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Genomic Tools Will Always be a Must-Have for Big Pharma. Got 20 Years?

NEW YORK, Aug. 19 - As big pharma's product pipeline continues to wither, the role of genomics-tool and -data providers becomes increasingly uncertain.

Will the pressure on pharma firms to develop new products at all costs mean that genomic companies can expect an increase in new-technology orders? Or will pharma's revenue woes mean that increased spending on new technology becomes foolish?


There are as many analyses and forecasts as there are analysts and insiders. GenomeWeb caught up with one of them, Richard Evans, a pharma analyst with Sanford C. Bernstein, who gave us his two cents on the near- and long-term prospects for genomics tool shops and the customers who'll always need them.


GenomeWeb: What do you see on the horizon for big-pharma R&D efforts, and how do traditional genomic tool and data providers fit into that vision?


Richard Evans: R&D productivity is declining but new product flow at the same time is becoming a larger portion of earnings growth in the business. So in order to maintain earnings growth ... you've naturally got to raise R&D spending as a percentage of sales or get some pretty dramatic productivity gains.


Drug companies are net consumers of intellectual property; [they are not] net producers. They're really dependant on the outside world for new product ideas. So it's not necessarily true that increased R&D dollars would flow from big-cap pharma to biotech in any particular discipline.

Overall you would [see] more biotech investment from big pharma. Whether it will go to genomic suppliers or not is a another question. You would naturally think that it would, but that becomes more of a tactical decision.


GW: What  would you say now is the best tactical step for a pharma company with an increasingly arid pipeline?


RE: I think you have to place your bets pretty broadly. You really have to take a look at each technology for what you think it can deliver. The problem is that at the discovery phase the risk of any technology is so high that you have to spread your bets.


Genomics is such a foundation technology that you know in some way, shape, or form that its contribution to new product flow over time is inevitable. You've got to have a pretty significant investment there.


It's hard to predict exactly what will happen. I can say strategically they should be spending more [on genomics]. Tactically whether or not they will given the current sales pressure is an open question. It's really a management decision.


GW: Do you think the fate of genomics tool providers are still in lock-step with the future of big pharma?


RE: Yes. I think that there are two things you have to keep an eye on. One is the health of the pharmaceutical industry from a revenue point of view; if the sales are not there, the R&D budget is not there. And that's still the key source of basic discovery funding. And the second is the biotech companies' alternative: If the pharmaceutical companies aren't spending the R&D money then are the capital markets willing to invest [in them]?


Unfortunately, these two tend to be pretty closely linked. I'd very much say that genomics companies ... long term are closely linked to the fate of the drug industry and to the health of the capital markets.


GW: What are your thoughts on the theory that genomic-tool suppliers, buoyed by big pharma's desperate need to spend more on basic R&D, will emerge from the current life-science doldrums ahead of drug discoverers and developers?


RE: It's not necessarily true. If you look now from an economic point of view it doesn't make immediate financial sense to spend any more on R&D because your marginal return on R&D dollars is neutral to negative. Your first objective as a manager is to increase the return on your R&D dollars either by raising R&D productivity or by cutting costs from growth in your operations. Then you pour more money into R&D.


I think ... that any part of biotechnology [that] represents productivity advancements that really do have very high marginal returns ... would be favored investments. Otherwise I think they would have to wait for some reconfiguration of the overall productivity in R&D.


GW: At this point, when do you think the pharma gloom will turn a corner?


RE: You know, I don't know that there really is a corner out there, honestly. I think it's more of a gradual thing. I think we'll see some productivity gains outside of R&D just through mergers, and then we'll slowly see some productivity gains in R&D through an improved ability to pick compounds before they go into humans.


I think it's going to be a fairly gradual, decades-long improvement absent some blinding insight from someone. Unfortunately, it's going to be fairly gradual.


GW: And that, too, will echo in the tool and data sector?


RE: I think so. Unless pharma decides from a strategic point of view that that is a place productivity can be greatest. And there's a lot of good reason to think that they might.


I'd say the two advantages that genomic tool companies have is: One, it's clear that genomics is going to be a contributor. It's not like, say, antisense, where there's controversy whether the technology was valid, and if it was would it ever matter. Here, it's clearly valid and clearly matters. Second, does that address the productivity problem? Probably so.

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