Marks & Clerk

Date: 21/07/08

Funding woes threaten future drug development, finds new reserach

Risk aversion from investors is posing a serious threat to drug development, according to the latest annual biotechnology report by Marks & Clerk, one of the world's leading firms of patent and trade mark attorneys.

* 82 per cent of executives believe that funding pressures pose a serious threat to the biotech industry

* 72 per cent believe future drug pipelines will become much harder to deliver unless the drug approval process is relaxed

* 91 per cent consider the time it now takes for drugs to get through the system is eating into patent protection

* 78 per cent believe the climate for enabling biotechnology innovation has deteriorated within the last year

The research identifies a number of unique challenges currently facing the biotech sector which are adversely affecting investment. These stem in particular from growing caution in the granting of marketing approval for new drugs by the US Food and Drug Administration (FDA) which, in turn, is placing added pressure on the patent life. The report suggests that drug modification or late-stage development will become increasingly popular - at the expense of genuine innovation.

The international research, carried out in April-May 2008, is based on the views of nearly 500 executives across the biotechnology and pharmaceutical sectors, principally in the US and UK markets as well as Europe and Asia.

83 per cent of respondents feel that the pressures currently facing biotech are making it less attractive in the eyes of many investors. 90 per cent believe secondary and further funding will become increasingly difficult to secure as market conditions deteriorate, and that investors will focus on less risky, latter-stage drug development in a bid to limit their exposure to risk. Correspondingly, 83 per cent think that biotech companies will themselves focus increasingly on drug modifications as well as more mature drugs in the pipeline.

Where capital is available, the terms for funding may become simply uneconomic. 80 per cent of respondents believe key investors will either take a greater equity stake, or potentially look to secure their capital against the drug-makers' intellectual property (IP) assets. This reflects a trend gathering momentum within the industry where investors focus much more intently on the strength of valuable IP rights. Overall, 78 per cent agree that the climate for enabling biotechnology innovation has deteriorated within the last year, and 89 per cent believe some small and/or early stage companies will either fail or be bought out at unattractive levels.

Dr Gareth Williams, Partner at Marks & Clerk and co-author of the report, comments:
"Biotechnology represents the future of modern medicine, where yesterday's innovators now struggle with dwindling pipelines, generic competition and a chequered R&D record. Whilst the long-term view has not changed, we are seeing a short to mid-term funding gap in the current climate, which poses a genuine risk to essential, early-stage research and development."

The genesis of the funding issue is not solely attributable to current economic fragility. A much more cautious attitude from regulatory bodies (specifically the FDA), is making it considerably harder for biotechs to get the marketing approval they need for drug development. This, in turn, is affecting investor sentiment. 68 per cent of respondents believe that the drug approval process must become much less risk-averse if investment levels are to be maintained, with 72 per cent viewing this as essential to the delivery of future drug pipelines.

One of the most important consequences of sluggish drug approvals is its impact on the lifetime under which a new drug is protected by its patent. 91 per cent of respondents feel that the time it now takes for drugs to get through the system is eating into the time those drugs enjoy the rewards of patent protection. 78 per cent warn that there is a danger of biotech companies bringing more "me too" drugs to market, rather than investing in real innovation, if the threshold for approving new drugs is set too high.

Dr Gareth Williams says: "We can expect the shock to be partially absorbed by alternative means, such as more academic research and through public bodies. These groups remain key drivers of R&D, although it must be said that Europe has a much poorer track-record than its competitors in the US when it comes to turning its public research into a commercial success. Europe's innovation record is likely to suffer until conditions ease."

The patent system emerges as a key tool in overcoming the barriers faced in the current crisis. 84 per cent believe that recognising secondary patents is an important means of encouraging and rewarding drug development. This "evergreening" process helps shore up new patent protection for later modifications to an existing drug, and may cover anything from dosage to form. Extensions to the existing patent term are also advocated by 73 per cent of respondents to promote more R&D investment, whilst 88 per cent would like to see patent approvals secured more quickly.

Dr Gareth Williams comments: "It is of fundamental importance that the system continues to reward the innovator and acknowledges the increasing time and expense of getting new drugs to market. 87 per cent of those surveyed recognise that part of the problem with drug discovery is the simple fact that the "easy kills" have already been made. This makes it all the more important for governments, and the various regulatory and intellectual property bodies, to look very carefully at what can be done to boost R&D. For example, better recognition of secondary patents could help boost the cash flow of drug developers, allowing them to reinvest in core research elsewhere."

Emerging markets
The research finds that perceived weakness in foreign intellectual property systems and the difficulties posed by competition, are adding to concern about profit margins. Whilst 72 per cent agree that investors and biotech companies see a lot of potential coming from new super-economies, 85 per cent believe weak IP protection in the world's largest emerging markets (China and India) is a threat to future margins.

Price reduction on a global scale is viewed as a "serious threat" as a result of parallel trading - the importing of drugs at a cheaper price from a lower-cost area. 79 per cent view parallel trading as a "significant" or "very serious" threat to the industry, with 91 per cent believing this threat will only increase as global trade continues to grow. 73 per cent think it likely biotech companies will reduce the availability of drugs in some territories if parallel trading begins to threaten profits in key, high-margin markets.

Dr Gareth Williams comments: "The prospect of reduced drug availability is clearly alarming, but the long-term view suggests that markets will adapt to the various pressures resulting from global trade. The difficulties posed by parallel trading are surmountable. We may, for example, see key markets divided into designated trading blocs, rather like the restricted trading zone of the EU. There is also evidence that confidence is slowly dawning in the IP systems of emerging markets. Significant steps have been taken to improve the Chinese IP system in particular, which has in turn resulted in much greater numbers of non-resident companies filing patent applications in the region."

Generic competition
The report also finds that biotech margins are facing certain pressure as generic competition emerges among the biotechnology sector. 76 per cent of respondents believe that the enforceability of patents against generic competitors is proving much harder than in the past, although 58 per cent feel confident about the validity of patents being upheld in the courtroom. 89 per cent feel that the promotion and approval of cheaper copies of biologics, or copycats, is likely to result in more "me too" drugs coming to market. Yet three-quarters (74 per cent) recognise that competition will have a positive impact on drug affordability.

Gareth Williams comments: "For now, innovators are fairly relaxed about competition as biotech drugs remain highly complex and less vulnerable to competition. They may also feel better protected by the higher bar for biotechnology patents compared to other hi-tech sectors, such as telecoms and software."

"This is an industry which recognises that a poor patent system benefits no-one. In fact, our research suggests the industry believes a quality patent system is helpful in withstanding the competition, retaining a strong reputation, and is valuable in the eyes of investors. Longer term, more concern may emerge should generic competition really start to take hold and challenge the appetite of investors to back the sector. Some modifications to the patent system would now be a practical way of boosting sentiment and encouraging investment in the fragile biotech industry."
In addition to the findings of the survey, the report also highlights key issues relating to IP law and policy around the world which are of fundamental importance to the biotech industry.

For a copy of the report contact Jo Colton, Group Marketing Manager, at jcolton@marks-clerk.com.

See also:
Organisation: Marks & Clerk

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