Looking around the world, biotech is a group with extremely high "metabolism".

According to statistics from GF Securities, since 1990, more than 600 biotech companies have IPOed on Nasdaq. However, as of June 30, 2020, only 12 biotechs have relatively stable income and positive cash flow.

Extending the timeline, from the rise of the concept of biotech in the 1980s to the present, in 40 years, there are only a few who have entered the pharma camp by buying on their own.

Why is it difficult for biotech to survive for a long time? This is determined by the business model. Compared with large pharmaceutical companies with average growth but strong certainty, biotech is a divergent innovation model, and the growth process is full of uncertainty.

In other words, due to the high risk of R&D and the uncertainty of sales, most biotechs can't run the business model at all, let alone make profits.

So, how did the world's top biotechs get ashore? And how much did they pay for it?

Whether it is Regeneron, Gilead, Vertex Pharmaceuticals, or Biogen, most of them turned losses into profits after more than 5 years after the launch of blockbuster products and sales reached more than 1 billion US dollars.

Take Regeneron as an example. After launching its first drug Rilonacept in 2008, sales have been unsatisfactory due to indication restrictions, and losses have continued to expand.

It was not until 2011 that Regeneron launched the ophthalmic miracle drug Eylea, and sales took off rapidly. Sales reached 840 million US dollars in the first year of listing. In the second year, it became a blockbuster drug, driving the company's overall revenue to 1.378 billion US dollars and successfully turning losses into profits.

Gilead's commercialization story started with the antiviral drug Cidofovir. After its launch in 1996, sales remained at around 100-200 million US dollars until the launch of the HIV blockbuster drug Tenofovir in 2001, and sales quickly exceeded the 1 billion US dollar mark within 3 years. Led by the blockbuster, Gilead successfully turned losses into profits in 2007, and its profit level has soared since then.

In contrast, it took longer for Vertex Pharmaceuticals and Biogen to make profits. The latter's recombinant interferon for treating multiple sclerosis was launched in 1996, and it took nearly a decade for sales of 1.8 billion to turn a profit;

Vertex Pharmaceuticals had an even more difficult fate. From immunosuppressants in 1999 to HIV, and then to antiviral therapy for hepatitis C in 2011, Vertex Pharmaceuticals went through 20 years of trial and error. Among them, the sales of Telaprevir exceeded US$500 million in the first year, far exceeding market expectations. Vertex Pharmaceuticals also achieved profitability for the first time because of this drug.

It was thought that the company's fate could be reversed, but two years later, Gilead launched a miracle drug for hepatitis C, Sovaldi, which can completely cure hepatitis C, and the company's antiviral line suffered a ruthless and devastating blow. Finally, in the promised land of cystic fibrosis, Kalydeco was launched in 2012 and Orkambi was launched in 2015 to stabilize the situation.

It was not until 2017 that Vertex Pharmaceuticals completely embarked on the road to profitability, with revenue approaching US$2.5 billion that year.

From the profit path of these top biotechs, it is not difficult to see that after launching a blockbuster, the average revenue must be more than US$1 billion to cross the break-even point.

Of course, looking through the annual financial reports of other well-known overseas biotechs, you will find that there are other situations here.

For example, Alexion Pharmaceuticals, which focuses on the field of rare diseases and was acquired by AstraZeneca for US$39 billion, turned losses into profits when its revenue reached only US$260 million.

This is closely related to Alexion Pharmaceuticals' R&D strategy. The company's core product is eculizumab, the world's first C5 complement inhibitor on the market. Perhaps because the development of this target is extremely difficult, the competition in this field does not seem so fierce.

In March 2007, the FDA approved eculizumab for the treatment of paroxysmal nocturnal hemoglobinuria (PNH). Subsequently, it was approved for indications such as typical hemolytic uremic syndrome (aHUS) and acetylcholine antibody-positive myasthenia gravis, and obtained multiple orphan drug qualifications.

Eculizumab's global sales have soared. In 2012, it entered the blockbuster echelon with sales of US$1.124 billion, and reached US$3.144 billion in 2017.

From the perspective of mechanism of action, C5 complement inhibitors theoretically have great potential in rheumatoid immune diseases such as rheumatoid arthritis, psoriasis, and inflammatory complications of heart disease. The company also did a lot of research in these fields in the early days.

However, things did not go as planned. After a series of clinical trials, eculizumab's therapeutic effects on rheumatoid arthritis and membranous nephropathy did not meet expectations. On the contrary, it showed good results in the field of PNH. Alexion also took this opportunity to shift its position to the field of rare diseases.

Unexpectedly, this gold mine is very durable. As the founder of Alexion said: Compared with the price pressure faced by non-rare drugs with tens of thousands or hundreds of thousands of patients, the drugs developed by Alexion have been almost unaffected for many years.

Although the annual cost of eculizumab is as high as US$440,000, insurance companies and national medical insurance institutions are willing to pay for it due to its precise efficacy and irreplaceability. Guarding such a "gold mountain", Alexion's R&D investment is obviously a level lower.

