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HEARING ON COMPETING IN THE NEW
MILLENNIUM: CHALLENGES FACING SMALL
BIOTECHNOLOGY FIRMS
WEDNESDAY, OCTOBER 27, 1999
House of Representatives,
Committee on Science,
Subcommittee on Technology,
Washington, DC.
The subcommittee met, pursuant to call, at 2:00 p.m. in room 2318, Rayburn House Office Building, Hon. Constance A. Morella [chairwoman of the subcommittee] presiding.
Chairwoman MORELLA. Good afternoon. I'm going to call to order the Technology Subcommittee of the Science Committee. And I want to thank you all for coming to our hearing on the challenges facing small biotechnology companies in the next century.
Dating back thousands of years to when the Chinese first used moldy soybean curds as an antibiotic to treat boils, the science of biotechnology has helped to improve the lives of countless individuals worldwide. In fact, just this week, a group of doctors in London voted penicillin, the first antibiotic and biotechnology breakthrough, as the medical miracle of the century.
As we approach the new millennium, biotechnology still continues to hold great promise for the future. In health care alone, hundreds of new biotech drugs are being developed that we expect to lead a medical revolution that will someday transform the treatment for human ailments, such as cancer and heart disease, to AIDS and Alzheimer's disease. And as the scientific community moves closer toward its goal of mapping the entire human genome in the coming years, the biotechnology industry will be at the forefront, utilizing gene therapy to correct once life-threatening hereditary disorders.
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Beyond health care, advances in biotechnology have led to improved products and services in a number of industries. Farmers today are using cutting edge biotechnology to help improve our Nation's food supply and to produce better tasting and longer lasting foods. Industrial biotechnology has led to improved manufacturing processes and a cleaner environment. And even our Nation's law enforcement, empowered by DNA technologies, has benefitted from biotechnology.
With this great promise, it's not surprising that the conventional wisdom holds that the biotechnology industry as a whole is flourishing. After all, revenues generated by the industry jumped an impressive 16 percent from 1997 to 1998. And biotechnology sales reached nearly $11.5 billion last year.
We are here today, however, because there's a growing concern that despite this seemingly impressive economic growth statistics, smaller biotechnology firms are not reaping the success enjoyed by their larger industry counterparts. For example, while the biotechnology industry raised over $5 billion in 1997 to fund important research in product development, a disproportionate amount was raised for small biotechnology companies.
And this is particularly disconcerting, given that small companies comprise a large percentage of all biotechnology firms. In fact, it's estimated that nearly two-thirds of all biotech firms employ less than 135 people.
I grew particularly concerned about this phenomenon when I visited with a number of small biotechnology firms this summer. The biotechnology companies that I met with in my Congressional district, which is home to the third highest concentration of firms in the country, all raised this issue to me independently without prompting. They are very concerned, and so am I.
There are a number of questions that we hope to have answered this afternoon, including, are there unique challenges facing small biotech companies that have slowed their growth? Why are smaller firms not participating in the success of the industry as a whole? What's the venture capital and market perception of small firms and this capitalization dilemma? And does the Federal Government have a role to assist small biotechnology companies? And if so, what should it be?
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We have an impressive panel of witnesses joining us here today to help to shed some light on these issues, and I look forward to their testimony.
[The prepared statement of Mrs. Morella follows:]
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Chairwoman MORELLA. It is now my pleasure to recognize our distinguished Ranking Member of this subcommittee, Mr. Jim Barcia.
Mr. BARCIA. Thank you very much, Chairwoman Morella. On behalf of our subcommittee membership, thank you for calling this hearing on this very important topic.
I want to join the Chairwoman in welcoming our panel to this afternoon's hearing. The focus, as we know, of this hearing, is basically addressing the challenges facing small biotechnology companies. And in this case, it's really the challenge small biotech firms have in raising venture capital. As we all know, the reluctance of the venture capital market to invest in small biotech firms reflects an assessment of the risk versus the anticipated payoff.
During the past few years, as biotech products have gone to market, we have seen a few of these risks first-hand, and a few of the hurdles these products face. Domestic and foreign regulatory regimes intended to achieve public health, safety and environmental goals can significantly impact the introduction and acceptance of new biotech products. Federal tax laws, especially those intended to promote investment in capital assets, are not always as effective as envisioned.
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In addition to these obvious considerations, there are two other factors which also affect the acceptance and use of biotech products. First, as cost concerns continue to dominate the health care industry, new biotech products must demonstrate they are clearly better and are cost effective, as compared to existing treatments. Secondly, there is the issue of public acceptance. There seems to be general public acceptance of bioengineered products that are designed to treat diseases.
However, the bioengineered agricultural products have received mixed acceptance by the public. This has been a particular problem in foreign markets.
I raise these issues to encourage our witnesses to explain not only the challenges that they face, but also why these challenges exist and how they can be overcome. I want to thank the distinguished panelists for taking the time to appear before our subcommittee, and I look forward to hearing their comments and recommendations.
Thank you, Chairwoman.
Chairwoman MORELLA. Thank you, Congressman Barcia.
I am now pleased to recognize Congressman Dr. Bartlett from Maryland.
Mr. BARTLETT. Thank you very much.
In a former life, I metamorphosed from an experimental biologist to a biotechnologist, and was awarded 20 patents. I had a small biotechnology company that then metamorphosed into land development and home building. And one of the reasons was the availability of capital for biotechnology. It was just easier to get it in land development and home building.
So I look forward to your testimony today with great interest. Thank you.
Chairwoman MORELLA. That's why he's a millionaire. [Laughter.]
I'm now pleased to recognize the gentleman from Massachusetts, Mr. Capuano, who wants to introduce one of our panelists.
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Mr. CAPUANO. Thank you, Mrs. Morella.
Mrs. MORELLA, I just want to introduce Dr. Niemi, from Genetix Pharmaceuticals, Inc. I just want to tell you a little bit about his background, so that you'll know why he is here. He's here both as a small business person in the biotech field, but he's also here representing the entire Massachusetts Biotechnology Council and the Massachusetts Society for Medical Research.
And prior to this particular endeavor, he also worked for Genzine Corporation. So he's been in the business on every end of it. He has very close relationships with everyone in the business, from large to small, from startups to long-term businesses, even though everything's relative in this business, nothing's really that long term. And I look forward to hearing his testimony today, and I know that he's going to bring us a particular viewpoint that I think will be probably broader than most. And I thank him for coming today.
Chairwoman MORELLA. Thank you, Congressman Capuano.
Dr. Niemi, Congressman Capuano represents the area that I grew up in, matter of fact.
And I now am pleased to recognize Ms. Rivers, the gentlewoman from Michigan.
Ms. RIVERS. I appreciate the opportunity to hear from each of you, and I have no further statement.
Chairwoman MORELLA. We have a distinguished panel of witnesses joining us today, and I'm pleased to welcome our first witness, who will be Dr. John Holaday, who's the Chairman, President and Chief Executive Officer of EntreMed, Inc., located in Rockville, Maryland. EntreMed is a leader in the research and development of cancer-fighting drugs. And he will be sharing his views on the obstacles facing small biotechnology companies.
I must note for the record that EntreMed, which is located in my district, is one of the many successful small biotech companies that I represent. And I'm very proud of the work that Dr. Holaday and his staff are doing, and very much look forward to his testimony.
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In addition, we are very pleased to welcome Dr. Michael Horvath. He's the Assistant Professor of Economics at Stanford University. Dr. Horvath will be discussing the flow of venture capital funds to biotechnology companies over the past 5 years, an issue of great importance to us. And we appreciate your coming here from Stanford.
