Innovation versus Financialization in the Biopharmaceutical Industry:

The PLIPO Business Model

Mustafa Erdem Sakınҫ, Groupe de Recherche en Economie Théorique et Appliquée, Université Montesquieu Bordeaux IV

erdemsakinc@yahoo.com

Öner Tulum, The Academic-Industry Research Network (theAIRnet.org) oner.tulum@theAIRnet.org

Ford Foundation Conference on Finance, Business Models, and Sustainable Prosperity

New York, December 6, 2012

I - OVERVIEW

• Biopharma is one of the few industries that has been successfully generating funding for innovation for decades– Successfully generated funding in the form of VC, R&D partnership,

M&A, public issuance and etc.– Exponential growth between 1990-2008

• Formation of development stage companies with no product/product revenue, and with less than 100 employees

• However, biopharma overall displays relatively poor performance – Industry overall has yet to generate profit– And relatively very few successful drugs came out given the size of

the money invested• Why have venture capitalists, big pharma, and public investors been

investing so heavily in an industry in which profits are so difficult to generate? (Lazonick & Tulum 2011)

II- the PLIPO Business Model• Given how complex, protracted (10 years+) and expensive (≈$US2-bn) the

product development process is, long term patient capital commitment is required BUT;

• Many development stage SMEs without any positive income figures and without any commercial products seek to go for an initial public offering (IPO) only a couple of years after inception

• We call these firms “PLIPOs”, or, productless companies that have done an IPO• Why does PLIPO occur?

– Major discoveries based on decades of NIH support on R&D activities has supplied the industry viable technologies for further development,

– VC industry recognized the potential value and applies the Silicon Valley model on biopharma

– NASDAQ provides the liquidity investors seek – Legislative changes on IP (Bayh & Dole, Chakrabarty v. Diamond Supreme

Court Decision)

National Institutes of Health budgets 1938-2011

Total NIH spending, 1936-2011 in 2011 dollars=$792 billion

NIH budget for 2012=$30.9 billion

Source: http://officeofbudget.od.nih.gov/approp_hist.html

VC Investment & VC Backed Deals 1972-2012

VC Backed IPOs 1980-2012

How Does a PLIPO Work?

• PLIPO companies are often founded in collaboration with university researchers initially funded by public grants

• NIH and other government funding of basic and preclinical research have been the major sources of funding for early stage drug development.

• Despite the availability of public support, when these scientists decide to form a company they still need more financial resources,

• The blockbuster drugs that big biotech commercialized both underwrote their continued existence and lent credibility to the PLIPO model.

• Lured by the prospect of a quick PLIPO exit on NASDAQ, VC has usually been the suppliers of equity finance anywhere from seed stage and pre-clinical phase

• Longevity of product development process allows market speculation to take place based on “real news” or “events” (milestones, FDA reviews, etc.), speculative investors draw to this feature (ie. Human Genome news during the dotcom era drove the prices overall)

Methodology

• The study is built upon researchers’ prior work, Lazonick & Tulum (2011) and Lazonick & Sakinc (2010)

• An empirical study utilizes:– Descriptive analysis based on the secondary data gathered from various

sources– Case study approach through building cases on biopharma

• Understanding the effects of the current finance model on the industry’s innovation productivity requires a firm level focus

• Constructing a longitudinal database will allow us to trace the companies historically, and by doing so we can conduct firm level analysis on selective company case studies to see how the companies have done overtime

CURRENT DATASET

• We have constructed a dataset of active public biopharma companies that are currently developing or producing therapeutic drugs, and that have secured funding in NASDAQ between 2000 and 2012.

• The dataset has been populated by combining data from Thomson Reuters Venture Xpert and NASDAQ historical records

• Dataset has been refined to 87 active biopharma companies that are operating in the U.S.

• Companies’ financial, R&D, product pipeline, and demographic information have been gathered from various SEC documents and financial reports such as 10-K, S-1, company proxies and various other legal documents.

• Product approval data has been gathered from FDA Orange Book and orphan drug data has been gathered from FDA Orphan Drug Database.

Database Highlights

• An average of 6.5 years from Incorporation to IPO, and ranges from anywhere from 0.4 to 22.3 years

• 61.9 full-time employees at the time of IPO, 119 employees per company average (up 92%) as of 2011,

• Per company average products in the pipeline went up to 5.4 from 4.6 (up 18%)

• Only 8 companies (10% of total) had at least 1 marketed product at the time of IPO. Currently this number is up to 24 companies (%31 of total) with a total of 35 marketed products,

• In 2011, total generated revenue of these 87 company is $US3.2 while the product revenues is only $US1.4bn. Net Income is -$US3.3bn and R&D expense total is $US3.4bn,

• 37 companies in the dataset have a total of 75 orphan designated product candidates, and 9 (out of 35 marketed) products have been granted marketing exclusivity

• It is an average of 10.4 years from inception, and 5.7 from the date of IPO that has taken for the companies in the dataset to get FDA approval

Pre- & Post-IPO Comparison Pipeline Comparison

Productless IPOs

Distribution of companies’ incorporation and IPO years

Source: NASDAQ Composite and Biotech Index data is downloaded from Yahoo! Finance.

