A view from the Center

Deloitte's Life Sciences & Health Care Blog

A balancing act: Four elements driving successful R&D

Recent research shows that financial returns from biopharma research and development (R&D), after years of struggle, might be turning the corner. Business development and M&A activity in the biotech sector was up in 2014 with 82 new IPOs issued— a one-year record. Revenue is growing and is expected to continue on an upward trajectory.

But that’s only one part of the much larger picture. Grading sector stability and growth principally on cost/revenue generation is just one measure of progress and predictor of future viability.

The question isn’t only whether R&D has turned the corner, based on revenue and profit considerations, but whether companies are using strategies, methodology, and resources most effectively to bring promising new drugs and treatments to market. It’s really a question of balance.

Increasingly, organizations are making strategic choices about increasing the use of innovative resources that originate outside of their own laboratories. Recently, Deloitte published its annual analysis of sector activity, Measuring the return from pharmaceutical innovation.” Our study found that large biopharma companies are continuing to trend in this direction to bolster internal R&D portfolios – 58 percent of late-stage pipeline valuation was coming from external sources.

In my discussions with industry innovators and visits to US research facilities, I’ve found that balancing private enterprise, risk-taking investment, government policy, and strong academic and foundation research in more creative ways can help tap these external assets and build a more entrepreneurial network.

Four factors are essential in establishing such a balance.

  1. Alignment: The first is a clearer and more workable alignment of science with the private sector – one that can better channel the flow of scientific research developed in university labs and innovation centers to commercial viability.
  2. Financing: The second is financing. It can come from various sources, but investors must know how to take a risk – capital infusions by pharma enterprises and outside investors who envision a big payoff but have the capacity and willingness to absorb risk.
  3. Customer presence: A third element is customer presence, and how a biopharma company or disease foundation, as the customer of scientific research, can adapt important research to what will be commercially successful and may ultimately make a difference to patients’ wellbeing.
  4. Environment: Finally, the establishment of a physical environment where companies can launch or expand with minimal friction, and without always having to reinvent the wheel, can be pivotal.

The development of Mission Bay in San Francisco is a good illustration. A decade ago, the city had just a handful of biotech companies. Today, there are a couple of hundred built in state-of-the-art facilities atop an old abandoned rail yard, from start-ups to big pharma companies. The city wisely elected to partner with private enterprise and public universities to create a sprawling urban environment where innovation could thrive.

For all stakeholders involved in a more balanced approach, it’s not as much doing one thing exceedingly well, but creating a multi-tiered system in which innovators have access to critical science, investment, and development information.

The timing for pursuing and achieving this type of R&D balance couldn’t be better. We’re seeing remarkable early stage work in the area of cancer drugs, immunotherapy, cell therapy, gene therapy, and the first wave of game-changing innovation in digital medicine and treatments for our aging population.

Understanding what works, what doesn’t, and whether the conventional thinking reflects reality can help determine the best path.

In a recent study, for instance, the California firm Bioscience Advisors presented some data about 2014 biopharma IPOs that seemed to contradict some common assumptions. Biotechs partnering to develop products and services on average fared more poorly in IPOs than those going it alone. Mid-stage IPOs often did better than late stage. Younger companies tended to do better than mature companies.

The lesson for stakeholders is that relying on conventional wisdom about what it takes to have a successful biopharma IPO may be misleading. And so, there are implications about which emerging companies might be most promising for R&D partnerships. Clearly, the market is evolving. Sluggish investment and ROI is giving way to more optimistic views of future activity as shown by the current hyperactive IPO environment.

Now, it’s imperative to rethink how we embrace an exciting and potentially lucrative scientific, funding, and public policy synergy. It’s not how much we spend or the revenue generated. Strategically, it should be how best to align these four essential factors that go into achieving the necessary balance, for the ultimate benefit of the industry and the consumer.

 

Author bio

Matthew Hudes is the BioPharma segment leader for Deloitte LLP’s Life Sciences practice. In this role, he provides guidance to the practice’s tax, audit & enterprise risk, consulting, and financial advisory services teams. With 20+ years of experience, Matthew provides strategic professional services to leading Biotechnology, Pharmaceutical, & Medical Technology companies, as well as Academic Research Centers. He works with leading Life Sciences innovation centers in the US and globally.