We're also joined by Dr. Dennis Purcell, the Managing Director of Life Sciences, Hambrecht & Quist LLC. LLC, I'll have to ask you what that stands for. Mr. Purcell will also share his thoughts on the biotechnology industry from a market perspective. Again, another very important element as we look at small biotechnology companies.
And finally, we have Dr. Niemi, who has been introduced by Mr. Capuano, President and Director, Genetix Pharmaceuticals, Inc. And he's going to be providing us with more input as a small biotechnology company regarding the challenges facing the industry.
Gentlemen, it is the policy of the Science Committee that we swear in all of those who are going to testify. So if you would stand and raise your right hand.
[Witnesses stand.]
Chairwoman MORELLA. Do you solemnly swear that the testimony you are about to give is the truth, the whole truth and nothing but the truth?
[Witnesses respond in the affirmative.]
Chairwoman MORELLA. Thank you, and the record will indicate an affirmative response.
Our tradition is that we try to ask you if you would speak not more than 5 minutes. Any testimony you have submitted to us in its entirety will be included in the record, so you might want to give a synopsis beyond that, or mention other points that aren't in your testimony. And I wanted to start right away, because as I had mentioned to our panelists, we are expecting to have a series of votes. So we will commence and hear from each of you and then we'll open it up to questions.
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We'll start off with you, Dr. Holaday.
TESTIMONY OF JOHN W. HOLADAY, PRESIDENT AND CEO, ENTRE MED, INC.
Mr. HOLADAY. I want to thank Chairwoman Morella for the opportunity to address you today. We're very proud of your record. And as members of the Eighth District of Maryland, you've been very supportive of the biotech industry, and we're proud to be among those many companies that have helped make this a prime area for biotechnology development.
So thank you very much, and it's a pleasure and honor to meet each of you today and to have this opportunity to tell you a little bit about the challenges that we face in the next millennium, perhaps in the context of those that we have faced in the past. So if I could build a little background for you, fundamentally what I would like to address today are the needs that we have for financial resources, for human resources, and then also, a little bit of concern about intellectual property matters as ways that we can protect those discoveries that allow us then to bring benefit to the patients.
From the first perspective, to tell you a little bit about our company, I had the pleasure of starting this company about 8 years ago. I have the pleasure of serving also as Chairman and CEO. My background is scientific. I'm not a businessman, although really, the only difference between scientists and businessmen is the decimal place. Those of us in the sciences work on the right, like in milligrams and millimoles, and business people work on the left with a few million dollars here and there.
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So those come together in EntreMed. Actually we named the company by contracting the words entrepreneurship and medicine. We are indeed a group of individuals who have put our careers and our opportunities at risk, as well as our own financial resources, to bring a betterment to patients and likewise allow that then to flow back to the shareholders. We have about 80 employees located in Rockville, Maryland, and we've been in business for a little over 8 years.
We began our company without venture capital support. We knocked on a lot of doors, and as a consequence, raised about $18 million from the private sector before a strategic partnership then allowed us to develop the resources to become a public company.
In May of 1998, our small company reached the front page of the New York Times, and it changed our lives, and perhaps will change yours as well. There was an announcement on that Sunday morning paper that a particular drug had been useful in curing mice of cancers. And this drug was called Endostatin. Although at that time, it was an early development drug, it prompted an awful lot of interest, not only in the field of angiogenesis and its inhibition, but also in Dr. Folkman, from Harvard's Children's Hospital, as well as EntreMed in Rockville, that's developing this drug.
What this article showed was actually old news. It had been published in the scientific literature 6 months earlier, suggesting that the use of Endostatin to treat mice that had incurable forms of cancer would result in a shrinkage of the tumor. How did this drug work? Well, the way it worked was by blocking the blood vessels that are required to feed tumors.
Now, that's an intuitive strategy. And it was one that Dr. Folkman had been fostering for a quarter century. In that context, however, he had not received adequate support to provide, if you will, the products that would prove the principle.
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Let me tell you about a way a small biotech company stepped up to the plate. In 1992 and 1993, Dr. Folkman was unsuccessful in achieving grant support from the National Institutes of Health to foster the discovery of these molecules. As a small company with a total of $7 million, we committed a significant portion of that to his laboratories, which allowed him then to discover these molecules, like Endostatin, Angiostatin, and 2-Methoxyestradiol.
I'm pleased to announce that in less than 3 years' time from the discovery of Endostatin, when that was published in January of 1997, we have begun clinical trials with patients, in Boston, at the Dana Farber Cancer Center. So this is a remarkable and a remarkably speedy effort. It has taken resources. This first kilogram, which is about 2 and a half pounds of material that we produced, cost us $7 million. As a public company, we cannot go to taxation to achieve our monies, but instead require that we go to either the public or the private sector for investment in our company, so that those individuals can take the risk and help us fill this need.
Now, remember, all that Dr. Folkman has and continues to receive now, good grant support. When the real need was there, he was unable to get the support. And that's one of the things that we in the biotech industry do very well. Hopefully, we recognize opportunity, and hopefully if we use good data to select the wheat from the chaff, we're able to support those discoveries that we think will make a difference in mankind.
Indeed, in that process, we have raised approximately $120 million in all from the public and private sectors over the course of our development. It is a very expensive process of developing drugs. As you may know, the Pharmaceutical Research and Manufacturers Association has showed us that on average, it takes 15 years and over $500 million for a concept to make it through the process of drug development, all the way out to the point where it can treat people.
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For a small biotechnology company, that's a real hurdle. For big pharma, that's less of a problem. But we're more willing to take the risks of drug development, and I think understand entrepreneurship.
The things that I'd like to appeal to you today is that you perhaps consider the biotech industry as a very valuable national and natural resource. We've got the best biotech in the world here in the United States. And as such, perhaps if there are ways to incentivize investors to allow them to take the risks with a greater understanding of the reward through various tax initiatives, etc., this would allow us to have more capital available to see through these very important concepts to the point where they can make a difference in the lives of people.
Secondly, I'd like you to consider the fact that people are essential to us as well. And that is that as we try to recruit scientists, we have a very difficult time. It's true in academics, as well. We don't have this group of trained scientists coming through our processes at the various academic institutions. Instead, what we're finding is that the brightest people are becoming lawyers, perhaps taking some of your jobs in the next few years. I'd rather have them take mine.
So we need some more incentives to provide them with greater pay. Until they're in their mid-30s, their wages are similar to that of people in the trades, and so there's not enough—or below, in some cases, minimum wage because of the requirements that these kids have to go through in order to develop the expertise as scientists.
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And finally, from the point of view of intellectual property, it's important that we consider that the body's natural drugstore is the one that we in the biotechnology industry are trying to discover, and then augment, if it will help us in the treatment of disease. And that means that the proteins that we make and the genes that make those proteins are essential to allow us the opportunity to protect these for the purposes of the exclusivity of development, not only to bring them to the market faster, but to also help reward those individuals that have taken the risk with us, which is a considerable risk in the development of these products.
So in essence, my message to you today is that biotechnology has come of age. But if we fail to nurture those types of things that are required for small biotech companies to grow, it will be like leaving ripe apples in the orchard, if you will. And that I would encourage you to consider some of these general events that we've talked about and will talk about today.
And I thank you very much for the opportunity to address you.
[The prepared statement of Dr. Holaday follows:]
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Chairwoman MORELLA. I thank you, Dr. Holaday. You kept your cool during all of those buzzers going off, which is very disconcerting. I think they do it purposely, so we never feel that we can take anything for granted. There is no stabilizing.
