Christa McAuliffe was a hometown hero to me. An American teacher from Concord, New Hampshire, she was supposed to be the first teacher in space. Selected from more than 11,000 applicants, she was to conduct experiments and teach two lessons from aboard the Space Shuttle Challenger. All those hopes were erased just 73 seconds after takeoff on January 28th, 1986.
Her legacy was her boldness. She was going to do something that had never been done before. After the tragedy, NASA did what NASA does best. It did not give up. It worked harder and smarter. In the past months, the space industry has suffered two more stunning setbacks, first with the unmanned rocket built by a NASA contractor and bound for the International Space Station, which exploded dramatically over a field of clicking media cameras, and then, just days later, the less spectacular but this time fatal crash of Virgin Galactic’s SpaceShipTwo, a much-anticipated space tourism plane.
Biotech, like the space industry, is no stranger to setbacks. In fact, I see a lot of parallels between space exploration and biotech. One industry operates in the macro universe, the other in the micro, but both use science to master that universe, and work against incredible odds to do something the generations before us deemed impossible. Curing a disease may not be as photogenic as a rocket launch, but biotech’s plotline is every bit as gripping, and far more lives hang in the balance.
As Senior Vice President of Business Development in a growing CDMO, I look inside a lot of biotechs in a year, and I have noticed some important trends.
The Economy Has Forced Biotech, Like the Space Industry, to Mature
Both industries have gone through the recent boom/bust cycle and radically changed their approach to business. NASA has gone private, allowing private industry to explore space tourism and putting much of the space industry in the hands of entrepreneurs.
I see maturing in our industry also. As I write this in November, I am between meetings at the Annual American Association of Pharmaceutical Scientists (AAPS). To me, the AAPS is a microcosm of what’s going on in the industry itself.
Before the recession, the AAPS annual meeting was like something out of The Great Gatsby. Biotech was the industry to be in, and AAPS was the place to be in biotech. Every year, the 4-day conference broke a new record for attendance. The science was fresh and rich too–with a valuable mix of symposium topics and one-on-one business meetings. But it did not end there. The galas and socials were extravagant, as each company tried to outdo the others. Vendors booked exclusive venues and held elaborate functions. It was a badge of honor to hold a golden ticket to one of these coveted events. The industry was growing faster than ever before, and it seemed the punch bowl would never be empty.
But it did empty. If the AAPS before the recession was The Great Gatsby, during the 2009 recession it was The Grapes of Wrath. Think tumbleweeds and dust bowls. It was a scary time. Large Pharma pulled their outsourcing and found ways to get things done internally. The industry threw what money there was into late pipeline drugs; the ones ready to start earning money. The early pipeline ran dry. Small biotechs were left in the cold, funding gone, hopes and dreams shelved.
Today’s AAPS is A Tale of Two Cities: a story of redemption. For all of our mistakes, we have learned our lessons. This convention is lean and mean. Companies are spending carefully. The money is back, but booth and event spending are not as extravagant as it was ten years ago. The trade show is tasteful and reflects a spending level appropriate to where we are, emerging from a tough market. There are no golden tickets; in fact, outside events are mostly a thing of the past. This new sobriety is not because things are bad, quite the opposite. It reflects a maturity I see everywhere in the industry, not just at AAPS.
This year we have more confidence than ever from our buyers. We are seeing growth far beyond what we experienced pre-2009. Clients are placing larger projects and less piecemeal. This allows continuity and speed in development and getting to trials in fewer steps when compared to the placement of work over the past four or five years. Smart buyers who have been here before realize that coordinating fewer vendors during development brings them from bench to bottle and into clinical patients more quickly and with fewer headaches. CDMO selection is more important than ever, and buyers are asking hard questions from experience, then doubling down with teams they trust.
The FDA has come a long way, too. We are getting accustomed to terms like fast track status, breakthough therapy, priority review, and accelerated approval. These terms reflect the fact that not all development should be treated the same. An application for fast track status, for example, expedites drugs showing potential to treat an ‘unmet medical need’; meaning an illness for which no cure currently exists. For desperate patients needing treatment, this law is a Godsend, and the FDA is delivering. The law requires the agency to respond within 60 days of receipt of such a request and more than half of all requests meet a positive outcome.
Biotech Is Entering a Stable Orbit
In 2013, biotech took off. That in itself is not unprecedented: biotech stocks routinely explode upwards or collapse and die in a single hour, either beneficiaries or victims of a single announcement.
But last year was something different. Like a spaceship entering orbit, biotech achieved something more stable than the industry norm. Growth was remarkably broad-based. More than a third of stocks saw their value top 50%, while 60 of 330 doubled their stock value, and 25 tripled.
