Send to printer »

Point of View: January 09, 2017

Management Tenets that Hold for Biotech

Entrepreneurialism, Competition, and Globalism Are Flourishing in Biotech

  • A recent column in The Economist (December 17, 2016) argued that “Management theory is becoming a compendium of dead ideas.” Specifically, the article took issue with the concept, “that we live in an age of entrepreneurialism.” It claimed that “business creation has declined since the 1970s,” that “most startups stay small,” and that in some years more businesses are dissolved than created.

    Fortunately, none of this applies to the biotech industry. First of all, there were just a very few biotech companies in the 1970s. It essentially took off in the 1980s and has flourished ever since. According to EY’s annual biotechnology reports, the total number of private and public U.S. biotech companies grew to 1,274 by 1999, and as of 2015 had reached 2,772.

    As for startups tending to remain small, that has always been the case, regardless of industry. Only a very few have the talent and capital to succeed. Nevertheless, as reported by EY, U.S. biotech companies raised almost $20 billion in capital in 2000, $30 billion in 2011, and $45 billion in 2014. Moreover, from 2009 to 2015, the number of U.S. public companies increased 39%, from 313 to 436, and the number of those companies with a market cap. greater than $500 million increased 149%, from 47 to 117.

    The Economist disputed another management tenet, “that business is more competitive than ever,” and instead argued that the growing consolidation of businesses via mergers and acquisitions has diminished the role of competition. Indeed, from 2006 to 2013, the annual number of mergers experienced by U.S. and European biotech companies averaged 58, but increased to 70 in 2014 and 89 in 2015. Yet, even with the uptick of mergers and acquisitions in 2015, the total number of independent U.S. and European public biotech companies increased from 611 in 2014 to 670 in 2015.

    Another set of numbers confirms that competition is vibrant in the biotech sector. For U.S. and European biotech startups, early stage venture investment, consisting of seed capital and Series A financing rounds, increased from $0.9 billion in 2000 to $1.8 billion in 2014 and $3.5 billion in 2015.

    The Economist’s remaining notion, which clearly does not apply to the biotech industry, is that globalization is no longer inevitable and instead is reversible. It predicts that nationalism will increasingly impact negatively on multinational firms and on global trade. Its argument is mostly based on political differences between nations that erupt from time to time. Yet in the long term, technological forces should overcome such differences.

    For example, having access to the appropriate biopharmaceutical can be life-saving.  Thus, if a U.S. biotech firm manufactures an essential therapeutic not made elsewhere, the odds are that sooner or later it will export that therapeutic to where it is needed. Data compiled by Statista reveal that U.S. biopharmaceutical exports worldwide increased from $16 billion in 2003 to $29 billion in 2007, $38 billion in 2011, and $47 billion in 2015. These figures indicate that around a quarter of global biopharmaceutical revenues are due to U.S. exports.

    Entrepreneurial biotech companies will continue to spring up well into the future for a very simple reason. Basic research in the life sciences continues to uncover fundamental knowledge at an exponential pace, which in turn leads to exponentially increasing advances in applied research.

    Although there is still plenty of R&D focused on coming up with improved medications that will extend life by a few months to a few years for patients with a multitude of chronic diseases, the playing field has changed dramatically over the past 30 years. In this relatively short period of time, stemming from out-of-the-box, basic research findings, an impressive number of biologics have been developed and commercialized that enable sufferers of life-threatening diseases to live a normal life span. Yet, this is only the beginning of how disruptive innovations are transforming medical care.

    Gradually, life-threatening chronic diseases will be treated as if they were acute conditions: cures will eventually replace palliative care. Procedures such as gene insertion, gene editing, stem-cell delivery, transplanting replacement organs formed by 3D bioprinting, and a host of other technologies (including ones not yet invented) will repair or replace damaged cells and organs.

    Given that the leading causes of death include heart disease, cancer, chronic lower respiratory disease, stroke, Alzheimer's disease, diabetes, and kidney disease, and that the vast majority of some 7,000 rare diseases are currently incurable, the economic opportunity for biopharmaceutical companies is staggering. In the biotech world, entrepreneurialism, competition, and globalism will flourish well into the future.