We're going to recess until about 2:50, maybe if we could do it a little earlier, fine. Because we have 3 votes in a row, and then we'll be back, if that's all right with everybody.
Great. So this subcommittee is recessed until 2:50.
[Recess.]
Chairwoman MORELLA. I really appreciate the patience of our panel and of the others who are here. And so I'm going to reconvene this Subcommittee on Technology.
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As I mentioned earlier, not only do we have the series of votes, but our members from the State of Michigan are over at Statuary Hall, where President Ford is getting a Congressional Medal of Honor. And so we have quite a few of them who are from Michigan who are on this subcommittee.
I'm pleased that we've been joined by Mr. Baird from Washington. And so I'm going to commence now with our second witness, Dr. Michael Horvath. Thank you for again being so patient.
TESTIMONY OF MICHAEL HORVATH, DEPARTMENT OF ECONOMICS, STANFORD UNIVERSITY
Dr. HORVATH. Madam Chairwoman, I thank you and the members of the subcommittee for inviting me here and giving me the privilege of testifying.
I teach in economics, in the economics department at Stanford University. And I have engaged in research on venture capital flows, entrepreneurship and the financing of innovation for several years.
My testimony today concerns empirical evidence on the flows of venture capital funds to biotechnology companies. And this data comes from a survey conducted by Price Waterhouse Coopers over the past 5 years. I want to stress that the comments are my own and do not necessarily reflect those of Price Waterhouse Coopers.
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I'll be using a presentation here. You can turn your attention to the charts I put up, and I'll try to explain in an efficient manner what they say. Let me just start out with some preliminary evidence on trends of venture capital flows in the United States. This chart shows your quarterly data on the dollar amounts flowing from venture capital firms to all companies in the United States.
So you see in this chart the tremendous growth in venture capital flows over the time period here, 1995 to the second quarter in 1992. In particular, in 1995, there were $8 billion of funds invested in startup companies in the United States. In 1998, the last full year of the sample, it's grown to over $14 billion, so nearly doubling.
Here's the flow of funds to biotechnology firms in the United States over the same time period. What this shows is that while flows overall have grown dramatically, there has been no trend upward in flows to biotechnology firms. Roughly $670 million flow to biotechnology firms in every year of the sample.
Consequently, the percentage of flows from venture capital firms to biotechnology companies has a dramatic downward trend, from about 9 percent of all funds flowing to startups in the beginning of the sample, 1995, down to 3 percent in 1998 and beyond.
Now, of major interest in today's hearing is the prospects for small biotech companies over the next millennium, sorry, the next decade in the new millennium, this graph breaks down the dollar flows to biotechnology companies by the size of the deal. And there are several size categories, zero to $2 million, 2 to 4, 4 to 8, you see that legend on the right hand side of the graph. So the bottom colored in dark blue are the percentage of deals flowing in sizes of zero to $2 million. Now, the implication here is that small biotech companies look for small amounts of funding.
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So if we look at the bottom, see the bottom two colors, the dark blue and the red, we see that in 1995, 20 percent of deals flowed in the two smallest size categories. This is down to 11 percent in 1997. Now, we see some return of the smaller deal sizes in 1998 and 1999, but not back to the levels we saw in 1995.
If we consider the next largest size category, the yellow on the graph, on the screens, that too showed a decline from 21 percent in 1995 to 13 percent in 1997. So we see that small biotech companies are getting a smaller percentage of the already shrinking dollars going to biotech.
There's also a geographic component to this, which is that California firms received about 50 percent of flows to biotechnology in 1995, but only 31 percent in 1998. Since most, a large number, I should say, of biotechnology companies are located in California, this shift away from funding companies in California over the sample period probably has contributed to heightening the sense that there's not enough money flowing to biotech. It's certainly true that the biotech companies in California are suffering perhaps a little bit more than biotech companies in general.
The same is true, sorry, I should also stress that this seems to have reversed itself, this trend away from financing California companies has reversed itself a little bit in the first two quarters of 1999. This trend away from financing California biotech companies is also evident at the smallest deal sizes, the deals in the zero to $2 million range. This would be for the small biotech companies. We see a decline of the percentage of flows to California companies from 49 percent to 33 percent between 1995 and 1998.
Now, the patterns that we see in biotech are not unique to biotech. They're true in a lot of other industries as well. So this graph gives you the percentage of total venture capital flows to other health sciences industries. There's health care, medical instruments and devices and pharmaceutical companies, in addition to the biotech companies. We see a declining trend overall.
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Where's the money going? It's going to software and information companies and to communication companies, increasing from $1.5 billion or roughly 15 percent of flows to each of those two industry groups in 1995, up to 60 percent of total flows in 1999. So what can we conclude from this? We can conclude that the venture capital industry is passing biotech companies by in favor of other investments, such as information technologies and communication technologies.
Less clear is perhaps the differential impact on small biotech companies. There seems to be evidence that it was much more difficult for small biotech companies to get funding in 1997 compared to 1995. That trend seems to have abated somewhat.
So some might conclude from this evidence that the right thing for the Government to do is step in and take over where venture capitalists have fallen short. And I strongly caution against this line of thinking. We have no idea what the returns to R&D investment in biotech are versus investment in R&D and information technologies. So to jump in and say that the Government should fund, directly fund biotech I think would be too quick.
However, there are ways in which the Government could remove regulatory hurdles that we might think contribute to the reason why venture capital firms are uninterested or less interested in investing in biotech companies. And what I mean by here is reducing the amount of unnecessary uncertainty associated with regulatory approvals. For example, it would serve to level the playing field between information technologies and biotech.
It's been a pleasure to provide you with this testimony and I welcome your questions and comments.
[The prepared statement of Dr. Horvath follows:]
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Chairwoman MORELLA. Thank you, Dr. Horvath. Thank you for the charts that were very reflective of your testimony.
Mr. Purcell, pleasure to hear from you, sir.
TESTIMONY OF DENNIS J. PURCELL, MANAGING DIRECTOR, LIFE SCIENCE, HAMBRECHT & QUIST, LLC
Mr. PURCELL. Thank you, Madam Chairwoman.
And again, I'd like to extend my thanks for allowing me to testify this afternoon. I run the health care business at Hambrecht and Quist. LLC stands for limited liability corporation. We just announced a merger with Chase Manhattan Bank. But our firm has been the number one underwriter of securities in the life sciences industries over the last 4 or 5 years. And today I am just going to take my time and talk about the view from the capital markets and Wall Street as it relates to small biotech companies.
We can go to the next one.
[Slide shown.]
Mr. PURCELL. And the message today is really a mixed message. We can go to the next slide.
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[Slide shown.]
Mr. PURCELL. On the one hand, Wall Street really views this as the best of times in the biotech industry. We know a lot about FDA reform and NIH budget and the like. However, what we may not know is that almost 2 times the number of drugs that are going to be approved in the next 3 years are biotechnology drugs versus regular, the old chemical entity types of drugs. I would say that the——
Chairwoman MORELLA. Excuse me, could we dim the lights a bit more?
Mr. PURCELL. The number of drugs coming from the biotech industry is going to explode over the next number of years. We have three times as many drugs in late stage trials as we did 2 or 3 years ago. It truly is the best of times. Companies like EntreMed and others are leading the way on innovation that Wall Street absolutely appreciates and have rewarded many companies.
The next slide, please.
[Slide shown.]
