Anne Evans: assessment of a biotechnology market opportunity.

This case describes Anne Evans' search for a market opportunity in the biotechnology industry, and examines the feasibility of establishing a new venture to exploit this opportunity. The drug development process in the biopharmaceutical industry spans three critical phases: pharmaceutical discovery, pharmaceutical development, and product marketing. The drug development process is a very capital-intensive process with expenditures averaging $800 million per drug and with very high failure rates--only one out of 5,000 compounds that emerge from discovery and preclinical testing will make it into the market. The drug development process therefore contributes to very high cash burn rates and corporate failures in the biotechnology industry.

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Being intimately aware of the reality and economics of drug development, Anne was intrigued and excited by the possibility of establishing an intermediary in the pharmaceutical discovery phase of the drug development process. Such an intermediary designated as a biotechnology services investment firm (BSIF) would bring together providers of discovery testing capabilities and biotechs that would be key users of such critically needed capabilities. Anne believed that the BSIF would succeed by enabling biotechs-and subsequently the much larger pharmaceutical organizations--to significantly enhance the efficiency of the drug development process. Her MBA thesis examined the feasibility of establishing a BSIF. While Anne was confident about the conceptual analysis underlying the feasibility of establishing a BSIF, she pondered what action(s) to pursue at this juncture. Was she passionate about the venture to overcome the entrepreneurial struggles that she anticipated would inevitably follow the launch of her venture?

Introduction

It was November of 2000 and Anne Evans had just been informed, in confidence, that the small biotechnology organization (biotech) she had joined less than six months prior was unlikely to remain as a going concern, in its current form, beyond first quarter 2001. She was advised that fixed costs would have to be drastically reduced and that it would be wise to initiate a search for a new position. The news was not unexpected, since the MBA she had completed that same year had enabled her to read the "writing on the walls" in the corporate financials. The situation was certainly not unique to the industry, since few biotechs had positive cash flow from operations, so when cash from external sources dried up, the organizations generally withered and died. She knew this all too well--not just from reading business periodicals or comforting laid off industry colleagues, but from personal experience--having been laid off roughly two years prior.

The question she kept asking herself was simply, "so now what?" Join the management team of yet another biotech and watch it burn through its cash as it tried to beat the odds and bring a product to market? At least her husband and family would know better than to suggest that she simply abandon her ten years experience in the biotech and pharmaceutical industry, fall back on her doctorate in veterinary medicine, and retreat to the fiscal stability that a practice in veterinary medicine would offer. The latter was as safe an out to her current predicament as it was dull and entirely out of keeping with the interests that had driven her back, midlife, to participate in the executive MBA program at San Diego State University.

Anne found herself contemplating the thesis that had culminated in her MBA program. Her business experience spanned the critical phases of drug development: pharmaceutical discovery, pharmaceutical development, and product marketing. Being intimately acquainted with the process, Anne was intrigued by the possibility of establishing an intermediary in the discovery phase of the pharmaceutical development process. Such an intermediary designated, a biotechnology services investment firm (BSIF) would bring together providers of discovery testing capabilities and biotechs that critically needed such capabilities. Anne believed that a BSIF could succeed by enabling biotechs--and potentially the much larger pharmaceutical organizations--to significantly enhance the efficiency of drug development. Her MBA thesis examined the feasibility of establishing a BSIE As she recalled and reflected on her thesis Anne said to herself, "this may represent my opportunity--my opportunity to succeed as an entrepreneur and to reinvent the business of biotechnology!"

Anne Evans' Background

Anne G. Evans had earned a doctorate in veterinary medicine in her early twenties, seeking that goal because of her love for animals and passion for science. The latter drove her to advance that degree with post-doctoral training in comparative veterinary-human medicine and with a focus on dermatology, allergy, and immunology. She obtained specialty board certification in veterinary dermatology in the mid '80s and opened a referral practice devoted exclusively to the treatment of dermatologic and immunologic diseases of large and small animals. The practice was sold in the late '80s at a profit so that she could accept what she envisioned as a more challenging academic position as an assistant professor of veterinary dermatology at a prestigious veterinary school, being involved with teaching, clinics, and research. Still, the position failed to bring her career satisfaction, with the focus on veterinary medicine preventing her from using the full scope of her training. She turned to human pharmaceutical development.

For most of the '90s Anne held positions of increasing responsibility that dealt with business strategy, multinational licensing, development of drugs, biologics, and medical devices that were intended for diagnosis and treatment of human disease. Subsequent to joining the management team of a San Diego biotech startup in 1997, she became acutely aware that her skills in business management were lacking and that obtaining an MBA while continuing her work was the most efficient solution. In August of 1998 she began an executive MBA program. However, by late 1998 the biotech's cash was running low, a third round of financing fell short of corporate and product development needs, and the CEO resigned. Anne left shortly thereafter to embark on a career as an independent consultant predominantly serving the local biotech community, although also addressing alternative health and fitness products and services in the scope of her work. Through the remainder of the '90s and into 2000 she watched as biotech after biotech burned through their cash, experienced product failures well into clinical development, fell out of favor with the investment community, laid off double digit percentages of their personnel, and ultimately failed as going concerns. The biotech industry's corporate and product failures drove her to look for answers and were the springboard for the topic of her MBA thesis.

Nearing the completion of her MBA, she accepted a full time position as executive director of corporate business development for another San Diego biotech. She knew that the organization's potential for long-term profitability was tenuous, at best, however the position offered some new and interesting challenges that were worth the risk. Shrinking market capitalization, declining cash flow, and investor dissatisfaction led to the situation she faced on this day. Once again, it was time to move on in her career.

The Biotechnology and Pharmaceuticals Industries

Collectively, the biotechnology and pharmaceutical industries are generally referred to as the biopharmaceutical industry. Their products include drugs, pharmaceuticals, and biopharmaceuticals with these terms frequently used interchangeably.

Unlike the pharmaceutical industry that has been in existence since the late nineteenth century, creating multinational corporate giants such as Merck, Johnson & Johnson, and Pfizer, the biotechnology industry is a fledgling that only began to gain recognition in the '80s. Although the two industries generate products that target similar markets (i.e., diagnosis and treatment of disease) the differences and relationships between them merit discussion in order to understand why one exhibits substantial cash reserves and profitability, while the other struggles with negative cash flows and layoffs.

The pharmaceutical industry and its organizations (Large Pharma) are mature and could be characterized as an oligopoly. The industry leaders are multinationals currently undergoing consolidation and with heavy reliance on "cash cow" products with revenues exceeding $1 billion in annual sales and with high margins to sustain their profitability. As an example, Schering-Plough's allergy medication, Claritin, generates $3 billion in annual sales. Large Pharma employ hundreds of thousands of people worldwide and are vertically integrated with operations spanning the stages from discovery research through development to global marketing and sales. The corporate weaknesses inherent and pervasive in the pharmaceutical industry are in discovery research; because of its size and associated bureaucracy, it is slow to foresee market needs, adapt to market change, and exercise innovation. (1)