Survey: Lack of funds, regulatory climate threaten biomedical industry

January 13, 2012 – 4:54 pm by Michael Christel

Future growth for the biomedical industry faces growing and unprecedented threats, according to a newly released survey of CEOs from life sciences companies in California, the largest biomedical cluster in the world. The three biggest threats reported were access to capital, a burdensome and uncertain regulatory environment, and lack of innovation and productivity in research and development.

The survey, which targeted about 100 companies focused in the areas of pharmaceuticals, biotechnology, medical devices, diagnostics, or medical equipment, was released during a briefing at this week’s JP Morgan Healthcare Conference in San Francisco. The survey was conducted in November by the California Healthcare Institute, BayBio, and PricewaterhouseCoopers US.

In perhaps the most telling finding, nearly three quarters of biomedical industry CEOs surveyed said their companies have had to delay an R&D project in the past year. Lack of funding was the top reason for project delays cited by private company CEOs, and accounted for more than 40% of delays by all public and private companies in the survey.

“That’s the first time we’ve really seen that significant percentage of CEOs that have said that their companies are in that box,â€� Tracy Lefteroff, national life sciences partner, PwC, tells R&D Directions in an interview. “That’s pretty significant. And it’s the first time since I’ve been working in the industry since the mid-’80s that we’ve seen that kind of high percentage of CEOs that believe that their company is having trouble accessing capital.â€�

In another concerning finding, eight in 10 CEOs surveyed agreed or strongly agreed that the current FDA regulatory approval process has slowed the growth of their organization. The majority of respondents believe the regulatory environment in the United States is adversely impacting the availability of capital and the comfort level of investors to invest in experimental drug discovery and development work. Twenty-eight percent of CEOs cited regulatory issues as the primary reason an R&D project was delayed.

Alexis Lukianov, chairman and CEO of NuVasive, a medical device company focused on surgical products and procedures for the spine, was part of a panel at this week’s briefing, and said product approval delays by FDA cost NuVasive about $70 million in lost revenue in 2011 and into 2012, and forced the company to reduce its headcount growth plan by potentially 15%. Mr. Lukianov says NuVasive has released about 10 new products per year over the last six years, but that output was cut in half in 2011.

“It’s the moving goal post,� Mr. Lukianov says. “It’s the fact that we pre-agree with FDA on a route, on a protocol, and on a timeframe. We go through all of these steps, which we planned millions of dollars for and which we have an endpoint relative to revenue and jobs. We go through all of these steps only to come to this nexus, which then drives it to [FDA saying] we need more data or we need more information, without any real reason for doing so.

“What we want to see is transparency and making sure that a deal is a deal. Now if something changed relatively to safety or efficacy, we would be the first to agree that we should make adjustments; nobody’s saying we don’t care what the outcome is. But there are plenty of people getting the benefits of these therapies in other parts of the world, but we can’t get them [approved] in the United States.�

Mr. Lefteroff points out that the problems of FDA-sanctioned delays and dwindling access to capital go hand-in-hand. When companies are forced to delay projects amid additional requests by regulators, investors believe there is less reason to fund them, he says. Conversely, as these same companies get less capital, they are forced to delay promising projects internally.

“There’s no transparency on what it’s going to take to get these companies through the regulatory process and get products onto market,â€� Mr. Lefteroff says. “A lot of the VCs just aren’t filling the tank anymore. They’re saying they can’t afford it. When you look at what’s happened to them and their industry, you can certainly understand that. A lot of these guys are being forced out of business because the returns aren’t there. If the returns aren’t there, they can’t get products approved through the FDA.â€�

The survey also highlights the shifting trend of biomedical companies to tap alternative sources of funding, realizing traditional private equity and venture capital channels have become increasingly difficult to access.

Forty-four percent of biomedical CEOs surveyed said they will look to licensing agreements and corporate partnerships as a source of finance in the next 12 months, double the number of CEOs who last year reported that their companies were using this route.

In addition, corporate venture funding, which is the investment of corporate funds into external endeavors, is expected to become a much more crucial source of funding to the industry, with 30% of CEOs saying they will tap corporate venture capital as a finance source in the next year, versus only 10% who did so in the past 12 months.

To that end, biotech startups and mid-sized companies have increased efforts around securing R&D partnerships and licensing agreements with organizations in big pharma and biotech, who have the cash to advance therapeutic discoveries through the costly clinical-development process.

“Venture capital is not going to be able to fund you all he way through that milestone anymore,� That’s where pharma is increasingly stepping up and filling that void through collaborations, R&D partnerships, and the like. [Biotechs] are pursuing [those kinds of deals] but they’re not getting it done in the speed that venture funding has always been done. The timeframe to get those deals put in place is another significant factor in people’s difficulty in getting access to capital.�

Such arrangements, however, are become increasingly attractive to larger drugmakers, many of whom face patent expirations on several of their top products and are under pressure to replenish pipelines.

“For pharma, there’s a sense of urgency that they need to get new drugs into their pipeline and get them through the development phase,� Mr. Lefteroff says. “To the extent that they can get some of these earlier-stage drugs into their pipeline, they can get that stuff done much more quickly than waiting as they have been and only licensing or purchasing very late-stage compounds.�

Though still only a small contributor to the finance equation, disease foundations/non-governmental organizations are growing as a funding source for 11% of CEOs who plan to use these funds in the next 12 months, versus only 4% who did last year, according to the survey.

Although access to funding is a critical concern for biomedical companies, the tone of the survey and this week’s briefing point to the issues around FDA and regulation as the prevailing theme affecting R&D for these organizations. Stephen Cary, Ph.D., CEO and co-founder of Omniox, an early-stage biotech based in the San Francisco Bay area, said that the requirements from FDA on the number of patients needed in a study to demonstrate safety, particularly for a cardiovascular disease drug, are “mathematically and financially untenable.â€�

Eighty-percent of biomedical CEOs surveyed do not believe that FDA has the best regulatory approval process in the world, and three-quarters believe that within five years, another country could conceivably recreate the ecosystem that has made the United States the leading biomedical region in the world.

“Without a level of reduction in regulatory uncertainty, you can’t attract capital into the industry,� Mr. Lukianov says. “When you can’t attract capital into the industry, you can’t hire good people and put them together on teams in order for them to solve public health problems.�

Executives at the briefing did acknowledge the increase in FDA approvals of cancer medicines in 2011, but said there is great need to extend the trend to other significant areas of unmet medical need.

“One of the views that we’ve had is the FDA is not very good at understanding the indirect risk of discouraging product development in important areas,� says David Gollaher, Ph.D., president and CEO, California Healthcare Institute. “They’re pretty good at understanding the direct risk – if a molecule has adverse events in a patient population – but if their standards are so high that investors don’t invest in the first place and a whole area is undercapitalized, the public health harms that can come from that might be very great.�

The CEO survey was released to provide an early glimpse into the 2012 California Biomedical Industry Report, due out early next month.