Mr. PURCELL. And the people that have really made out have been the big biotech companies. If we just look at this chart, the top 10 biotech companies rose in value almost 88 percent in 1998. They continue their upward rise into 1999, and they have market values of almost $100 billion.
Next slide.
[Slide shown.]
Mr. PURCELL. However, the story is different on the small biotech side. We have almost 100 companies that have less than 1 year of cash. The smallest 50 public companies have an average of 1.3 years of cash left. The survival index means how much cash before I run out of capital and can't operate any more. So on the smaller companies, we're clearly facing an upward battle.
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And that's been reflected in their stock prices. The next slide, please.
[Slide shown.]
Mr. PURCELL. If we look over the last 3 years, on the far right hand corner in 1997, almost over 70 percent of the stocks declined in value. In 1998, over almost two-thirds of the stocks declined in value. We've had a little bit of a reversal in 1999. But the stock market has been very unforgiving of the small biotech industry over the last 2 and a half years.
Next slide.
[Slide shown.]
Mr. PURCELL. The way we've been able to keep ourselves afloat is we've had two good financing windows, one on the left hand side there in 1991 and one in the 1995–1996 time frame, where we actually raised a lot of money. This chart just shows money raised in biotech.
The question we're struggling with right now at the end of 1999 is, will we be able to again on Wall Street raise enough capital to keep the industry viable.
Next slide.
[Slide shown.]
Mr. PURCELL. And what's happened, there's been a direct correlation between size of your company and performance. If you just look at 1998, the top 10, and this actually goes through 1999, first half of 1999, are up. The largest number is 11 to 99. The next largest amount and the rest of the universe are down almost an average of 50 percent over the last 18 months.
Interestingly enough, numbers of 100 to roughly 350, 350 biotech companies, represent almost 75 percent of the industry and only have about 7 or 8 percent of the market value of the industry. The market value of the industry is concentrated in the top tier companies.
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Next slide, please.
[Slide shown.]
Mr. PURCELL. On the other hand, what we have here is the pharmaceutical industry having a desperate need for the biotech industry as evidenced here by the amount of R&D that they're outsourcing, almost 28 percent in 1997. I think it's going to be 30 percent in 1998. The large pharmaceutical companies are increasing their exposure to the biotech industry by outsourcing their research and development.
And the pharmaceutical industry has its own set of issues in the sense of new drug discovery on the one hand, and on the other hand, drugs coming off of patent, almost $25 billion in drugs will come off of patent in the next 5 years.
Next slide, please.
[Slide shown.]
Mr. PURCELL. Sorry about these charts. The one that slopes upward is the impact of the pharmaceutical industry on the biotech industry. You can see that they continue to finance more and more of the biotech industry. The chart that kind of goes up and down is Wall Street, the investment community where we have a good period back in 1991, as I mentioned, and in 1996. But other than that, it's been relatively anemic.
Next slide.
[Slide shown.]
Mr. PURCELL. The issue that really has to do with the investment banking, the pharmaceutical and the investment community, there's been tremendous consolidation. And Wall Street wants bigger companies right now. Wall Street wants stability, Wall Street wants liquidity. And in a certain sense, that goes against what we're doing in the small biotech world, where science is not always so straightforward, not always dependable in terms of its outcome. And therefore, the large financial institutions have by and large shunned the smaller biotech industry.
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So the question becomes, can we make the smaller biotech industry a larger biotech industry and can we put two companies together that if we do put them together, they'll actually be worth more than the sum of their parts. And that's been a challenge for both companies and Wall Street.
Next slide.
[Slide shown.]
Mr. PURCELL. So what we have right now is we have an industry that has had tremendous value creation over the last 5 or 6 years, with valuations in the stock market steadily declining. And the challenge for all of us that are associated with the industry is to try to figure out a way to close that gap and make valuations equal to what the real values of these companies are.
Last slide, please.
[Slide shown.]
Mr. PURCELL. And is it worth it? I would argue it is worth it. For 3 or 4 years ago, companies in Maryland, Medimmune, for example, had tremendous trouble raising capital. Their stock was at $1.75, there were questions about whether the company would make it. The stock's now over $100 a share, it now has a drug on the market that's having a major impact on children. Idec Pharmaceuticals, a company in California, a tremendous impact on cancer over the last number of years.
Virtually all these companies now have drugs on the market that are curing people. Three or 4 years ago, they were teetering on the edge of bankruptcy, many of them. And because we were able to finance them, we now have drugs that are out there and saving lives.
With that, thank you very much.
[The prepared statement of Mr. Purcell follows:]
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Chairwoman MORELLA. Thank you very much, Mr. Purcell. It was great to see it through the charts, also, and we appreciate that.
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Now I'm pleased to recognize Dr. Niemi for his comments.
TESTIMONY OF STEVEN M. NIEMI, PRESIDENT, GENETIX PHARMACEUTICALS
Dr. NIEMI. Thank you, Madam Chairwoman. I'll keep my comments brief, because I know there are some questions, and I look forward to those.
It may be interesting to the committee to actually get down in the trenches and get a view of what the actual process is of raising money for a small biotech company, either today or yesterday. But that process hasn't changed. You first start with a business plan that describes your technology, your founders, your key personnel, your previous investors, and then the progress that you've made to date. You then go on to describe the progress you hope to make with the next round of financing, the time line involved and where you plan to be by the time that period has ended.
This also involves a portion of the company that you're offering for sale in terms of equity and an expected price that that piece of the company should mandate. With the business plan drawn up and approved by the board, you then go out and make as many contacts as possible, to the venture capital community, either through industry meetings, health conferences, web sites, directories. You also talk to investment banks, like Hambrecht and Quist, who will find investors for you on your behalf.
You talk to angels, which are wealthy individuals. You talk to the bankers and lawyers who represent angels. Anywhere you can find a receptive audience is fair game. And more recently, you also talk to government development agencies. Not Federal, but either State or county in this country.
But more recently, and at an expanded rate, foreign countries have been very aggressive in pursuing or recruiting investment or acquisition or subsidiary expansion into various European countries. This may be on a provincial basis, it may be on a city-wide basis. And I can't tell you how many feelers we've received, unsolicited, over the past two years, for us to expand or relocate to Europe. Because there is more money currently going into the European biotech sector for a whole lot of reasons that we can get into during the Q&A.
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But they are still valid, because cash is transnational, just like science. And it's my main job description to raise money for genetics.
Once the contacts have been made, you provide these people with your business plan and your brochures, that will include your latest press releases, scientific publications, anything else that may be pertinent, usually your licenses or your patents. Then you hopefully receive an invitation to present. That may be at your location, it may be on the road. It may be through some type of virtual conferencing.
And then if things look favorable, your material is turned over to an in-house panel of experts, which usually includes Ph.D. scientists, physicians, patent attorneys, other investors. And if it looks favorable, then the negotiations commence. And if you're fortunate, you wind up with a check in hand in return for diluting the ownership of your previous investors and hopefully at a higher valuation.
This is continuing to go on at pretty much a full time basis for myself and my peers in this industry on the small company side. Because until we have revenues, this is pretty much our only source of capital, as it should be. Because this is capitalism at its most intensive level.
That's just an overview of the process, and I'd be happy to follow up during the Q&A. Thank you.
[The prepared statement of Dr. Niemi follows:]
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Chairwoman MORELLA. Thank you, Dr. Niemi.
I guess I'll start the questions, again allocating each of us about 5 minutes for questions, and we can go a second round.
I guess I'll start off with Dr. Holaday. You state in your written remarks that biotech companies are not always successful, despite excellent ideas. And I'm wondering, what impact does this have on your ability to raise money through the capital market?
