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Biotechnology as a business arguably began with the birth of Genentech (DNA) 30 years ago in 1976. The company had a successful IPO four years later in 1980, which motivated a flurry of other biotech ventures to seek Wall Street’s vast wealth. These companies, which included Genentech, Chiron - now part of Novartis (NYSE:NVS), Biogen - now Biogen Idec (NASDAQ:BIIB), Amgen (NASDAQ:AMGN), and Genzyme (GENZ), marked the beginning of a new revolution in medicine.
genentech logo
This first wave of excitement for the biotech industry was full of hope as many argued that traditional pharmaceutical research, relying mostly on chemistry to formulate new drugs, would slowly succumb to the new fields of recombinant technology, molecular cloning, RNA interference, viral vectors, and other cutting edge sciences.

Many believed then, and many still do now, that pharmaceutical giants Pfizer (NYSE:PFE), Johnson & Johnson (NYSE:JNJ), Eli Lilly (NYSE:LLY), Bristol-Myers (NYSE:BMY), and others, could not possibly keep up with the wholly fragmented, albeit, singularly focused research of the many tiny biotech ventures springing up seemingly over night.

The evidence however points to the contrary; the biotech industry has failed so far.

In his new book, Science Business: the Promise, the Reality, and the Future of Biotech, Harvard business professor Gary P. Pisano provides eye opening proof showcasing how the biotech industry has failed in its attempt to function as a science-based business.

A Losing Industry
Consider the following observation: from the year 1975 through 2004 the biotech industry as a whole has seen an increasing trend in sales, but total operating income before depreciation is essentially zero. In fact, if you remove the top ten companies; Amgen, Genentech, Genzyme, Gilead (NASDAQ:GILD), Biogen, Biovail (BVF), Cephalon (NASDAQ:CEPH), ImClone (OTCQB:IMCL), KOS Pharmaceuticals (KOSP), and Chiron, the rest of the biotech industry has lost more than $6 billion. On average it takes a biotech company 12 years after its IPO before it sees its first profit.

Many biotech companies continue the need for additional funding to take drug candidates through the pipeline. In 1990, biotechs made just as much money from secondary offerings as their IPOs. In 2004, secondary offerings provided double the funding that IPOs delivered.

This analysis does not even take into account the scores of privately held biotech ventures, which are surely losing more money than publicly traded companies. The biotech industry is a business in the red.

What about the biotechnology industry’s other promise, to deliver novel and cutting edge research? There was no difference in total productivity between the biotech industry and that of the big pharmaceutical companies over the last couple of decades.

While there is an increasing number of new drug candidates, fewer are making it to later stages. In fact, between the years 1998 and 2002, 48 percent of drugs in the pipeline were at the discovery stage. This is telling of the direction this industry is taking. New drug candidates require more initial funding. Little startups are hailing any research study that hints at a new drug candidate to attract new venture spending with less emphasis on quality.
Biotechnology was also believed to bring drugs to the market through cheaper means. In fact, there is no difference in R&D spending per new drug between the two industries. Big pharma’s sales per R&D dollar spent was twice that of the biotech industry back in 1987, but was three times as much in 2004. So not only is big pharma more efficient at producing and selling, but the gap is increasing, not narrowing. There is no evidence that the biotech industry is learning.

So why is biotechnology not succeeding as a business? There are many reasons for the industry’s shortfall. One big issue is the length of time and the cost of bringing a drug to the market. But this is a problem for large pharmaceuticals as well, and they seem to be faring much better.

No Information Flow, No Collaboration
The true problem with the biotech industry is that the free flow of information has essentially been negated. Intellectual property protection through fierce legal actions has affected the open environment necessary for the collaborative advancement of science and technology ideas. While this type of environment has existed in the pharmaceutical industry for many decades, biotech is especially in need of a collaborative effort, considering the novelty of the scientific techniques being utilized.

Biotechnology was supposed to introduce a new form of enterprise, one which throws away the shackles of old business practices. The formation of Genentech was believed to signal an escape of old business ideas. Genentech was essentially a new and exciting type of venture that was to be run by scientists free of corporate limitations. The opposite has been largely true of the biotech industry as a whole.

DNA 5-yr chart

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Source: The Biotech Industry: 30 Years of Failure, Starting with Genentech