[author: Kevin E. Noonan]

Every year, Steve Burrill, President and CEO of Burrill & Co. takes the stage at the BIO International Convention and spends 90 minutes giving the audience his take on the state of the biotech nation.  And every year he has a theme:  upbeat optimism in 2008 followed by downright pessimism in 2009, "Adapting for Success" in 2010, and "Looking Back to See Ahead' in 2011 (his 25-year retrospective).  Last week, Mr. Burrill was again in front of his BIO convention audience, and his theme was "The New Austerity."  And while on the surface his presentation was devoted to some of the most important challenges the industry faces, by the end Mr. Burrill left the audience with his characteristic enthusiasm for the prospects of the biotech industry.

His presentation began by enumerating several "crises" facing the industry and the country, including aging and end of life care; obesity; the need for chronic care; the end of the 'blockbuster drug" era; poverty and its impact on disease; emergent diseases in a global population; the dysfunctionality of the healthcare system and what he termed "basic" economics -- the reality that there isn't enough money to keep everyone alive.  His recap of the year since his last (2011) talk was not optimistic:  market gains during "recovery" reversed by current economic situation; high unemployment (8.2%) and political infighting (citing the debt ceiling fight as an example).  Particularly mentioned in his presentation was the European debt crisis, with many European countries in significant and growing debt (including BE, IT, ES, PT, IE and GR).  He then addressed the "solution du jour":  austerity, defined as "a policy of deficit-cutting by lowering spending often via a reduction in the amount of benefits and public services provided," noting that this is not good for the biotech industry (and that European populations appear to be rejecting it).  His presentation specifically focused on the effects of austerity on the pharmaceutical industry, including governments cutting spending on drugs or mandating reduction in drug prices (e.g., by requiring generic drugs where available).  He also cited issues created by permitting lower-priced drugs to be imported and efforts by governments to introduce efficiencies into drug development process.  Insurers were called out for their effects on markets by increasing requirements for reimbursement.

Having briefly surveyed the economic situation (he would return to it), the presentation then looked at "everything else."  This included the increase in biologic drugs and the possibility for biosimilars in the U.S. (assuming the Supreme Court does not do away with healthcare reform this Thursday).  In addition, he noted the increased uncertainty of patenting, in view of actions judicial (Prometheus) and legislative (patent reform).  And that the mainstay of the industry, "big pharma," is faced with a patent cliff at the same time that their presumptive saviors, startups and biotech companies are having greater difficulties in attracting capital.  On the positive side, Mr. Burrill showed a slide of various biologic drugs and an increased number of biologic drug approvals, predicting that these drugs would be "top selling" drugs by 2016 (including Humira, Avastin, Rituxan, Enbrel, Herceptin, Remicade, Prevnar 13).

Mr. Burrill's presentation then posed a critical question for healthcare:  who pays and how are care decisions made?  More specifically, "what it the balance between individual responsibility and societal costs?  Should new drug approval be determined by safety and efficacy, or is cost also a factor?"  He then related this question (essentially regarding healthcare consumer decisions) to dilemmas for producers, specifically reduction in R&D spending both public and private.  The U.S. government has reduced R&D investment (although less of a drop under administration proposals than Congressional proposals) to the point that, without "American Recovery and Reinvestment Act" funding, federal funding would have been flat for the past 5 years.  This is also reflected in who gets funded, with the age of first RO1 award increasing from about 36 to about 42 from 1980 to 2011.  The track record for industry R&D is not much better, with U.S. funding between 2009 and 2012 steady between $70-80 million/year; worldwide between $140-150 million.  Looking specifically at industry segments important to his audience, Mr. Burrill reported that pharma R&D funding was down 11.5% from 2010-2011 and that a similar story could be told in biotech.

In addition to financial pressures, Mr. Burrill's presentation identified weakening of intellectual property, "burdensome and opaque" regulation, a rising bar for reimbursement, and difficult access to capital as evidence that "it's getting tougher" to innovate.  The IP problems mentioned included Prometheus, Myriad, compulsory licenses in India (Bayer's Nexavar), and patent reform.  On the regulatory front, reform issues with FDA have led companies to seek approval outside the U.S. (which slows access to the U.S. market), a phenomenon that extends to approval of medical devices.  While acknowledging that an industry pioneer, Geron had left the stem cell space and that that the European Court of Justice had banned patents on human embryonic stem cells, the first glimmer of optimism surfaced when the presentation noted that other companies had stepped up to continue development of stem cell therapies.  Other areas of progress mentioned included antibody conjugates, in vitro production of "body parts," gene therapy successes, the impending advent of the $1,000 genome, and the NIH translation research initiative (indicating perhaps that the government recognizes the importance of translating basic science to the clinic and the marketplace).