I mean, do you find that many investors balk at putting their money into small biotech firms, rather than the larger, better-known firms, because of the high failure rate? I wonder, how do you promote investor or venture capitalists' confidence in the industry?
And after he responds, if any of you would like to add to that response, I'd welcome it. Dr. Holaday.
Dr. HOLADAY. Thank you very much for the question.
I think it's certainly a situation of once bitten, twice shy. And in the case of biotech investors on the venture capital side, or perhaps on the institutional side, it's maybe twice or even three times bitten, twice shy. And the reason why is, biotech companies, largely we as an industry made promises we didn't keep. We said we could do it better, faster and cheaper. And this is beginning about a quarter century ago.
Now the fruit is ripening, but there are a lot of deaf ears out there, because of the fact that it has taken so long. We're not a dot com, where we can take a laboratory concept that evolved in someone's garage into the marketplace, without the scrutiny of the Food and Drug Administration, without the scrutiny of all these other appropriate agencies, and get products out there very quickly to people that have a rather short horizon in terms of investment appetite. They have to understand that clinical development of drugs takes a long time.
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If we're able to increase the life span of a prostate cancer patient from 5 to 7 years, that's 7 years of studies that have to be supported. So if I go out to, with Dennis or some of the other members of this group, to try to get money, we say, look, we need to raise $50 million to do clinical trials. Even so it's cheap. And they say, when is our return? We have to say 5 to 10 years. Because it takes that long for these clinical trials.
And for that reason, the most important thing we can do is to make conservative promises, to get people enthusiastic that we now are on the cusp of success in biotechnology and for them to take that enthusiasm and put them into investments where they'll have the opportunity to reap the reward of their risk through incentives that allow that to happen beyond the standard ones.
Chairwoman MORELLA. Would anyone else like to comment on that? I guess you would tend to agree.
Let me ask all of you, I have been very interested on this committee and on the full Committee, in trying to promote partnerships between or among Government, the private sector and academia. We usually do it in something called a CRADA, the Cooperative Research and Development Act. I wonder, how successful, from your experiences, have these partnerships been for industry? And what about technology licensing from Federal laboratories? I don't know who would like to start with that.
Dr. NIEMI. I'd be happy to address that first, Madam Chairwoman. One of the messages I hope this committee takes from today is that these types of Government programs do indeed work. Bayh-Dole, for example, in technology transfer from universities, has been critical for us to corral and claim some key intellectual property that was developed at Columbia University, at MIT, at the Dana Farber Cancer Institute. And without access to that federally supported basic research, and the protections that the patents and the exclusive licenses provide, we would not either be able to or be willing to take the risk to develop those into potential medical products.
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Same thing with the SBIR program. That has been very useful to this sector. Not necessarily in terms of the number of dollars that are provided, because they are very small compared to the burn rate that is usually experienced by these companies. But it does give a rewarded company or recipient added visibility, added credibility as a scientific peer entity to NIH that is commercializing. And that's really the only difference, the technology or the discoveries at hand.
Chairwoman MORELLA. Anyone else like to comment on it? Dr. Holaday.
Dr. HOLADAY. I would really like to commend the foresight of Congress for having put through the Cooperative Research and Development Agreement, I believe it was in 1986, as well as Small Business Innovative Research Grants, which have been instrumental to our growth as well. We are very proud of the fact that in developing the Endostatin molecule, that we've worked in a seamless dialogue between the National Cancer Institute of the National Institutes of Health, the Centers for, particularly in Dr. Folkman's case, the Children's Hospital at Harvard, as well as EntreMed in Rockville, Maryland, where we meet on a quarterly basis, all of this being facilitated by cooperative research and development agreements that help us not only gain the benefit of the medical wisdom at the NIH, but also gain the, if you will, sanctification of this group in producing our particular clinical trial results and save us a lot of money.
Although it costs us enormous amounts of money to make these particular drugs and proteins, through this cooperative research and development agreement program, some of the costs of the patient management are borne by the National Institutes of Health. So these are very important to our growth and I think to the growth of the biotechnology industry as a whole.
Chairwoman MORELLA. Matter of fact, this Congress, a bill that our subcommittee had that went through the House, has a bill over in the Senate dealing with expediting a licensing within a CRADA, which I think you would agree with. We also reauthorized the SBIR program. Just yesterday, Small Business Administration gave some awards, they call it the Tibbits awards, to the entrepreneurs who have demonstrated success with innovative technology. I'm glad to hear you say that.
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I'm pleased now to recognize Mr. Baird for his questioning.
Mr. BAIRD. Thank you, Madam Chair.
Dr. Niemi, I was intrigued by your comment about your money heading to Europe, given the European concerns about GMOs. Could you elaborate on that a little bit?
Dr. NIEMI. I think you have to distinguish between health related products and food or consumer related products. The money that's going into, or the majority of the money that's going into the European biotech sector, has been health oriented or health focused. And it's been this interest that has led them to the U.S.
What they're looking for specifically is not only intellectual property and R&D progress, but it's very key to them to have a U.S. presence through what would then become a subsidiary. Because there's no greater science than is being done in this country, especially at the commercialization level. And that's key to their shareholders back home, to be able to grab some of that action.
Mr. BAIRD. We've seen in other areas, particularly electronics, how ideas that had their genesis in our country were then later adopted by other countries, the transistor would be one example. And actually, they then got way ahead of us.
Do we run that risk in the area of biotechnology? If so, what countries might be providing greater governmental or private sector support? What are we looking at? I'd hate to see 10 years down the road somebody's gotten ahead of us, just like they did in some of the micro-electronics areas.
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Mr. PURCELL. There was more startup biotechnology companies within a 50 mile radius of Munich last year than anywhere in the world. And I would say almost, particularly the smaller biotech companies, virtually every one of them is looking at trying to set up operations in Europe, because of the government subsidies, particularly in Germany these days, that are coming out of there. Many of the publicly held, a number of publicly held U.S. biotechnology companies have actually set up subsidiaries or sister companies in Germany to take advantage of more attractive financing opportunities.
Mr. BAIRD. Dr. Holaday, you were going to comment?
Dr. HOLADAY. Indeed, I was going to comment precisely on what Dennis has said. There is somewhat of a brain drain. I think part of our concern also is that we're not educating our own scientists in the United States adequately, or providing adequate funds to them to make this an incentive to go into our industries. And as a consequence, when we look for people to fill jobs, we cannot find them, necessarily, with people from the United States who would be the ones we would ordinarily want to bring into this capacity, particularly with some of the immigration laws making it very difficult for us to bring in people from outside.
But as these people come into our biotech companies and learn our science, they go back home again with the idea of being entrepreneurs and with the idea of forming new ways of bringing back medicine to their people, capitalizing on the knowledge that they've gained here. There is a risk of that.
Mr. BAIRD. So you face H1B type challenges, similar to other high tech companies?
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Dr. HOLADAY. Indeed, we have.
Mr. BAIRD. Could you elaborate a little bit, any of you, about the financing assistance or differential structures that are attracting companies to Europe as opposed to, apparently to Munich or other European countries, as opposed to the U.S.? Maybe Mr. Purcell.
Mr. PURCELL. Sure. Generally, the programs in many of the European countries, right now Germany is the one in favor. It generally has to do with local regions providing loans to companies that are multiples of the investment, so if you made a dollar investment in a company as a venture capitalist, the specific region of Germany may in fact match that or double that, so that you really have $2 to $3 at work for every dollar of equity investment, if you will. Obviously, that means that companies have to raise less money to accomplish the same ends.
