Looking to the Future

Tracy Lefteroff of PricewaterhouseCoopers takes us through the challenges and opportunities facing the biomedical industry.

These are interesting times for the biomedical industry. On the one hand, the industry is poised for incredible growth, with every major industrialized nation entering its highest user years for health care. Basic research, from stem cell science to molecular genetics, promises finally to unlock the secrets to diseases that have remained incurable.

On the other hand, there is concern about the industry’s ability to attract and retain appropriately skilled workers, about increasing regulatory burdens that slow product development and add costs, and about global competitive pressures that could negatively impact its ability to raise capital. There is also is a general sense that government intervention could cast a pall over the US market by altering the risk-reward calculus, thus reducing investment.

As Tracy Lefteroff, Global Managing Partner, Life Sciences Industry Services at PricewaterhouseCoopers, explains, “The challenges are always going to be there: finding qualified people, finding the right ideas, raising venture capital. There are also the regulatory elements: the FDA has to weigh in on the approval of products, and getting through that process can be a huge challenge.

“Then there is the issue of reimbursements: setting up reimbursement codes for new treatments and new products is sometimes a challenge for smaller companies. But the rewards so far have outweighed the challenges, and that’s why so many companies get into this business, because it is a good business.”

And it’s a business that employs a lot of people. In California alone, 270,000 people work in life sciences companies and academic institutions, which generate more than $73 billion in revenue. According to Lefteroff, “California’s got all the elements that make for a very successful industry. It’s got world-class research institutions and it’s got venture capital – more than half the venture capital that’s located in the United States is in California. The state also has a skilled employee base, and a cluster of existing companies, which is crucial to supplying those employees to enable the industry to expand.”

Potential threats
While the promise of California’s – and America’s – biomedical industry is immeasurable, its leaders cannot ignore emerging potential threats to its future. Companies and institutions must now contend with rising global competition as the movement of information, talent and capital accelerates across America and intensifies around the world.

The incredible pace of foreign economic growth, from Brazil to China, and the ‘flattening’ of the world made possible by high-speed Internet connections, open up remarkable new opportunities for expansion. The sheer velocity of change now forces the industry to pursue innovation aggressively to be able to compete globally.

Uncertainties about the extremely costly and lengthy clinical trials required to bring a novel drug, medical device or diagnostic to market can diminish investor interest in an industry that depends on billions in investment capital. Following setbacks from recent drug recalls and delays in approvals of new technologies and therapies, the industry expects the FDA to require more rigorous review of products, along with larger, more expensive studies and greater scrutiny of data to confirm product safety and effectiveness.

As it becomes increasingly difficult for biomedical products to move through the FDA, the risk of foreign competition grows. US biotechnology companies have historically enjoyed a barrier, based on the quality of their science and first-mover advantages, insulating them from direct competition. As the first generation of biotech products loses patent protection, however, they face competition from biosimilar drugs.

Some concerns have actually created opportunities for the industry. For example, the convergence of technology challenges biomedical companies as the hard lines between industry segments – biopharmaceuticals, medical devices, diagnostics and information technology – begin to blur. However, this convergence compels the industry sectors to expand their knowledge of one another’s technologies and best practices and better understand the competitive context for their unique products.

Technology convergence also fuels rapid innovation and creates incentives to speed treatment delivery and tailor drug modality to more precisely match patients’ specific needs. Simultaneously, globalization spawns unparalleled opportunities for companies to provide treatments to vast new markets, including the increasingly prosperous E7 countries – Brazil, China, India, Indonesia, Mexico, Russia and Turkey – which PricewaterhouseCoopers estimates could account for as much as one-fifth of global pharmaceutical sales by 2020.

That’s quite a list. How is the biomedical industry positioned to meet these challenges and take advantage of the opportunities?

Developing the workforce
A recent study published by the National Science Foundation showed that the number of qualified people seeking jobs in the biotech industry has not kept pace with growing demand. According to the study, only 12 percent of US college graduates in 2003 took science and engineering jobs, barely changing from 11 percent a decade earlier.

