This past weekend I joined over 20 of my E&Y colleagues and 5,400 other riders in the 2012 edition of the PanMass Challenge bike ride. For those not familiar with the PMC, it’s an incredibly well organized, very fun 2 day ride from various points in Massachusetts to the tip of Cape Cod – 165 or 190 miles depending on where you start. The PMC has raises an incredible amount of money for cancer research and care at the Dana Farber Cancer Institute in Boston. In fact, the over $30 million raised each year makes the PMC the largest single-event sports fundraising event in the country and comprises over half of the Dana Farber’s annual budget. While riding this year, I got to thinking about why endurance sporting events – be they walks, runs, rides or more creative varieties – are so popular and such an important source of fundraising for various medical conditions. Fortunately, others have done research and writing on this topic including here: http://ow.ly/cMrde , here: http://ow.ly/cMrIO , and from the perspective of evolutionary psychology, here: http://ow.ly/cMwdS .
The website www.runwalkride.com has some interesting stats about the top 30 largest fundraising events in the US in 2011. At the top of the list is the American Cancer Society’s Relay for Life which brought in $416 million and incredibly involved over 3 million participants. If one sorts the list by dollars raised per participant, the bike rides comprise the top 4 positions and 5 of the top 7 (with the PMC comfortably in the lead). While runs and walks accounted for 78% of dollars raised, on average the bike events raise nearly seven times as much per participant. I think one can safely presume that the average bike rider, having invested several hundred to several thousand dollars in equipment, has more financial resources and is likely older than the average walkathon participant (the average age of riders in the PMC was 45). Also bike rides tend to have capacity limitations - it is certainly hard to imagine the PMC with many more riders although the organizers have been creative in expanding the routes over time. Over half of the total $1.6 billion raised in all endurance events went towards cancer research, with no other disease comprising more than 10% of the total, and only three of the top 30 events raise money for causes unrelated to disease or disability (hunger, youth programs).
Part of the great feeling around the PMC comes from the number of individuals and teams riding in memory of a loved one, a friend or former patients. For them, the motivation is clear and highly inspirational. For many others – myself included – I think the motivation varies. Like most, I have lost family members to cancer, but participation in the PMC is more about the challenge (including having a goal to motivate training), the camaraderie with teammates and other riders, and the experience of the ride. That’s not to say that I am not a proponent of more cancer research - after all I spend much of my life working with life sciences companies that are pursuing cures and treatments - or of the mission of any particular institution like the Dana Farber. It is more a case that if I ask myself objectively, would I be motivated to donate or raise the $4,500 PMC minimum fundraising total to Dana Farber absent the event, the answer would be probably be no. I would certainly donate to medical research related causes, but more likely spread it around to different organizations. Also, I don’t think I would be asking friends, family and colleagues to contribute along with me absent the event. Thus these events are very powerful aggregators of donations – from those motivated to participate and for those that want to lend their support.
Team E&Y and I will be back.
In an earlier blog post, I provided an overview of creative R&D financing structures utilized in the biotechnology industry over the years, and the related accounting consequences of such structures. These structures normally involve the use of a special purpose entity (SPE) that licenses one or more product candidates from a sponsor company (which retains a buyback option on the products or on the entire SPE), raises capital from third party investors and then funds research on the licensed products. The risk of development in these structures falls with the SPE, with a significant upside to the third party investors if the repurchase is eventually exercised.
Over the course of time in the biotech industry, these structures have been motivated either by profit and loss considerations (for example by recently profitable entities seeking to move some R&D expenses off the financial statements), or by purely the need to access capital (for example by loss making biotechs with reduced options for traditional fundraising). From the perspective of the sponsor company, the income tax considerations of these structures has historically been, at most, a nominal consideration, and thus the structuring dialog has focused primarily on governance and financial reporting.