And for a while, France was attempting to do that, and that has slowed down a little bit. The U.K. has also been another attractive place for startups. Although I would say that as we head into late 1999 and the year 2000, the whole biotechnology industry is becoming a global industry. It used to be that there were U.S. companies and European companies, and now we have people doing so-called dual listings, where they raise capital in London and in New York. So it's becoming much more global.
Mr. BAIRD. To what extent are issues in the tax code, for example, R&D tax credit, important to your industry? And the notion of a permanent extension of R&D tax credit?
Dr. NIEMI. Let me respond generically, even though we are not anywhere near product sales or revenues at this point. And that would be a nice problem to have some day, when we do have earnings. We look forward to that. [Laughter.]
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Anything that is unsettling or builds uncertainty in the investment community as to the ultimate payback, whether it's through R&D tax credits or loss carry-forwards or changes in patent law or license restrictions or most recently, price controls on drugs that require very expensive development time lines is going to continue to sour the investment community on the potential payback, with a given company or a given sector.
And so without asking for any direct subsidies, grants or other support from the Federal Government, I think that this committee needs to recognize, any indirect financial assistance is always welcomed and is absolutely necessary.
Mr. BAIRD. Thanks very much.
Thank you, Madam Chair.
Chairwoman MORELLA. Thank you, Mr. Baird.
I'm pleased to recognize the Vice Chair of the Subcommittee on Technology, Mr. Gutknecht.
Mr. GUTKNECHT. Thank you, Madam Chair, and I want to thank the panel. This has really been excellent testimony. I do apologize for some of our colleagues. Right now, you're having to compete against the President, the Vice President and a former President, Gerald Ford, who are over in the Rotunda as we speak. And I suspect there are other meetings going on. It doesn't mean that what we're discussing here is not important. But I just want you to know there are other things going on.
A couple of the questions that I wanted to ask have been asked. I am really very concerned about what's happening with genetically modified organisms, GMOs, and what is happening especially relative to Europe. I want to come back though, since principally you're involved in pharmaceuticals and the development of drugs, can we talk a little bit about, maybe one of you can talk or several, about the regulatory burdens that the FDA puts on relative to perhaps what goes on in Europe to get drugs approved? And what is that doing to the industry, what does it do to costs?
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Dr. HOLADAY. Not being a regulatory expert, but certainly having witnessed the rules and regulations that I think are appropriate in drug development, it does cost an enormous amount of money to go through the orchestrated process of phase 1 clinical trials for safety, phase 2 for limited efficacy, and phase 3 where more globally, one finds if a drug really works in a randomized and blinded manner.
That's the real cost of drug development. And the reason why it takes so long for us to bring products forward and keep investors patient. But I will say that I think the time has gone from around 13 plus years, about 3 or 4 years ago, from the time a product initially went into the regulatory process, until it came out, to somewhat less than that. I don't know what the statistics are, but maybe 10 years or something like that now.
Nonetheless—and I think a lot of this has been due to the foresight of Congress in accelerating the process. We're developing cancer drugs, and certainly the way that we can see getting those products, if they're successful, to the market faster, is through the process of fast tracking, which I think was also encouraged as a way of developing products more rapidly than they would be developed through the more standard and laborious process.
But it does dramatically affect the cost and the time for building our products and differentiating us as an industry from some of the other ''tech'' industries, where you don't have these regulatory hurdles to overcome.
Mr. GUTKNECHT. Could you compare the differences, though, between us and Europe, even today? I mean, Congress, in the 5 years that I have been here, I know the Chairwoman has pushed very hard for regulatory reforms that relates to the FDA, while protecting the safety of the American consumer, but we still hear occasionally that it's still much easier to get products to the market in Europe than they are here.
Dr. NIEMI. I don't know if that's true for ethical medical products, or proprietary novel medical products. I think that the FDA Reform Act and the continued progress FDA has made has gone in some sense unappreciated based on where they were. And they're still recognized around the world as the scientific leader in regulatory science, if you will.
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The threat in one sense may come from European harmonization, where you will have a market of 350 million people without the nation to nation variation. So financially or strategically, it may be a more appealing target. But only rarely have they differed or been in advance of FDA, and where they've come in scientifically.
And so continued support of FDA as a scientific center in our minds is absolutely critical.
Mr. GUTKNECHT. Could I just ask, and my time has about expired here, but I do want to get to another point. Because right now we're having the beginnings of a great debate about pharmaceuticals in general, and particularly as it relates to Medicare, and whether drugs should be included as a benefit under Medicare package. Clearly we've got a problem.
But there is some finger pointing going on, and I'd like your response to this. That in effect, if you compare the differences in prices for drugs, for example, I come from the State of Minnesota, and we have seniors who are now driving across to Canada buying their prescription drugs for 30 to 40 percent, some of the drugs, for 30 to 40 percent less, just across the border in Canada. And there's a growing sense among American consumers that Americans pay too much for pharmaceuticals. Matter of fact, I think just a week or so ago, the President took a swipe at the pharmaceutical industry.
How would you respond to some of these charges? And they tend to come down to a point that American consumers are shouldering the lion's share of the burden for research and development, and that a lot of the benefits are being subsidized, if you will, in other parts of the world. I'd really appreciate your response to that.
Mr. PURCELL. It seems to me, at least, that the industry that we're discussing today is in the business of novel, breakthrough drugs. I think that virtually any analysis that I've seen, at least, shows the benefit of the drugs the biotechnology industry is producing far outweigh the costs, as well as the development costs. I'm not sure I agree with the premise that the American taxpayer is footing——
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Mr. GUTKNECHT. No, no, no, not the American taxpayer. We're talking about the American consumer, who is paying 30, 40, 50 and even in some cases 60 percent more, no matter how, whether using Euros, or Deutschmarks, or whatever, we can come to an equivalent. And I think you are in a position to help answer that question, because at the end of the day, you talk about business plans. Your business plan ultimately is about how much can you sell the product for.
Mr. PURCELL. Interestingly, there was a meeting of about 150 CEOs in the biotech industry last week. And there was virtual consensus on the FDA question that there has been tremendous and significant progress. And Commissioner Henney was there, and she was warmly received by the group in terms of the FDA reforms.
Having said that, even with those reforms, almost 70 percent of all new drugs that come onto the market don't recoup their capital costs. Dr. Holaday talked before about a number, $500 million and the like. It's very hard, many drugs don't recoup their capital costs. It's one of the questions we're worried about in biotechnology, for example, where we've spent an inordinate amount of money trying to get drugs to the market. And now we have to really worry about getting a return on that capital. Because certainly if we don't get a proper return on that capital, the source of capital will dry up in a hurry.
And to a certain degree, the source of capital for smaller biotech companies has dried up, simply because the Wall Street judgment has been we're never going to get an adequate return, the right rate of return for the risks that we're taking. That's really at the root of the problem.
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Dr. NIEMI. Let me just add a brief footnote to that as well, Congressman. I think that there are two issues you have to consider. What is the price for depressing or inhibiting innovation, most simply. If there is not perceived to be a reasonable return at the end of the story, how seriously do you disincentivize someone to start down that road and commercialize a product?
And in that context, I think it's very important, again, with FDA involvement, to appreciate what they've done over the last 2 or 3 years, where with limited resources they have told the medical product community, we are very uninterested in ''me too'' drugs and incremental improvements in drugs, and we will give priority to those that truly look like breakthrough products. And we will provide more resources and faster time lines if you can convince us that what you have is truly significant. And I think that has certainly worked well for the American public, through the pipeline that Dennis just mentioned.