As Lefteroff points out, “It’s important to have people with the requisite skill sets and education to continue to supply the industry with talent, and allow it to grow. To address weaknesses in worker preparation, forward-thinking biomedical companies and academic institutions are taking action to reverse this trend and develop the talent needed to meet escalating global competition and growth.”

Biologists, chemists, geneticists and engineers still form the foundation of biomedical innovation, but the industry’s transition from being primarily engaged in R&D to developing full capabilities for product manufacturing and commercialization brings with it the need for a broader pool of trained workers for process development, manufacturing, packaging, marketing, distribution and a growing list of other job functions.

A good example of this is Genentech, whose workforce has doubled in the past four years to more than 10,500 employees, the bulk of whom work in manufacturing. The company is increasingly challenged to fill these positions with sufficiently prepared workers, due to a lack of students interested in health and science education. It has pioneered several education enhancement programs, particularly in the communities where it operates.

Many other companies work closely with schools, universities and academic research institutions and their communities to create programs designed to support math and sciences and to build a more technically trained manufacturing workforce from which to draw talent.

Patent expiry
Another challenge faced by the biomedical industry is the global competitive pressures that could negatively impact its ability to raise capital. Companies find themselves going head to head with multinational pharmaceutical companies that are developing cutting-edge therapies of their own and rapidly absorbing smaller biotech companies with promising products. Innovative biotech drugs allow traditional pharmaceutical companies to bolster their flagging drug development pipelines with breakthrough drugs.

As biotech patents expire, some manufacturers are already producing biosimilars. Creating an exact copy of a biologic is not possible; the intricate manufacturing processes for biologics, which are often proprietary, are hard to duplicate. Because they are living cells, biologics are difficult to manufacture and transport, and they are more fragile than small molecule drugs and more susceptible to impurities in the manufacturing process.

“The real question,” says Lefteroff, “is what is regulators around the globe going to do about allowing generic biotechnology drugs being produced. Up to this point, generic biologics have not really gotten a foothold because it’s so difficult to make them. What we could see is that, even though the actual patents may have expired, those drugs may still have barriers to entry and will continue to keep some market share.”

During 2007, the US House of Representatives and Senate debated legislation intended to create a regulatory pathway for the FDA to approve follow-on biologics. Supporters of the proposed laws drew an analogy to the generic drug industry, which has been successful in reducing the cost of certain prescriptions as branded drugs lost their patent protection. Senate hearings included testimony from generic manufacturers as well as European Commission (EC) drug regulators, who, in 2004, started a process that resulted in the approval of five biosimilar drugs in the European Union.

To the surprise of many, the biotech industry found much to admire in the EC approach, which took into account the extraordinary complexity of manufacturing biologics and, in consequence, placed great emphasis on patient safety. In the end, Congress could not agree on the details of follow-on biologics legislation, leaving the matter to 2008, or perhaps beyond.

Even so, biotech innovators generally agreed that follow-on products would inevitably find a regulatory path to approval, and are determined to work with lawmakers to ensure that, even as they seek to lower drug costs, patients will be protected and future innovation encouraged.

Drop in approvals
Despite robust R&D production across the industry, recent studies have shown a sharp drop in new drugs approved by the FDA in 2007. According to a November 2007 report from the Friedman, Billings, Ramsey Group, U.S. drug approvals fell by almost one-third from the previous year.

Of particular concern is an 18 percent decline in approvals of new molecular entities, which generally represent novel treatments for diseases. Meanwhile, according to the report, biotechnology products have ‘fallen off the cliff’, with just one new drug approved through October 2007, compared to four during the same period in 2006.

While there is disagreement about what has caused the slowdown, many industry observers point to changes in the regulatory climate within the FDA. According to their view, concerns about drug safety, along with highly-publicized product withdrawals and litigation, have driven FDA regulators to become increasingly cautious.

Despite this, Lefteroff sees no need to panic, “There are more products in the pipeline now than there have ever been in the industry as a whole, including the pharmaceutical industry.”

Increased manufacturing
As biomedical companies flourish and new life sciences businesses emerge, the industry will demand greater manufacturing capacity than ever before. During the past 30 years, the medical device sector has taken countless products from bench to bedside and has generated strong employment and revenues for the state’s manufacturing portfolio.