Then Mr. Burrill turned to the "big" themes, such as why innovation is important in the first place.  Innovation, he contended, is the only way to address problems of aging population and chronic diseases, but new technology also tends to increase rather than decrease costs (at least in the short term), and medicine and the healthcare system are still focused on treating rather than preventing disease (because, inter alia, changing unhealthy behaviors is difficult to do).  And healthcare costs are an important factor even in conventional terms:  healthcare costs increased from 13.7% of U.S. GDP in 1993 to 17.7% in 2012 (and are projected to be 19.5% in 2017), with the same trend being seen in other member countries of the Organization for Economic Co-operation and Development (OECD).  And, not surprisingly, the U.S. leads in per capita healthcare spending.  Presented were statistics indicating that 63% of disease-related deaths were non-communicable (cardiovascular disease, cancer, diabetes) and the presentation posed the question:  "is aging a disease that can be treated?"  The answer is "maybe not," but diseases characteristic of aging (like Alzheimer's) are, illustrated by estimates that delaying onset of Alzheimer's disease by 5 years would save $447 million in U.S. alone by 2050.

Where there is healthcare, there has traditionally been drugs delivered by "Big Pharma" but Big Phama is "in trouble" according to Mr. Burrill (using a slide having a dinosaur to illustrate the point).  The "old" model (blockbuster drugs, "large, expensive clinical trials," marketing emphasis and sales in developed countries) doesn't work, and what the industry needs is to "retrench, redefine [its] business model, buy rather than build and seek opportunities in emerging markets," because the era of blockbuster, "one-size-fits-all" drugs over.  Illustrating the point was evidence that despite an overall increase in R&D spending 1992-2011, on average no more than ~27 new medical entities (NME) were produced per year and that the timeline for recovering development costs for these drugs had been "compressed" by generic drugs and Hatch-Waxman timelines (5 years of market exclusivity).  Added to this is the patent cliff, termed "significant":  branded drugs are losing patent protection at a rate of ~$17 billion in sales per year over the past 5 years, which will double in 2012 and remain at least about ~$20 million through 2014.  As a consequence, the trend is for innovator pharma companies to acquire technology (both successfully and not) and pursue other avenues (OTC, branded generics, access to emerging markets, biosimilars).  Regarding generics, 80% of prescriptions for these versions of branded drugs have a retail price 75% lower than their branded counterparts; as a result, generics account for only 26% of drug costs, with the generics market expanding in U.S. and globally, especially in emerging markets.

The "new" model for innovation? -- co-opetition (a term Mr. Burrill coined last year) -- with innovator companies combining efforts, as well as partnering in emerging markets (CN, RU) and with payors.  Mr. Burrill's presentation also cited collaborations between pharma and academic researchers, which he termed "reaching over" traditional biotech start-ups by going after early stage development.  This development generated an interesting question, to wit "is big-pharma nuts?" in view of fact that less than 10% of candidates pre-phase II fail (and 35-40% of costs are incurred pre-phase II) -- looking like a lose-lose proposition, where "thinking outside the box" is merely a reminder of why there is a box in the first place.

Turning to what he does best, the presentation showed that partnering (rather than public offerings) have become a major funding source (compared with financing) over the past 5-7 years, but that venture capital deals are down after having recovered somewhat last year, and the trend over the past 12 months is for VCs to "move away" from therapeutic drug investment with "angel" investors "filling the gap."  Capital is available, but accessing it has become increasingly difficult -- and while IPOs are still used by some, "M&A" exits (that is, takeovers) have been the the predominant "end game" for startups since 1998 – 2000.  But capital is "funding products, not companies" and there is a rise of government and NGO/patient (disease-focused) group participation around the world.

Emerging markets (changing the global focus from US-EU-JP to BRICS and CIVETS countries) are becoming a "magnet" for foreign investment due to growing middle classes (defined as household income >$5,000/yr) and, as a result, finding an increasing consumer drug market.  In this environment, the opportunity and challenges facing the industry are due to unfamiliar business and regulatory environments.

Another "big theme" of Mr. Burrill's presentation was wastefulness in pharma on many levels.  These included statistics that most (90%) drugs only work for at best 50% of the population; estimates that $350 billion are wasted annually simply due to this lack of effectiveness.  Worst of these are cancer drugs (which are 75% ineffective), but Mr. Burrill's list also included drugs for arthritis, depression, asthma, diabetes, and depression.  As a result, the focus is on the promise of personalized medicine, something desired by all segments of the medical supply chain (patients, doctors, drugmakers, regulators, and payers).  However, targeted drug treatment approaches are in their infancy, with 150 of the ~2 million protein targets presently used (and these targets are predominantly cancer targets).  But in infancy there are mistakes, and the experience has been more trial-and-error than theoretical, and as with all biotech, personalized medicine has over-promised and under-delivered.  In this regard, Mr.  Burrill also notes a more general problem, what his presentation labeled as "sloppy science," resulting in 15-fold increase in number of papers retracted since 2001 (339 in 2010 vs. 22 in 2001).  He did not provide any indication that this reflects increased complexity or reduced carefulness.