Mr. GUTKNECHT. I'm sorry, Madam Chair, but I'm still not really clear. Because this is going to become a big issue. And I think whether you're a big company or a little company, this is going to be on the horizon over the next year, I would suspect. And the question is whether or not American consumers are paying a disproportionate share, right now, of the cost of research and development.
The same drugs, and wherever the drugs are developed, ultimately I think, in the business plan, you're expecting to sell them, in Canada, in Mexico and in other places around the world. And yet, you know, you don't have to have an MBA from a good business school to understand that there are serious differences in what you charge for those drugs in different parts of the world. And at some point, I think—and we've got—and believe me, I'm a capitalist who strongly believes in research and development. But I think we're going to be caught in a debate that we cannot win unless we get better answers to these kinds of questions.
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Thank you very much.
Chairwoman MORELLA. Thank you, Mr. Gutknecht. I think you raised some good points.
Dr. Horvath, I'm not going to let you off the hook. You warned against Government funding for small biotechnology companies to compensate for lost revenue in the capital market. Instead, you advocate removing any unnecessary uncertainty associated with regulation in the product markets that biotech firms are pursuing as a way to attract potential investors.
I wonder, what unnecessary uncertainties do you recommend the Government address that might help small biotech companies remain competitive?
Dr. HORVATH. Thank you for the question. I think that maybe we should first clarify. My position is not that the Government should not be in the business of funding or contributing to funds. We did discuss, for example, establishing CRADA organizations, or CRADA groups. That certainly is a good use of funds.
The question is really about the relative social rate of return in biotech versus other potential investments the Government could make. There's no evidence I've seen that shows that the best thing for the world or for the United States in general would be investing in biotech over, say, the next dot com.
Now, the reason why I see a lot of venture capitalists investing in the next Internet-related company is because they see that the returns are potentially greater and potentially accrue faster than they would the biotech. When I mentioned removing unnecessary uncertainty, it's precisely that, when we look at rates of return of a potential investment, we have to discount them if we think those rates of return are less certain. And that's what a lot of venture capitalists are doing.
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What kind of uncertainty could we remove in the biotech industry? I raise the issue of the regulatory approvals in the FDA. There was a period of time from 1962, with the FDA Amendments Act, where the length of time to approval of a new drug went from 3.5 years to 13.5 years. That has come down since 1994 when that study was done by two researchers at Northwestern University. But that kind of uncertainty, whether your drug is going to get approved or not, would severely limit the interest of venture capitalists in an industry like biotech.
However, there's also other ways you can remove uncertainty. For example, in the arena of patenting. Intellectual property is an asset that's owned by these biotech firms. If we think of that asset as being secure, then the venture capitalists can place a value on it and be sure of that value. If the venture capitalist perceives that that asset, the intellectual property asset, is less secure because patent laws are just not tightly enforced on things like genetic code, then that's going to discount the value of that company, make it less valuable for the venture capitalist to hold that asset.
So that's another area where I can see that this committee can take direct action to improve the perception of the investment in a biotech company on the part of a venture capitalist.
Chairwoman MORELLA. Let me ask, well, we look forward to pursuing that further, and you may have some specific things that you would suggest that we in Congress should do.
I guess I want to ask all of you a question dealing with whether or not investors are turning increasingly to the Internet for technology, and you know, technology stocks, in order to get a quick return on their investment. I think this is a trend, and I just wonder what impact this trend has on the ability of small biotech firms to attract investment capital.
I would address this to whoever would like to answer, or all of you.
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Dr. HORVATH. Maybe since I just finished talking, I can continue. I think that that's exactly what's going on at the early stage investment level. When we're thinking about not the public markets, where we have small investors trying to make a quick buck, day traders, etc., here we're looking at venture capitalists who are in the habit of making investments that they think will have a time to pay off or time to liquidity of say, 3 to 5 years.
Internet companies fit that mold, they fit that model very well. The time it takes to take a company from business plan to public markets, IPO, in the Internet sector, is 2 to 3 years and shrinking. In the biotech sphere, as we talked about today, it can take 7 to 10 years just to get an approval for a new treatment.
So in terms of for venture capitalists, the financing doesn't fit at the earlier stages as well as it does with internet related companies.
Chairwoman MORELLA. Anyone else want to comment on that?
Mr. PURCELL. A majority of the people that have funded the industry from the late 1970s and the early 1980s, institutional firms, have basically left the field of health care investing because of the reasons that Michael talked about. I would think that probably three-quarters to 90 percent of the people that funded the successful biotech companies have now turned their attention to the Internet.
And in fact, this year, of all the initial public offerings, not venture capital, but initial public offerings in the U.S., over half will be Internet related. In 1991 and 1992, at one of the heights of the biotech boom, if you will, it was about 20 percent. So the Internet has really overshadowed everything that we're doing right now from a venture capital and initial public offering perspective. And venture capital firms and institutional money managers are reflecting that in the way they're organized.
Dr. HOLADAY. Perhaps anything that could be done to shorten the time horizon of the development, from the discovery of a drug until its ultimate availability to patients, would decrease, if you will, the amount of time that people are putting their capital at risk and increase the opportunity for achieving further investment. Certainly the statistics are for every 5,000 drugs that are discovered at the bench, only 1 will ultimately make it through to routine patient care. It costs money to do that. You've got to separate the wheat from the chaff.
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Even when you begin clinical trials, only 1 in 5 products that starts a phase 1 protocol will ultimately make it through that process and out into treating people. I'm not saying that these should compromise science, which is the fundamental reason for drug approval as being safe and effective, but anything that could be done to diminish these hurdles would certainly benefit us, put a shorter time horizon, make us more attractive to investors.
Chairwoman MORELLA. I'm going to see if—Mr. Gutknecht, would you like to follow up with anything?
Mr. GUTKNECHT. Madam Chair, I really didn't have a follow-up question. But I do know this about capitalism, that capital seeks its best return. And when you can get astronomical returns on anything that has a dot com behind its title, you know, just throwing darts at the board and get huge returns in relatively short periods, I think at this point in time, I'm not sure there's anything we can do in Congress that's going to change that arithmetic.
I do think, though, long term, that as a Nation, I think we have to recognize that investments in ideas and new biotech products, I think long term, we're going to see a tremendous return. So I'm not sure what we can do, but we do need to have these dialogues. And I sincerely mean it when I say that, we need help from you, because as I say, the next great debate I think in Congress is going to be about drugs and Medicare. We need all the help we can from the various industries.
And as John Adams observed 200 years ago, facts are stubborn things. So we need the facts. Because it's going to be a very heated and a very emotional debate, I suspect. So we appreciate whatever you can do to help us.
Chairwoman MORELLA. Okay.
Dr. HOLADAY. Could I make one last attempt——
Chairwoman MORELLA. Yes, of course.
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Dr. HOLADAY [continuing]. At perhaps addressing the question that you asked, Congressman, that I'm really not in the business of selling anything yet. We're developing these drugs.
I don't think we could have done that in Canada, for example. There are not the incentives to develop drugs in Canada. You don't find a lot of biotechnology companies there. Price controls limit opportunities. I think because of price controls that artificially lowers the price of drugs.
One of the things that I think we will benefit from in the United States is the technology that has been fostered here by virtue of the fact that we have had a freer opportunity to charge for the products and thus get that money back to pay us for the risk and the investment. So perhaps the world will benefit from our risk, but then again, I don't think that companies or countries like Canada and elsewhere where price controls limit the gain are going to foster the growth of much needed technologies in the health care sector such as that that we represent.