Analysts said the market was over-valued. For a while, they seemed to be right. In early spring, the market lost altitude and biotechs dropped 22% over 6 weeks. Panicky headlines (“How Low Can Biotech Go?” --Moneyshow. com, May 2014) abounded. But for biotech, 22% really isn’t bad, especially after a great long run. The moment passed, and the summer was a biotech dream. Untested biotech companies were suddenly going public. By late August, 24 US firms had issued initial public offerings (IPOs), injecting $1.8 billion into the industry. The average IPO saw a 20% increase in share value on opening day. Another 8 companies waited their turn, giving 2014 potential to be another banner year.
As I write, biotech is up 45% year to date, and 228% over the past 3 years.
These figures have huge implications for the drug development industry as a whole. Biotech is the spigot that fills large pharma’s development pipeline. Large pharma has shrunk internal R&D to such bare bone levels that they are now very reliant on biotech to seed the entire industry. It’s a model that seems to be working.
Orphan Drugs Fuel Biotech
If biotech picks favorites, lately it is orphan drugs, which target rare diseases. These cures, long on drug makers’ back benches, are now of prominent interest. The combination of government incentives, smaller/ shorter clinical trials, and extended exclusivity has made top orphan drugs as viable as their non-orphan peers (WSJ Pharmalot, August 2012). Sometimes, a drug’s first orphan disease is just the beginning. Thomson Reuters reports 15% percent of orphan drugs later re-launch for other diseases. Of 86 orphan drugs analyzed, over a quarter generated annual sales over $1 billion, making them blockbusters. In fact, the percentage of non-orphan status drugs achieving blockbuster status is exactly the same as those in the orphan category.
Mergers, Mergers, Mergers Everywhere
M&A in the healthcare sector is at record levels. As I write, the diagnostics company Laboratory Corp. of America just announced a $5.9 billion cash and stock deal to buy Covance, one of the largest CROs in the US. On a smaller scale, Paratek merged with Transcept, Daiichi bought Ambit, and we all have watched as Valeant knocks on Allergan’s door and Abbvie dances around Shire.
Big pharma is gobbling up biotechs on a weekly basis. The feeding frenzy is attracting billionaire investors everywhere. Whenever you see a stock owned or controlled by a billionaire investor, you can bet someone is working behind the scenes to sell the company. Investors don’t make big dollars owning and holding; they buy, build, and sell. Billionaire and top hedge fund manager Seth Klarman of the Baupost Group made over $1 billion when Merck acquired Idenex at a 229% premium.
Good investors can make a profit under any market conditions, but today’s solidly positive uptrend reduces the challenge and makes it a particularly good time for a takeover.
Toxicology Molecules Are Back
The toxicology field remains an integral part of a strong and healthy market. Toxicology saw double-digit growth in Q2 of this year, for the first time since 2008, according to William Blair Equity Research, September 23, 2014. Blair reports that pharma sponsors are pouring funds into early development, following the peak of the generic wave. This, combined with a record wave of biotech financing, should fuel growth for at least 12 to 18 months.
An Emerging Market for Small-Scale Clinical Supply Services
As NASA increasingly hands the keys to innovation and development to private industry, so, too, we see a similar shift from large to small in Clinical Supply Services (CSS).
Until recently, CSS was the near-exclusive purview of large producers. That began to change as Xcelience opened a new clinical supply packaging facility in November 2012, offering packaging and distribution services. At the time, it was something no other company under $1 billion in revenue was offering, and the industry badly needed it. Larger packaging companies cannot provide the quick turnarounds and flexibility that many clinical trials desperately need.
A small company like Xcelience keeps several secondary packaging rooms available so one can always be made ready immediately when an order comes in. Because our operation is designed for smaller runs, we are also priced for them—which means significantly cheaper than larger companies. Just two years since the new facility opened, CSS make up 30% of our revenue.
In 2014, enough other small CROs have dipped their toes into the CSS pool to consider this an emerging market. Announcing similar intentions, they are starting with small bottling lines and a few pieces of equipment. Smaller-scale CSS is an exciting opportunity for all biotech producers, and we welcome the trend because the noise is doing a lot to get the word out that there is a better way.
Failure will always be a part of both industries’ stories. In the space industry, setbacks make headlines full of fire and fatalities. In biotech, our setbacks happen quietly in the lab, often with no headlines at all. Another startup closes its doors and turns out the lights. Another ray of hope dashed for the patients who might have benefited. Biotech’s setbacks never produce a single name for us to mourn, like Christa McAuliffe, and yet thousands die each time a cure isn’t found. Both industries accept failure not as a permanent state, but as setback. Failure is just what happens before you start again. And again. And again. Until you get it right.
Sharon Burgess is Senior Vice President, Business Development at Xcelience, a CDMO in formulation development and clinical packaging and logistics located in Tampa, FL. Mrs. Burgess has over 20 years of experience in the CDMO industry and has been a member of the Xcelience team since 2003, where she has made defining contributions to the growth and strategy of the company.