Summer is here and with it a chance to reflect on a very productive last six months that culminated with the release of our the release of the 26th edition of Ernst & Young’s Biotechnology Industry Annual Report, Beyond Borders, at the BIO International Convention on June 17. Beyond Borders came together later this year, in part because our team needed to catch its collective breath after the February release of Beyond Borders sister publication, Progressions. While we were still fortunate enough to have contributions from many industry executives and investors – including Moncef Slaoui, Chairman R&D at GlaxoSmithKline, and Tony Coles, CEO of Onyx Pharmaceuticals - we had far less of an opportunity to “test and validate” our points of view with market participants as they were evolving. As such, it was particularly gratifying that the key themes of the year’s report – how biopharmaceutical R&D needs a new model, based on holistic collaboration between players from across the healthcare ecosystem and perhaps beyond – was very aligned with many of the panel discussions and hallway conversations at BIO. As one of SuperSession panelists, Joshua Boger, put it – we seemed to have “captured a bit of the meeting zeitgeist.”
I will be blogging about Holistic, Open, Learning Networks (or what we call HOLNets), and how models based on these principals could transform the way R&D is conducted in the biopharmaceutical industry today in future posts – both here and on a blog on Ernst & Young’s Life Sciences webpage which is launching later this month (www.ey.com/lifesciences).
For now here are some links:
The media release which summarizes key findings is here
An interview I did at BIO with Chris Morrison of Elsevier and the InVivo Blog on the HOLNet concept is here
In the recent Ernst & Young Life Sciences Annual Report Progressions (found here: www.ey.com/p12 ), my colleagues and I argue that the single biggest opportunity to improve health outcomes and reduce the growth in healthcare expenditures is behavior change. As a result life sciences companies, and indeed all players in the health ecosystem, must consider themselves in the business of helping patients change their health behaviors. We further make the case that as companies adapt their business models, much can learned from the emerging field of behavioral economics in designing effective solutions (product, service, education) that seek to improve patient behaviors.
To explore these concepts further, on June 4th we hosted an interactive client seminar that featured Dr. George Lowenstein from Carnegie Mellon University, and Dr. Katrina Firlik and Tom Kottler, founders of the start-up company Healthprize. Dr Lowenstein, along with colleagues at UPenn, Harvard, MIT and elsewhere, has conducted some of the foundational research in applying behavioral economics principles to health. The team from Healthprize has launched a business that seeks to leverage some of the techniques that have emerged from this research to impact the “real world” issue of drug adherence.
Dr. George Lowenstein, Carnegie Mellon University
I recently contributed to an article published in the current May issue of PharmaVoice Magazine entitled “New Course for Biotherapeutics”. The article features various subject matter experts who cover details around the future of biotherapeutics from collaborations to the funding environment.
“Companies developing biotherapeutics are beginning to study indications beyond cancer and autoimmune and infectious diseases and are researching how antibodies and proteins can be used to treat other conditions, such as pain and cardiovascular conditions, that have traditionally been treated with small molecules…”
To read the full article, see PharmaVoice pages 18-20
Also notable in the May PharmaVoice issue is an article featuring Yazaki-san, E&Y Japanese Life Science Leader. This piece, “The Sun Keeps Rising on Japan’s Pharma Industry”, (page 26) discusses Japan’s “hallmarks of a leading market for the pharmaceutical industry”. This article was especially interesting having recently gathered my own new insights on the market following a visit with clients in Asia last month.
Along with several colleagues from the US and Europe, I had the opportunity last week to visit Sao Paulo and to spend time with our Brazilian Life Sciences team and with the Brazilian management teams of several of our global pharma clients. Sao Paulo is a very dynamic city and one certainly cannot miss the hallmarks of a rapidly growing economy which are present in there, including an incredible amount of construction and completely unpredictable traffic. It is almost impossible to leave too early to travel to the airport as one never knows if it is going to take one hour or three. I was fortunate enough to have a “creative” driver who got me there in 90 minutes by traversing most of the city.