“In the biotech sector, the product development cycle is longer,” says Lefteroff. “It’s typically 12 to 15 years, and the progress to manufacturing is slower. While Amgen, Genentech, Gilead and other large companies are engaged in large-scale manufacturing, hundreds of smaller firms are still engaged in clinical trials.”

But this is rapidly changing. Today, the state counts 471 drugs in clinical trials, including 114 in phase III and pre-approved. As companies continue to see significant innovation and growth in the development and manufacturing of diagnostic tools, medical devices and instruments, there will be a steady increase in biotech manufacturing in the decade ahead. California companies currently sustain a healthy balance of in-state and out-of-state manufacturing, and the state is in a strong position to maintain that balance.

The need for research
Basic research forms the foundation of the biomedical industry, and California’s academic research centers stand as the cornerstones of discovery. As Lefteroff says, “Look at institutions like the University of California and Stanford and all the really incredible research institutions that just spit out technology. The state’s biomedical research centers lead the nation in grant funding and commercial licensing agreements – and for good reason. For decades, researchers at these centers have engineered discoveries yielding lifesaving therapies, diagnostic tools, drug delivery systems and medical devices.”

While product sales and investment capital fund the work of California’s biomedical company labs, the state’s academic institutes rely primarily on government grants and philanthropic support to advance their scientific discoveries. The National Institutes of Health (NIH), the primary contributor to health-related research in academic laboratories in the country, however, has come under intense pressure as the federal budget deficit has soared and discretionary spending has been pared back.

Through a highly structured and competitive process, grant applications are peer-reviewed, but even investigators who are eventually funded are increasingly seeing their grant proposals go through successive rounds of submissions before applications are funded. This lengthening of the proposal cycle will have downstream implications for future local workforce development and, ultimately, the growth of innovation.

A bright future
The United States leads the world in life sciences: from basic research to biotechnology to innovative medical devices and diagnostics. California’s biomedical industry produces several benefits: the most immediate of which is economic. Life sciences is the quintessential knowledge industry, producing intellectual property and creating high-wage jobs.

When foreign countries and other states envision ways to grow, these are the kinds of jobs they want: high levels of education and specialized skills, export-oriented, environmentally clean, and devoted to making products that improve and save people’s lives. Saving and improving lives through medical innovation is the ultimate goal of the life sciences industry and its greatest benefit to humankind.

Today, disorders that were once considered untreatable can be managed and, in some cases, cured. Deaths from coronary artery disease have declined sharply with the introduction of pacemakers, stents, statins and clot-busting drugs. People infected with HIV can manage their illness with a single pill, taken daily, and live a normal lifespan. And many forms of cancer, once considered hopeless, are susceptible to monoclonal antibodies and other biotech drugs.

With recent advances in decoding the human genome and understanding the potential of stem cells, the outlook for gaining control of dread diseases, from multiple sclerosis to Alzheimer’s, has never been brighter.

Still, there are serious risks in the political environment that cloud the industry’s prospects. These include government intervention in healthcare markets, rising healthcare costs, soaring Medicare and Medicaid spending, and an increasing uninsured population are pressuring federal and state government to expand coverage and cut costs.

Daunting as its challenges are, the industry has never been better positioned to meet them. “I think the industry is poised for incredible growth over the next couple of decades,” says Lefteroff. “There’s a solid base of young growing companies.. And the highest user years of the healthcare system are still ahead of us, which is going continue to drive that demand and growth. And so the outlook for the industry is very robust and very bright.”

[With material from the PricewaterhouseCoopers/California Healthcare Institute California Biomedical Industry 2008 Report]

Tracy T. Lefteroff is Global Managing Partner, Life Sciences Industry Services at PricewaterhouseCoopers LLP. He has been with PriceWaterhouseCoopers for 18 years and is in charge of services to publicly-held, privately-owned and venture capital-funded life sciences companies worldwide. He has been key to the development of strategic collaborative agreements with many of the major international pharmaceutical companies.