There's a particularly annoying trend in the drug business whereby companies that aren't in the biological manufacturing business refer to themselves as Biotechs. To some, this may seem like splitting hairs. To me, it is disingenuous and may be fooling investors into buying into a business model that doesn't live up to its name.
My first glimpse of the practice was during my MBA program when I took a course entitled Biotech Commercialization and it was an elective geared toward the Biotech option in the MBA program. I thought I was taking a course dealing with relevant issues facing a biological manufacturing company and the commercialization process which is the series of 10 or more years from concept to manufacturing utilizing complex biological processes to regulation by CBER, the Biologics arm of the FDA, to the submission of a BLA as opposed to an NDA, to a business model commensurate with Biologics as opposed to a typical Pharma commercial model, clinical trial topics relevant to biologics, etc. The adjunct professor was hailed as an officer and executive of a major "Biotech" company.
Well, about two courses in, I realized I was duped and I was being taught a class in pharmaceutical commercialization from a guy from a small drug company that decided to call themselves a "Biotech" instead. It turns out they were a one-hit wonder (well, the drug wasn't even approved yet and still isn't) with a single DRUG that all his lectures were based on. He was basically going through the tried and true pharma model and we didn't learn a thing about the Biotech industry - the REAL Biotech industry. The same was pretty much true of all the electives in the Biotech arm of the program. While I found this to be personally annoying, I see the same mislabeling occur in the mainstream press, from stock pundits on TV and people that just aren't aware of the difference.
First, let's talk about some of the differences between the terms "Biotech" and "Pharma":
- Biotech is cool and Pharma's evil. Think of it as Google (GOOG) vs. Microsoft (MSFT). This is what your politicians will have you believe and you can even find hippie college students that are destined to work in the cool biotech hubs in California and Boston while claiming they wouldn't be caught dead at a "Big Pharma". Even Cramer was always touting that under Obama, Biotechs would be winners and Pharmas would be losers.
- Biotech relies on biological manufacturing processes to produce their products while Pharma utilizes chemical synthesis - in general. While there are sometimes some fermentation processes for a small molecule product and biological products surely require various chemical treatments and separations throughout the process, the overall processes are very much different. Pharmaceutical processes are generally referred to as "small-molecule" since the active is a chemical, whereas a Biologic is a large molecule since it's often a protein, a polysaccharide, an antibody, or some other biologically derived material.
- Biotech is cutting edge and Pharma's old school. This would be an over-generalization, but in many cases, it has some truth to it. Many pharmaceutical processes produced today are employing similar processes that were utilized 30 years ago to produce drugs. Meanwhile, companies are still finding ways to entice biological matter to behave in ways we never imagined - to improve yields, characterization, consistency, potency, whatever it may be. Biological products are often injectibles or infusions, whereas drug products are often solid oral dose. The difference? Massive differences in risk to the patient in the manufacturing process - and hence, regulatory oversight. If you're injecting someone with a syringe and there's a single USP pathogen in there, it could mean death once it gets into their bloodstream. With a tablet going through the digestive track, the risk is much lower.
- Costs: While big pharma is often vilified for their pricing and seniors want their drugs for free, the biotech model is often one of seemingly truly exorbitant pricing to the tune of $10,000 per month or more for treatments. In many cases, it may be a cancer drug that extends the patient's life by 6 months, but ends up costing insurers/families upwards of $100,000 for a regiment. If I'm the guy looking at a terminal illness and have the means, surely I'd want to enjoy an extra 6 months with my family. However, as more and more treatments are developed and as our population continues to age, is this sustainable?
Why is it Important to Distinguish Between True Biotechs and Pharmas
- All other things being equal (commercially), it is much more difficult to manufacture a biologic than a pharmaceutical. Take a look at the trouble multiple capable and established players in the vaccine space are having manufacturing the H1N1 vaccine. People are clamoring for a vaccine by the millions while the companies are helpless to improve their yields. Sometimes, a particular strain just doesn't do what you want it to. Biological processes are particularly difficult to design, control and maintain consistently. Drug processes - not so bad.
- This being the case, if you're working in Biotech Manufacturing, there's probably a lower likelihood that your job is going to be outsourced than if you're working in a pharmaceutical plant. While there are dozens of API (active pharmaceutical ingredient) plants in India and China manufacturing upstream components for drugs ultimately sold in the US and the rest of the world, there are virtually no biologics coming out of either country into the US. None, actually that I'm aware of, but there may be a handful that have been approved in the past couple years, as opposed to hundreds of API and drug formulation steps. Large US Pharmas are actually gobbling up Biotech assets by the mouthful while shedding pharmaceutical plants. Every single legacy pharma is doing it and it's unlikely this trend will reverse.
- Different Business Models: While the patent law surrounding small molecules is pretty straightforward (at the end of the patent, many generics enter the space and pretty much wipe out sales of the innovator company by undercutting the price), for biologics, this is still evolving. To date, there's still much debate on biogenerics given the technical difficulty in both replicating the manufacturing process and then, proving the efficacy in patients. For this reason, especially if your product is in the peak/mature phase now, it's much better to be making a biologic than it is a small molecule.
Now, let's talk about why people confuse the two - or startups deliberately mislabel themselves as Biotechs when they're not.
- Coolness Factor - While executives aren't in the business of being cool per se, they don't want their startup to be viewed as just another old-school drug startup. Biotech has a certain ring to it. It sounds innovative, exciting, about to explode into a world of opportunities. It helps with everything from recruiting to getting people to show you the money:
- Venture Capital/Wall Street Treatment - Angel investors and retail investors are enamored with the biotech industry, whereas the pharma industry is viewed as a bit of a dinosaur following the era of the blockbuster. Especially in the early stages, wouldn't you be much more excited throwing your money at a "Biotech" startup than a pharma based on what you've heard?
Who Cares?
- You Should if you're considering investing in a Biotech because you think it's a Biotech.
- If you're looking to buy a company that's a likely buyout target due to its cutting edge manufacturing and research pipeline, Pharma's on the prowl for Biotech assets (physical) and not pharma assets. This includes plants, personnel and know-how. There's plenty of that to go around on the small molecule side, not so much in biologics.
- If you're thinking your target company may have decades of exclusivity while Congress toils with laws governing biotech patent law and the FDA still tries to figure out how to regulate biogenerics, you'll want to make sure you're really buying a Biotech company and not a pharma company.
- If get a job offer from a cutting edge Biotech company, you may find out when you get there that you're running a packaging line for tablets and your Biochemical Engineering degree isn't being put to good use. Well, I guess an informed candidate would ask some questions during the interview process, but sometimes you don't learn much about your company until you're already there.
Any other distinctions that come to mind?