Pace of IPOs and Employment Change

CASE STUDIES

• Pharmacyclics– Founded in 1991 (Sunnyvale) by scientists with in-licenses from UT and

went public in 1995– Critical support of NCI in the early period– Major source of finance: secondary offerings (11 times in the last 16

years after its IPO)– Repeated failures of drugs in late-stage Phase III– Restructuring in 2008 with new executives and new product candidates– NASDAQ notification in 2009– Rise and fall of employment (re-rise in 2012)– Continuous stock purchase of current CEO until 2011 within a price

range of $1 to $9. Currently the stock price is around $55– Collaboration with Janssen Biotech (J&J) which brought the only

significant revenue in the 21 year history of the firm– As of December 2012 the most advanced drug candidate is in Phase II– Highly fluctuated ownership structure due to hedge funds

31-Mar-1997

31-Jun-1997

30-Sep-1997

31-Dec-1997

31-Mar-1998

30-Jun-98

30-Sep-1998

31-Dec-1998

31-Mar-1999

30-Jun-99

30-Sep-1999

31-Dec-1999

31-Mar-2000

30-Jun-00

30-Sep-2000

31-Dec-2000

31-Mar-2001

30-Jun-01

30-Sep-2001

31-Dec-2001

31-Mar-2002

30-Jun-02

30-Sep-2002

31-Dec-2002

31-Mar-2003

30-Jun-03

30-Sep-2003

31-Dec-2003

31-Mar-2004

30-Jun-04

30-Sep-2004

31-Dec-2004

31-Mar-2005

30-Jun-05

30-Sep-2005

31-Dec-2005

31-Mar-2006

30-Jun-06

30-Sep-2006

31-Dec-2006

31-Mar-2007

30-Jun-07

30-Sep-2007

31-Dec-2007

31-Mar-2008

30-Jun-08

30-Sep-2008

31-Dec-2008

31-Mar-2009

30-Jun-09

30-Sep-2009

31-Dec-2009

31-Mar-2010

30-Jun-10

30-Sep-2010

31-Dec-2010

31-Mar-2011

30-Jun-11

30-Sep-2011

31-Dec-2011

31-Mar-2012

30-Jun-12

30-Sep-2012

0

5

10

15

20

25

30

Series1

Series2

Series3

Series4

Series5

Series6

Series7

Series8

Series9

Series10

Series11

Series12

Series13

Series14

Series15

Series16

Series17

Series18

Series19

Series20

Series21

Series22

Series23

Series24

Series25

Series26

Series27

Series28

Series29

Series30

a

31-Mar-1997

31-Jun-1997

30-Sep-1997

31-Dec-1997

31-Mar-1998

30-Jun-98

30-Sep-1998

31-Dec-1998

31-Mar-1999

30-Jun-99

30-Sep-1999

31-Dec-1999

31-Mar-2000

30-Jun-00

30-Sep-2000

31-Dec-2000

31-Mar-2001

30-Jun-01

30-Sep-2001

31-Dec-2001

31-Mar-2002

30-Jun-02

30-Sep-2002

31-Dec-2002

31-Mar-2003

30-Jun-03

30-Sep-2003

31-Dec-2003

31-Mar-2004

30-Jun-04

30-Sep-2004

31-Dec-2004

31-Mar-2005

30-Jun-05

30-Sep-2005

31-Dec-2005

31-Mar-2006

30-Jun-06

30-Sep-2006

31-Dec-2006

31-Mar-2007

30-Jun-07

30-Sep-2007

31-Dec-2007

31-Mar-2008

30-Jun-08

30-Sep-2008

31-Dec-2008

31-Mar-2009

30-Jun-09

30-Sep-2009

31-Dec-2009

31-Mar-2010

30-Jun-10

30-Sep-2010

31-Dec-2010

31-Mar-2011

30-Jun-11

30-Sep-2011

31-Dec-2011

31-Mar-2012

30-Jun-12

30-Sep-2012

0

3

6

9

12

15

Series1

Series2

Series3

Series4

Series5

Series6

Series7

Series8

Series9

Series10

Series11

Series12

Series13

Series14

b

CASE STUDIES

• Esperion Therapeuctics– Founded in 1998 (Ann Arbor) by scientists with a license of a single

compound from Pharmacia&Upjohn– IPO in 2000 without any clinical stage drug candidate– Major source of finance: secondary offerings until the acquisition by

Pfizer with $1.3 billion in 2004 after a big jump in stock price– Cancellation of Esperion’s program in 2007 by Pfizer and liquidation of

Esperion– Restart in 2008 by same founder with VC investment and a single

compound reverse licensing from Pfizer– Outsourcing and staying small strategy (only 15 employees as of

November 2012 although it has a Phase II level drug candidate)

DISCUSSION

• Steady rate of BLA approvals since mid 1990s when the biopharma rush began cashing in on the low hanging fruits of 1980s publicly subsidized R&D

• The blockbuster business model and the rapid rise in blockbuster revenues. Yet, there are only two new biological blockbusters in the last five years and a substantial decrease in the rate of increase of BB sales with continuing losses of patent protection

• Rising costs of commercial drugs for the society (drugs cost twice as much or more in the US as they do in any other country)

• Where the money goes: More stock buybacks and more executive compensation in the form of stock options of big pharma and biopharma companies.

• Persisting efforts of the US government to support biomedical research through NIH which is adopting a more radical and proactive approach in biomedical innovation through deploying new resources for late-stage clinical research and trials.

• Research into the validity of the financialization hypothesis and its implications for productive investment in the drug development process addresses a major social concern

Thank you for your attention