Back to School 1997: Nightmares, etc.

Back-to-School Issue

BioCentury frequently is asked whether we ever run out of topics to write about. The truth of the matter is that as the industry has grown, the number of subjects to cover has grown with it. There are more companies, at more stages of development, with more diverse technologies and products than ever before. The result, as we described in last year's Back-to-School Commentary, is more complexity and thus more opportunity to think about new issues.

But in general, for the management and investor communities, many ideas fall into global categories that describe the key success factors for corporate performance, or that promise to influence the industry's structure.

In keeping with these global themes, this year's Commentary starts by addressing the goal of most companies, which only now is being faced by a growing handful of companies: managing for earnings.

We then mull over some dilemmas facing the discovery platform model, raise some questions about pharmacogenomics, and then consider whether government financial aid to the sector, particularly in Europe, will succeed in nurturing a commerical life sciences industry.

Earnings: Biotech's worst nightmare

As is well-known, biotech companies spend years taking Other People's Money - OPM - for the purpose of creating products. An important part of the dance between investors, companies and their bankers/analysts is the estimation of future revenues and earnings from those future products. As we have noted on more than one occasion, the unreality of many of those estimates must someday come home, like chickens to roost.

The transition from a cash burning research company to a cash generating business creates challenges that cannot be over-estimated. In the research phase CEOs don't necessarily have to worry about the losses, as long as the company maintains a pipeline of products that looks sufficiently exciting to keep OPM balances above the burn rate.

Ironically, investors do get worried if a company is thought not to be allocating enough of its money to innovation. However, once a company crosses the revenues Rubicon, then the outside world expects profitability to follow revenues.

In addition, after hearing years of promises about a revolution in health care, and getting a taste of explosive success from Amgen, investors also expect biotech products to achieve at least "pharmaceutical company-type" returns.

For the emerging group of companies that have finally "made it", the lesson for those that hope to follow is becoming clear: creating and explaining profit numbers demands different skills than creating an appealing story based on potential.

Once revenue expectations are created, biotech companies must account for actual behavior by prescribing clinicians, satisfy reimbursement demands, anticipate the impact of "sales from inventory", take the

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