E&Y colleagues from L to R: Transaction Advisory Resident Andrew Forman, Brazil Life Sciences Leader Frank de Meijer, Glen Giovannetti, and Brazil Chairman Jorge Menegassi
On the healthcare front, costs in Brazil are actually growing at a faster rate than the rest of the economy, which has slowed a bit in recent quarters, and now total about 8% of GDP. The growth is largely due to a combination of increased spending by a rising middle class, the so called “C” class, and the government’s efforts to provide more care to the “D/ E” classes (see figures below). According to government numbers, the middle “C” class has expanded from 45 million in 1993 to over 105 million today – an increase larger than the entire population of many developed countries. While the Brazilian constitution mandates healthcare as a right for all citizens, as in many other markets, there is a clear divide between what is available to the “haves” in the “A/B” classes (with the ability to pay out of pocket or through use of employer sponsored insurance) and the “have nots” which must rely completely on government provided care (government healthcare coverage generally does not cover the cost of prescription medications administered outside of the hospital setting).Read more
The biotech industry has a long history of creative financing structures - proving the point that necessity is the mother of invention. A common structure that has existed in some form or fashion since the early days of the industry involves the use of a special purpose entity to fund the development of a particular product or set of products. Simplistically, this involves the licensing of products or technologies under development to a new entity that is controlled and funded by investors. The sponsor company is typically hired to perform some of the R&D and retains an option to acquire the newco at a pre-established price. The risk of the development is transferred to the investors - albeit with a built-in healthy return if the option is exercised.
These structures have come in an out of use over time due to changes in tax laws and accounting rules and the funding needs of the various participants. The initial version of the structure was the R&D Limited Partnerships used by Genentech in its early years. These partnerships provided a new source of capital to fund innovation and immediate tax deductions for the investors. Tax law changes made the structure obsolete (although, interestingly, BIO has recently proposed amendments to the US tax law that would permit a similar structure for defined types of R&D based on provisions that exists in the code today for oil & gas exploration).
The next evolution, the so called, SWORD or SPARC transactions, often involved companies that had access to capital but were reaching profitability and were seeking a measure of P&L relief by moving certain projects “off balance sheet.” The idea was that the market was beginning to value these companies on earning multiples, constraining R&D investment for the future. I had the opportunity to be involved with a couple of these at ALZA Corp., but many companies including Elan, Genzyme, Centocor and others executed similar transactions. The same basic structure was used by Symphony Capital, whose founder Mark Kessel has played a role in most of these transactions over the years. The Symphony structures were directed at biotech companies that had robust pipelines and were seeking capital to fund development. There was also a value arbitrage thesis in play - if the underlying products worked, the value of the company would presumably increase, allowing the biotech the capital necessary to exercise the option with lower dilution than if they raised the capital along the way from public investors. Unfortunately for many of these transactions, the value arbitrage concept ran into the financial crisis and a stock market that was no longer rewarding companies for their pipeline progress.
Over the last couple of years, interest in these funding models has moved from biotech to the pharma industry. We have been involved in numerous discussions with private equity and venture capital firms, and large and mid-sized pharmas exploring this type of structure to address more constrained R&D budgets and the reality that the companies cannot afford to develop all of the assets in their pipelines.
The accounting rules related to these deals - in particular around consolidation - have also moved over time. For biotechs involved in the Symphony structure, who did not trade based on their financial results, consolidating the losses of the newco was not important. For Pharmas considering versions of this structure, a primary reason for doing the deal is to reduce consolidated R&D expense (along with sharing R&D risk), so the consolidation answer is critical. Getting to that result requires the sponsor company to give up important control and decision making authority over the newco and the programs within the newco, which can be a difficult trade-off. For those considering navigating these rules, a more in-depth discussion of the accounting considerations can be found here.
While the accounting answer is normally a driver for the sponsoring company, investors are often interested in tax efficiency. In future posts, I will discuss the tax considerations for investors.
I recently wrote an article for PharmTech Magazine discussing some of the challenges Biotech faces in light of ongoing industry financing constraints. The article outlines four complementary approaches for biotech companies to sustain innovation as discussed in EY’s annual biotech report, Beyond Borders.
Ways to sustain innovation:
For more details, see the Pharmtech article: A Sustainable Biotech Path