Before being acquired, Alexion's R&D expense rate was the highest in 2017, but it was only 25%. That year, its revenue exceeded US$3.5 billion, with only 6 products, 3 of which were on the market, and one product each in clinical phase I, phase II, and phase III.

Seeing that large pharmaceutical companies often have dozens or even hundreds of product pipelines, Alexion's product line seems much thinner. And with the growth of revenue, Alexion's R&D expense rate has dropped to about 16%. It is far lower than the 30% R&D expense rate of Regeneron and others in the same period.

Of course, the low R&D expense rate is also related to Alexion's preference for mergers and acquisitions. Of the three products launched in 2017, two came from mergers and acquisitions.

This is somewhat similar to Gilead. Gilead made its first profit in 2007, and its net profit margin exceeded 30%. It has maintained this profit level for many years, and it seems that there is no problem of profit climbing.

In 2001, Gilead's first anti-AIDS drug, tenofovir disoproxil, was approved by the FDA. Just one year later, Gilead spent $464 million to acquire Triangle Pharmaceuticals and obtained emtricitabine.

From the perspective of later comers, it was the acquisition of emtricitabine that made Gilead quickly become a leading company in the HIV field. The miracle drug Sovaldi for hepatitis C was also acquired through the acquisition of Pharmasset. In 2012, Gilead spent $11 billion to acquire Pharmasset. In the first three months after its launch in 2014, Sovaldi created an astonishing figure of $2.3 billion, setting a sales record for new drugs launched in the United States at that time.

A consensus is that even if sales are high, pharmaceutical companies must maintain the attribute of burning money in research and development. A typical example is Regeneron, where almost all the money earned by Eylea was thrown back into research and development, an order of magnitude higher than that of biotech in the same period. Therefore, its profit level in the first ten years of commercialization was not high.

Companies such as Alexion Pharmaceuticals and Gilead, which have grown through mergers and acquisitions, can either achieve profitability earlier or achieve high-quality profitability earlier.

Of course, there are also "negative" examples in the top biotech camp.

The so-called "negative" means that even if the sales of the company's products are not low, the company's profitability is still a long way off due to the huge amount of R&D investment.

A typical example is Seagen, an ADC veteran acquired by Pfizer for US$42.8 billion.

As early as 1997, when ADC technology was not yet mature, Seagen was established and targeted the ADC field. After more than 20 years of exploration, Seagen has now established a high-quality ADC product pipeline.

Currently, Seagen has four products on the market, namely Adcetris, Padcev, Tivdak, and Polivy. In 2022, these four products brought Seagen US$1.7 billion in revenue, accounting for 87% of total revenue.

In the same year, Seagen's R&D expenses reached US$1.34 billion, and the R&D expense rate was close to 70%. In addition to sales expenses, the company lost more than US$600 million throughout the year.

In fact, Seagen's commercialization capabilities are not bad, but the company continues to spend money on platform and subsequent pipeline construction, resulting in increasing losses. In 2018, its R&D expense rate reached 86%. Although the expense rate has declined with the growth of revenue, it is still close to 70%, and the loss has also expanded from US$260 million to US$610 million.

This is not difficult to understand. Faced with the huge pressure brought by DS-8201, Seagen must use more investment to regain the opportunity to lead. Just last September, Seagen, which was afraid of being overthrown, also reached a cooperation with Nurix, a leading company in the PROTAC field, with a total price of up to US$3.46 billion, hoping to develop a degradation antibody conjugate (DAC) with a new mechanism of action.

Investment and risk-taking continue.

Another example is Alnylam, the leader in the RNAi track. Since 2018, it has launched the world's first approved RNAi drug, verifying the RNAi technology route. Now, with 5 RNAi drugs on the market, sales continue to rise; the stock price has also soared, with a market value of more than 34 billion US dollars, successfully completing the class leap.

Last year, relying on sales and licensing income, Alnylam's revenue exceeded 10 billion yuan for the first time. In the first half of this year, it continued to maintain a high growth rate of more than 80%, with revenue exceeding 8 billion yuan. However, the company is still losing money.

In order to maintain its leading position, Alnylam has to continue to invest in research and development to verify the value of its own platform, which also makes the company's R&D investment high. From 2023 to 2021, the R&D expense rate was 55%, 85% and 94% respectively.

At the same time, due to the simultaneous sales of multiple drugs, the company's sales and management expense rates have also remained at a high level, 44%, 74% and 74% in the past three years. These factors have jointly led to the company's inability to make a profit.

Of course, the good news is that with the rapid growth of Alnylam's revenue, various expenses are being diluted rapidly. In other words, Alnylam is still on the road to profitability, but it takes a little longer.

R&D and commercialization are equally important for innovative pharmaceutical companies. Excessive cost levels will constitute a gap between the company's sales profit and overall profit. How to increase sales and dilute the cost rate while maintaining R&D competitiveness is a science.

For domestic biotech that is striving forward, learning these successful cases can not only better understand the industry rules, but also provide valuable experience for its future path.

After all, in this challenging field, every successful example is a valuable asset to success. And the profit trajectory of those successful people may also allow the market to look at the profitability of biotech more objectively and rationally.

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