productivity, he compared the inflation-adjusted cost per NME between the top 20 pharma companies in the world and the panel of 293 publicly held biotech companies. This analysis was complex with many confounding factors that needed to be accounted for, but these details are beyond the scope of this review. The important thing is that Pisano’s analysis showed no evidence that biotech companies are any more or less productive or innovative than pharmaceutical companies. Productivity and innovation between these two industries has been a dead heat almost since the beginning of the biotech industry.  

"..the biotech R&D productivity and novelty boom that has been
expected has not happened."

In other words, evidence shows that, when it comes to R&D, biotech companies are not more productive or innovative than their larger brethren, which means that the biotech R&D productivity and novelty boom that has been expected has not happened. Pisano writes, “If big pharmaceutical companies are looking to biotech to help them fill their revenue gap, these data would not make one optimistic.”

Conclusions

The malaise of the pharmaceutical industry is no secret, but Pisano’s analysis suggests that, by both financial and operational measures, the biotech sector also has not been healthy during its entire 30 year life. Only very few companies have ever been profitable, and an even smaller number of biotech “elites” have achieved substantial profits. These include Amgen, Genentech, Genzyme, Biogen, Idec and others, which, interestingly, were also among the earliest entrants into the industry. Hence, one might argue that with time, additional companies will rise up to finally realize the biotech promise. But after 30 years, or about 2 product development life cycles according to Pisano, there is nothing to suggest that this will happen in the foreseeable future. In fact, projections that profitability is just around the corner have been made since the earliest days of the biotech industry and have been consistently wrong. The bottom line is that the biotech sector so far has failed to reach its enormous commercial and economic promise.

This begs the question—given this lackluster performance, how has the biotech sector been able to continually attract capital over such a sustained down period from market forces obsessed on quarterly performances? A more important question is whether the industry will continue to be able to attract such capital if it continues to operate in the red. An ominous history lesson might come from the dot-com bubble and burst.  Pisano points out that once it became clear that the vast majority of these internet firms lacked a viable business model, the capital markets quickly pulled the plug. Pisano attributes the remarkable resiliency of the biotech sector to an “irrational exuberance” by investors who hope to invest in the next Amgen, and this is not unlike the exuberance that led to the dot-com bubble. But the sobering reality is that in 2006, only 20% of all publicly held biotechs had any products on the market or earned any royalties from products commercialized by partners. 

Thus, the vast majority of biotechs are simply R&D entities that have nothing to sell, and are not much different than most of the dot-com companies that existed just before the bubble burst.  Sobering indeed.

Fighting back against the high-handed nay-sayers

In a Wall Street Journal op-ed, authors David A. Shaywitz and Thomas P. Stossel take on high-minded academics who relentlessly attack university-pharma associations.  Labeling such critics as "PharmaScolds" they point out that relationships between university researchers and medical product companies are under relentless attack by critics who portray these associations as a morality play in which noble academics struggle to resist the dark, corrupting influence of industry. Then they follow with this question: why are leading disease-research foundations increasingly choosing to partner with industry rather than condemn it?

"The goal of medical research is not to publish papers,
but to develop new treatments..."

The answer is that by prioritizing the needs of patients, medical philanthropies remain keenly aware of something academic critics of industry may have forgotten as they've scaled the ivory tower ladder. The goal of medical research is not to publish papers, but to develop new treatments for people suffering from disease. And translating laboratory research into new therapies, in the words of Robert Beall, president of the Cystic Fibrosis Foundation, is something "academics are really not good at."

Read the full article here.
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Dr. Shaywitz is a management consultant in New Jersey.

Dr. Stossel is a professor of medicine at Harvard and a fellow at the Manhattan Institute.

SBIR (non)Authorization Redux?

The latest word from Washington is that getting the SBIR reauthorization passed before it expires on March 20 is about as unlikely as the Cubs winning the World Series without a shortstop.  In order to keep the program alive until Congress can get around to the reauthorization, a continuing resolution (CR) is needed to temporarily extend its life. In fact, the SBIR program currently lives on via CR life-support since the last Congress did not complete the reauthorization bill.

The SBIR Program, created by the Small Business Innovation Development Act of 1982, periodically comes up for reauthorization every few years.  It was reauthorized in 1986, 1992, and 2000 and was slated again for September 2008; but, instead, congress failed to act and the program was temporarily extended by CR to March 20, 2009.

"You are encouraged to contact your congressional representatives..."

In 2008, Nancy Pelosi’s (D-CA) House made a heavy-handed attempt at the reauthorization, and under pressure from the biotech lobby, a bill (H.R.5819) was strong-armed through the House Small Business Committee. A major point of contention was whether to allow companies that are majority-owned by VCs to be eligible for SBIR funding—currently they are not. In other words, the debate centered on whether to emphasize the “S” vs the “B” in the reauthorization act.  To the consternation of the small business community, which was not allowed any input by the Committee, the bill passed and SBIR eligibility was extended to companies mostly owned by VCs.

Over on Harry Reid’s (D-NV) side of the Capitol, and under the leadership of Senators John Kerry (D-MA) and Olympia Snowe (R-ME), the Senate Small Business and Entrepreneurship Committee recommended a compromise bill (S.3362) that was supported by both the biotech and the small business lobbies.  Despite this broad and bipartisan support, Reid never scheduled a vote on it and the 110th Congress adjourned without completing the SBIR reauthorization.

Both bills are now moribund and the SBIR program is on its last legs unless another CR is passed.  The 111th Congress will have to start from the beginning on a new reauthorization bill, but efforts to reconsider the reauthorization bill have not yet begun.  Even if Congress began work on the bill today, it is unlikely that it would make it to Obama’s desk before the end of this year, several months after the program is scheduled to expire. Hence, another CR is urgently needed in order to avoid interruption in the SBIR program.

You are encouraged to contact your congressional representatives to urge them to take action to ensure that the SBIR program does not die from neglect.  Here is a template of a letter you can send to your Representative and Senators. And If you are worried about that SBIR grant application you plan to soon submit, you might consider sending a letter to those who held up the reauthorization last year, including every member of the House Small Business Committee as well as to Senate Majority Leader Reid.

Tell them what an important “stimulus” the SBIR program is for business development, job creation and the economy.  That ought to get their attention.