Mr. GUTKNECHT. Madam Chair, if I could just say, I don't disagree with that at all. In fact, in my own district, the city where I live, Rochester, Minnesota, an awful lot of things have been developed over the years which in effect were given to society. And you could say that, well, they could have taken some of these products and made a whole lot of money for the Mayo Foundation. I will say now they have come up with a separate agency they call Mayo Medical Ventures, that has figured out how they may be able to recover some of that.
But you are right, I think in the long run, the benefit to us, to society and even to those of us in Rochester, Minnesota, has been enormous. So I don't disagree with what you say. I'm just, I think we all need to be aware, there's going to be a growing debate and part of that debate is going to be, how much should American consumers be required to subsidize research and development which accrues to the benefit of people in Canada, or Europe, Mexico, wherever.
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And I don't know how that debate's going to turn out, but I do know that we need all the help we can from the industry. Because it is a very important industry, we don't want to lose it to other parts of the world. And I do strongly believe in research.
So I'm not your enemy. I'm just saying, we need your help. Thank you.
Chairwoman MORELLA. I think it's true, we do have a partnership with you. And I wanted to give you each an opportunity for a parting shot. Perhaps one where there is a specific recommendation beyond what you have suggested in your testimony that you would like us in Congress to follow through on. We could start, maybe Dr. Niemi, we'll start off with you.
Dr. NIEMI. Thank you, Madam Chairwoman.
I would just like to make one more comment on Congressman Gutknecht's line of inquiry. And I'm in complete agreement that this is going to be a critical issue for the American public, for the biotech industry, the pharmaceutical industry. And I think people need to be reminded of the irony of the situation, where we have done so much with drugs to the benefit of avoiding surgery, avoiding prolonged hospitalization stays, so that when you add up total health care costs in a given disease management entity, it's actually less. People live longer, they live higher quality lives.
But since the only thing that is left is the drug bill, that is what's going to attract attention. And people need to be reminded, whether it's a drug, a vaccine, gene therapy, in our case, some of the fantastic things that EntreMed are developing with regard to cancer therapy, if this is all that's left, let's remember all the things that have now been avoided or been totally sidestepped with the progress that's been made.
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Thank you.
Chairwoman MORELLA. Thank you.
Mr. Purcell.
Mr. PURCELL. Sure. I think that we have to keep in mind here that over 100 million people have been touched by the biotechnology revolution. And certainly in the years ahead, biotechnology, a lot of people call the 21st century the biotech century. We in the investment community are worried, because we think we need to raise between 6 and 7 and 8 billion dollars a year to keep the industry viable. We've raised about a billion dollars this year.
So the industry and small companies need the help from Wall Street, need the help from the Government. And we think it's an important industry. Anything we can do in partnership would be much appreciated.
Chairwoman MORELLA. To enhance partnerships as much as possible, right.
Dr. Horvath.
Dr. HORVATH. Yes, continuing that, I think that the university is actually an excellent place to look for those kinds of partnerships. The university setting in which you have well-funded research facilities for doing basic research, and also an environment which encourages entrepreneurship on the part of faculty, that then when they come up with something, they can be sure that they're going to also participate in the monetary rewards that this new creation has brought about.
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That kind of a setting, I think, can go a long way to get over this small size problem that we see in biotech, that you have basic research by a group of very, very smart scientists being done and outside of the university setting, they need all the facilities, they need a lot of funding for that. The university has a lot of that equipment already. If they just provide the right incentives for researchers to be thinking about marketable products coming out of their labs, that would go a long way to helping that initial startup phase.
And then these universities creating partnerships with the private sector to either license technology or take on the faculty who have come up with the creations, come up with the ideas, take them on and help them grow from that point on. I think that's an excellent thing to pursue in the future.
Chairwoman MORELLA. Thank you. Briefly, mention had been made of tax incentives, and nobody really picked up on it beyond that. Is that something that really should, would be nice but not really that critical?
Dr. HORVATH. I just think a lot of tax incentives focus on revenue. Most of what you benefit from is after the point where you start generating revenue and the problem really is much earlier than that. So to some extent it helps but it's so far away as, one data was pointed out, many companies fail in the first 4 years. If you're not recognizing revenue within the first 4 years, those tax incentives don't help much.
Chairwoman MORELLA. Got you.
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Dr. Holaday.
Dr. HOLADAY. Thank you very much.
On the matter of taxation, certainly being no expert there, but I believe in the early 1980s, one could pass through losses to the shareholders in ways that are similar to what one can do in the investment in natural resources such as oil and gas, and that went away in 1985 or 1986.
That did provide a much more free-flowing capital to biotech companies at that point in time. And perhaps some legislation along those lines could be helpful as a way to encourage investors to at least, if they're not able to gain an earlier reward based upon product sales to at least have some tax incentives to enter into our industry with aggressive investment.
I think biotech is a very valuable natural resource. And as a consequence of that, anything we can do to foster its further growth in the United States is going to be much appreciated, with financial incentives, with things that ease the ability to find qualified scientists, by improving their education opportunities, and allowing them to be paid more under Government grants, such as those from the NIH. And finally, by protecting our intellectual property.
And it's really been a great honor for me to testify to you today, and I look forward to seeing if there's any way that we or I can help further.
Chairwoman MORELLA. I thank you. You've all been great.
There is a point, Dr. Holaday, that you've mentioned a number of times. And I don't know whether others want to comment on it as we complete our hearing. And that is, you talk about education and people and personnel. Maybe this is an area where we in Congress should try to do more. Is it in terms of education in our schools? Is it trying to recruit more people into the field? And maybe those in the field are being lured away by big companies? Is there one area with regard to people that you think we should try to focus more on?
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Dr. HOLADAY. Chairwoman Morella, I am, like you, a teacher. And I am also a science geek. And developed that in the 1950s, when Sputnik encouraged a greater emphasis on science. I think we've lost a lot of that.
So what I would recommend perhaps could have more later and practical incentives, and that is that if people do go into the sciences, they'd have a greater assurance that they could get a greater salary earlier than what they do at present. Someone with a law degree can go out and earn $100,000 their first year. Someone with a Ph.D. degree is lucky to break through the $30,000 or even minimum wage level, but virtue of the fact that they have to go on for further training, with post-doctoral studies.
And many of these limited salary caps are brought about by grants that are limited in what they can allow the payment to the student. So if for instance there weren't penalties to the particular institution seeking those grants that allowed for further payments to those individuals receiving compensation under those grants, that could foster a greater interest in the science by providing a more monetary incentive to those individuals.
Chairwoman MORELLA. Anyone else want to comment on that?
[No response.]
Chairwoman MORELLA. Just two points. A commission that emanated from legislation that I introduced is looking at bringing more women, minorities and disabled into science, engineering and technology. There's also a commission that is now called the Glenn Commission, I'm serving on that, dealing with helping teachers learn, not learn, but do more in terms of developing teaching of math and science and related courses. This is a result of the Timms Report, the third international math aptitude and achievement test that had been given, which showed the U.S. doing so poorly.
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But I think we also have to look at the salaries that they're going to get after, if they go through that entire passage of time.
I want to thank all of you for not only being here and giving us the benefit of your expertise and experience, but also for your patience, with this incredible hearing, with all the digressions and diversions that we had.
Thank you, Dr. Holaday, thank you, Dr. Horvath, thank you, Mr. Purcell, thank you, Dr. Niemi. The hearing is now adjourned.
[Whereupon, at 4:15 p.m., the subcommittee was adjourned, to reconvene at the call of the Chair.]
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