Follow-on Biologics and Patent Reform

June 16, 2008

Will They Discourage Venture Capital Investment in the Biotechnology Industry?

"…without assurance that there exists adequate market exclusivity… VC investors have no guarantee of a return on investment."


According to a study by PricewaterhouseCoopers and the National Venture Capital Association, venture capital (VC) investing hit a five-year high in 2006, with $25.5 billion invested. Notably, the Life Sciences sector, which includes biotechnology and medical devices, accounted for 28% of VC money invested, the largest investment sector in 2006.

As Life Sciences venture capital investing has risen, the biotechnology industry has become increasingly dependent on such funding. This is particularly true for start-up companies that cannot rely on revenue from marketed biologics to fund their research and development pipeline. To cover the nearly $1 billion capital investment required to bring a biologic drug to market (from discovery through clinical trials and FDA approval), early-stage companies rely on VC investing. Investing in emerging companies, however, is risky for a venture capitalist: only 1 in 10 drugs discovered actually makes it to market, and despite the more than $50 billion spent on biotech drugs in 2006, the great majority of early-stage companies never reach the point of net profitability.

Given the high failure rates and enormous costs of bringing a biologic to market, companies (and their investors) look to successful drugs to reap sufficient revenue to compensate for both the research and development costs of the successful drug and the expense of failed biologics. In this landscape, intellectual property protection is critical to the start-up biotech company and to its VC investors — without assurance that there exists adequate market exclusivity to allow a successful biologic product to earn adequate profits, VC investors have no guarantee of a return on investment, and will be hesitant to direct their funds to the Life Sciences sector.

Unfortunately, recent proposals in Congress to create an abbreviated pathway for approval of "biosimilar drugs," in tandem with attempts to reform the patent system, may weaken intellectual property protection for emerging biologics companies to the extent that venture capitalists may be less willing to risk capital investment in the industry. For many early-stage companies, intellectual property is the only asset of value. Weakened intellectual property protection may stifle innovation and ultimately hinder patient access to life-saving new biological medicines.

Download the Foley Hoag  Follow-on Biologics eBook  (.pdf)