The Burrill view: Get ready for biotech's next phase

Steven Burrill's 'state of the industry' address is the star turn at the annual BIO conference in the US. And we've just been through an "incredible year" for biotech, the industry's best-known investor told this year's conference in Philadelphia a couple of weeks ago.

Incredible? Really? In the middle of a flat IPO market, and in the wake of the withdrawal of promising blockbusters like Vioxx and Tysabri? Yes, Genentech's market capitalisation is now greater than that of Merck & Co. But that's not why the last 12 months will define the industry for the foreseeable future, according to Burrill, the principal of San Francisco-based biotech investment bank Burrill & Co.

Merck's fall from grace was one of the contributing factors to that definition, he explained to a packed auditorium at BIO 2005, in Philadelphia, a couple of weeks ago -- it will affect how drugs are designed and how they reach the market, and indicated clearly the problems entrenched in current R&D processes.

The Vioxx debacle is one of the reasons why Burrill can tell biotech companies who are setting out their business plans and market strategies: "Don't look at the market today, look at the market of a decade ago -- I guarantee your model today is flawed."

The problem with drug R&D, Burrill said, is that most of the costs come late in the process. It gets more expensive at the back end of the process, and a pharma will not know until the back end whether or not the drug will work. Then the regulatory pathway contributes to an even greater escalation of costs. The failure rate, he said, is the main contributor to the high cost of drug design.

The solution for pharma, he said, was becoming increasingly clear -- address the problems early, using systems biology, and building to rule sets that offer better understanding of how drugs work. "We have a network today that we understand poorly," Burrill said. "We have some biomarkers, but we're at an early understanding of the enormous complexity.

"But we're headed much more quickly to finding the right drug for the right disease -- information-based medicine. The drivers of preventative and predictive care are not just in the science business, but also the needs of the patient."

The life science industry, Burrill said, would develop a 'biomarkers R us' and a 'molecular diagnostics R us' mentality -- one of the reasons why Burrill & Co was now investing in diagnostic technology, despite its low volumes and low margins.

"Wall St doesn't understand," Burrill said, "but the [future] value of the industry will clearly be driven by molecular diagnostics. We [currently] sell US$480 billion worth of drugs in a one-size-fits-all world. But there's incredible patient variability."

In the US alone, healthcare costs were now at $1.8 trillion, Burrill pointed out. But the example of some chronic diseases, like diabetes, showed there was great value in early diagnosis and treatment. "Already, general [genetic] testing is routine," he said. "We already understand groups of patients have indicators for certain genetic disorders."

Increased regulatory scrutiny, and higher barriers to reimbursement, were also incentives for a trend towards theranostics and away from therapeutics, Burrill said. "If you think getting to the market is just the FDA, you better work on your CMS [Centres for Medicare and Medicaid] strategy," he warned. "The pathway to reimbursement approval is going to be every bit as complex.

"If you want to get [a drug] to market, you had better have a diagnostic test attached to it. Theranostics is the only way you're going to get a drug on the market."

There were also great opportunities for the drug industry on the 'wellness' side of the equation, Burrill pointed out -- a US$150 million market for nutraceuticals. It was increasingly obvious that "we live in a pro-generics world", he said, and pharma developers would have to learn to spend more time in Phase IV, the post-approval stage of drug development. "We're going to live in a world of generic small molecule drugs and generic biopharmaceuticals," he said.

Burrill said the past year had also shown more clearly the opportunities for emerging biotech industries in countries other than the US. The US, he said, was losing its dominance, opening up opportunities not just for the BRIC countries (Brazil, Russia, India and China), but also burgeoning biotech nations like Malaysia, Thailand, and South Korea.

'There's no question that we have globalised the industry," Burrill said -- and one of reasons for that was advancements in stem cell research. "I think we're going to see dramatic progress on stem cells," he said. "In Russia, if you need a treatment, you can go to your local hospital and they can 'juice you up'." In Thailand, stem cell-related "medical tourism" is becoming more popular, and recent advances in stem cell science in South Korea had attracted widespread attention. "The capital markets will jump into that," he said.

Fearing that the US would miss out on opportunities in this field, Burrill & Co was instrumental in California's Proposition 71, which led to a massive investment of US$3 billion into stem cell research. The trick behind the success of Proposition 71, Burrill said, was that "we personalised something that was very complex." But aside from stem cell science, biotech was now very much a global industry, he said. "Historically, companies go global when they reach a certain level of development, but that's no longer true," Burrill said -- now, companies must be born global. "Science, people, IP, capital -- it happens from day one. We need to operate on a global basis. Parochialism has all but vanished." One result, he said, would be better treatments for people in developing countries.

So, what about that IPO market? Turning his attention away from the broader picture, Burrill rounded off his summation with some home truths. "Investors are saying, 'I will buy quality today, and I will buy things I understand, not things where I perceive risk'," he said. "But the IPO market will be strong in 2005/06. I'm fairly optimistic that the capital markets will improve."

We continue to gauge the success or failure of the biotech industry based on how the market perceives us. "But," Burrill pointed out, "no great company has ever not found capital."