Beyond Borders: Global biotechnology report 2010

Perspectives for the new normal
There’s gold in those efficiencies
In today’s resource-constrained environment, drug development
companies large and small are looking for more ef cient ways
to deploy capital and conduct R&D. Evotec may be able to offer
some insights for these times, both because we have learned
to leverage our assets better through the evolution of our own
business model and because the model we have today enables
more ef cient resource allocation for us and our partners.
Panning for gold
While Evotec’s platform technology — our high-throughput
screening capability — has attracted capital and allowed us to
endure, we have also altered our business model more than
once because of changing market conditions. In the aftermath
of the genomics bubble, the belief in the market was that gold
lay in developing products rather than providing screening
services. Consequently, in 2004, we changed our business
model to focus on pipeline development. We acquired an earlystage
pipeline in central nervous system and in ammation
indications, with four to six clinical candidates. Unfortunately,
we didn’t nd gold. Instead, as is often the case in our industry,
we suffered clinical setbacks. And as is also often the case, the
markets reacted severely, creating something of a crisis for
our company.
It’s worth remembering that in the original California gold
rush, it was frequently not the people digging for gold
who became rich, but rather the entrepreneurs providing
strategic services to the gold diggers — Levi Strauss and
others — who built sustainable, long-term, revenue-generating
companies. The business model we adopted after our clinical
setbacks re ects this reality. Today, our primary business is
providing integrated and strategic outsourcing, essentially
taking over R&D projects from our big pharma partners and
developing them to designated clinical phases. This increases
capital ef ciency for our pharma partners, allowing them to
“variablize” their xed costs.
While we sacri ce some of the upside of discovering and
developing our own drugs, from an operating standpoint, we
are shielded from downside risk because we generate a steady
revenue stream from our fee-for-service business. In addition,
we gain potential upside from a much larger portfolio of projects
through milestone payments and royalty streams from our
strategic partners.
Lessons for the new normal
20 Beyond borders Global biotechnology report 2010
Werner Lanthaler
Evotec AG
CEO
The biotech operating models we have seen so far have included
much built-in inef ciency. Up till now, it has been permissible to
build a 50-person company around a single target or idea from
academia. Such companies have not had to worry much about
overhead because the conventional wisdom has been that value
in biotech is not created by cutting costs, but rather by spending
on R&D.
But many of these inef ciencies will no longer be sustainable
in today’s “new normal.” Financial investors are increasingly
unwilling to build entire companies around binary, all-or-nothing
clinical risks. And while big pharma is increasingly looking
externally for innovation, the reality is that the vast majority
of biotech companies will not be a good match for pharma
buyers — they may be too unproven or their therapeutic or
commercial focus may be unsuitable. For most companies,
therefore, the answer will have to come from learning to do
more with less.
Consequently, the drug development industry as a whole
could bene t tremendously from a wider utilization of Evotec’s
approach. Our value proposition to our partners — give us your
targets, and we’ll bring them to a value-in ection point and
get you to a go/no-go decision more quickly — is exactly what
the industry needs more of. We need to see more companies
unencumbered by large xed costs and the pressures of
constantly having to raise capital. We need to see more
investors investing in portfolios of risks and funding them from
one value step to the next — but not necessarily building a
company around each risk.
We can no longer be wedded to the notion that there is only
one way of doing things or that business models are built for
eternity. To sustain biotech and sustain innovation, we need to
challenge long-held ideas and seek new paths to ef ciency.