In another theme (and one Mr. Burrill has discussed before), the existence or development of a paradigm shift in healthcare was discussed, changing from symptom-based, universal treatment models based on present illness to mechanism-based, individualized models based on prevention and recognition of heterogeneity of illnesses and potential illnesses.  As a consequence, healthcare systems are changing/must change, to focus on wellness instead of sickness and use technology to alter delivery and venue (another Burrill theme of "consumer digital health").  This change is accompanied by changes in roles -- patients being less passive consumers than active managers of their own health status, with greater amount of (genetic) information and greater access to that information (both generally and their own personal health records).  In this new world, doctors are less "unquestioned authorities" and are now advisors, with greater integration in a team approach (comprising labs, pharmacists and other specialists), and also relying on digital information and prevention instead of treatment.  Increased (genetic) information is "transforming" medicine from treating the symptoms to changing the "actual" disease according to this portion of Mr. Burrill's presentation.

All this genetic information is accelerated by falling costs for sequencing -- the "$1,000 genome" by the end of 2012 -- but this raises the "era of the big data problem," raising the question of how this data will be handled.  The problem with genetic information is magnified by the "omics" revolution (genomics, proteomics, metabolomics, etc.), which is really just a manifestation of the complexities of the biology.  Once again, the effects are most prominent in cancer, where from 21-73% of different cancer types have identified mutations having therapeutic significance as targets.  Mr. Burrill also discussed in his presentation a "refinement" in the granularity of what it means to have "cancer," illustrated by identification (on genetic grounds) of 38 types of leukemia and 51 types of lymphoma.  But there are also growing pains for the technology, as healthcare is still a "brick and mortar" industry and chronic illnesses have compliance issues.  Returning to the "big data" theme, Mr. Burrill asserted that sufficient computing power can "capture, validate and analyze" high volumes of data with benefits of multiple data sources and pattern recognition, enabling "real time" answers for doctors, consumers, payors, etc.  There was also a little traditional Burrill futuristic vision in the presentation, surrounding IBMs Jeopardy-playing Watson computer and its application to healthcare, and purported "brain chips" by IBM intended to mimic human brain.

As Mr. Burrill indicated last year, there is another side of this paradigm change, namely social media, where 32% of people say they have used social media for healthcare (and ~30% of this is Facebook and YouTube) and the inherent (or potential) unreliability making this phenomenon problematic.  Mr. Burrill's presentation illustrated the "disruptive" aspects of this change by comparing the time taken to reach 50 million users for different technologies:  from the telephone (75 years) to radio (38), TV (13), the Internet (4), iPhones (2.5) and Facebook (< 1 year).  He identifies the smartphone as the "center of the digital revolution" based on adoption by physicians and patients (illustrated by ECG app as one of > 100,000 "healthcare" apps).  The benefits include increased access/delivery of healthcare, reduced costs, increased compliance, enabling better monitoring/compliance, changing behavior, and permitting the elderly to continue independent living longer.

Fully 163 of Mr. Burrill's 209 slides relate to healthcare; at the end of the presentation, the slides turned to the other uses for biotechnology -- agriculture and energy (as well as water purification and industrial applications generally).  His presentation mentions in passing that most "new" discoveries of fossil fuels occurred outside the Middle East in the past decade (South America, Australia, Canada).  But this developing industry is threatened by "austerity," which can prevent adoption of (today) more costly biofuels in favor of fossil fuels.  This of course has negative consequences for energy independence and security.

Mr. Burrill's presentation also mentioned the conflict between agriculture and fuel needs, and that land and water are limited.  Capital requirements are "vast" in the aforementioned limited financial space; on this regard he used Amyris as an example of difficulties in scaling up to commercial levels and Wall Street's reaction (not good).  But the trend is to (try) to "go green," and the presentation cited efforts by traditional food (packaging) and chemical companies to invest/partner with biorenewable companies (citing several examples).  Government also as a role, in providing infrastructure, R&D funding, and tax and other incentives (regulations and policy).  The benefits for society (which in turn justify governmental investment) include increases in productivity and reductions in environmental impact, as well as reducing the carbon footprint.

In conclusion, Mr. Burrill predicted the remaking of pharmaceutical companies, changing impact of value on pharma regulation, a continuing shift from doctors to payors to determine what healthcare will be provided, continued trend from IPO to acquisition as endgame, his personal obsession with "minute clinics" over traditional doctors' offices, the smartphone as medical advisor, and the digitalization of data and diagnostics.  His presentation ends on a typically upbeat note:  "value capture is key" and "opportunity to create value has never been greater."  Even austerity is not so bad in Mr. Burrill's view.  It makes capital efficient, fosters new businesses and business models, imposes discipline, prioritizes "true" innovation, and focuses on capturing value, thus rewarding creativity.  Once again, Mr. Burrill points out that this is biotech's "greatest moment," and most if not all the BIO 2012 attendees hope that he is right.

The complete Burrill Report can be purchased from Burrill & Co.; sales at BIO 2012 included Mr. Burrill's presentation slides.