On February 17, 2009, President Obama announced as part of the 2009 stimulus bill, an increase of approximately $10B dollars to the budget for the National Institute of Health (NIH). This is a much needed increase in funding as government sponsored biomedical research has remained relatively flat over the past several years (Figure 1). Whether or not these funds will have a direct effect on stimulating the economy or to what extent they have on long-term economic growth can be debated elsewhere. The more important question regarding health care in the U.S. is “will the increases in funding lead to new medical advances that improve a patient’s quantity and quality of life?”
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Figure 1: A history of NDAs relative to the NIH budget. The NIH budget has grown steadily from 1980 through 2000 at which time the budget has remained flat until 2008. The number of NDAs has remained around 100 annually despite increased federal spending on academic research through the 80s and 90s. Data source: NIH website (http://www.nih.gov/about/budget.htm) and FDA website (www.fda.gov)
Despite the fact that the NIH budget has increased from a little less than $4B in 1980 to about $25B in 2008, the number of New Drug Applications (NDAs) to the FDA has remained somewhat constant, indicating that there remains a gap between NIH funded academic discoveries and translating the ideas into FDA approved products. Accordingly, it is unlikely that in its current form, increasing NIH funding will lead to a proportional increase in NDAs. The primary source of the bottle neck may begin with the challenges associated with starting, running and funding an early-stage biopharmaceutical company.
Starting a biopharmaceutical company based on academic discoveries takes a great scientific mind, yet relatively few top academic scientists accept this challenge. One reason is the funding “trap” associated with running an NIH sponsored academic lab. Principal Investigators (PIs) spend a great percentage of their time writing grants, which is the primary source of funding for their labs. Once a grant is received, their time is spent training new scientists and generating preliminary data needed for the next grant. It is simply not feasible, especially for some of the less-funded labs, to allocate resources to start a spin-off company. Small Business Innovation Research (SBIR) grants are available to some PIs, yet these are only a small fraction of the money needed to start and run a successful biopharmaceutical company. Incidentally, the NIH SBIR budget was not increased in NIH stimulus bill. Thus, the risks of starting a new company, while potentially losing NIH funding, are simply too high for many PIs to undertake.
If the technology is licensed out of an academic institution, a life-science entrepreneur is faced with arguable the most difficult aspect of starting a company: fund-raising. Sources of early-stage funding for start-up biopharmaceutical companies is primarily venture capital, angel investors, or other sources of private equity. With the current economic conditions, these sources of investments are decreasing and there is more competition for what remains. On a local level, even Ben Franklin Technology Partners (BFTP), a proven job-generator that has contributed substantially to Pennsylvania’s overall gross state product, is at risk for reduced funding according to a May 20, 2009, opinion editorial by Terry Singer, Director of Statewide Affairs for BFTP.
About half of the biotech companies on the NASDAQ, many of which have promising long-term pipelines, have less than six months of cash remaining. As a result, they are either reducing their investment in drug discovery and development or closing their doors completely. As discussed at our recent roundtable event, this type of “financial” failure is unique for biotech companies compared to traditional failures that are based on poor clinical trial data. Since investors do not have the ability to determine in advance if a drug is slow to develop for scientific reasons or destined to fail because it is a bad drug, many potential drugs may be abandoned due to these financial shortfalls.
Small biopharmaceutical company executives need to find ways to act lean, keep focused, and effectively communicate their merits to investors in order to remain competitive and survive. Additionally, CEOs need to adapt to changing market conditions and technologies by understanding their product relative to these outside forces and positioning them accordingly. CEO leadership and decision making is critical to the success of the company at this stage of development as they look to partner for a successful exit.
Despite the adversities discussed above, life science financings are still happening, such as the recent series A financings of Sagent Pharmaceuticals and Aragon Pharmaceuticals and $34.5 million series D financing for Avid Radiopharmaceuticals. The challenge for early stage companies is to find ways to distinguish their products, technology, and team from the many other companies in a similar position. Unfortunately, many scientific entrepreneurs are either strong in terms of scientific knowledge or business skills, but it is the rare exception that master both. A broader vision of all aspects of a life science company is needed to compete for the limited resources. Many of the important issues were recently discussed at the MD Becker Partners round-table event titled “Successful Strategies for Raising Visibility and Capital.” A full transcript of the event can be obtained by contacting MD Becker Partners.
The difficulties associated with the development of a drug from academic discovery through NDA approval are vast in a good economy, but are amplified in today’s volatile economy. There is no one single solution and the creativity of our researches, entrepreneurs, and investors will be challenged as new collaborations emerge. Still, there remains a significant desire to find new medicines to treat many of our unmet medical needs. A review of the data indicates that the problem is not a lack of scientific ideas developed in academic institutions but rather early stage company development and funding. More funding should be focused on helping early stage companies with preclinical studies allowing them to de-risk so that they are more attractive for private equity financing in these difficult economic times. In this regard, government-funded agencies exist that support early stage life science companies, such as Ben Franklin Technology Partners. While their model has proven highly successful, their greatest challenge in the years ahead will be limited capital resources due to proposed budget cuts.
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