The Current State of the Biopharma Development Industry

Speaker 1:
Welcome to TD Cowen Insights, a space that brings leading thinkers together to share insights and ideas shaping the world around us. Join us as we converse with the top minds who are influencing our global sectors.
Charles Rhyee:
Hello, my name is Charles Rhyee, TD Cowen's Healthcare Technology and Distribution Analyst, and welcome to the TD Cowen Future Health podcast. Today's podcast is part of our ongoing series that continues TD Cowen's efforts to bring together thought leaders, innovators, and investors to discuss how the convergence of healthcare technology, consumerism, and policy is changing the way we look at health, healthcare, and the healthcare system. And in this episode, we'll discuss the current state of the biopharma industry. Coming out of the pandemic, the biopharma research and development industry saw a wave of innovation and investment.
However, as we move further beyond the pandemic, the biopharma industry has begun to experience a multitude of headwinds including the impact of the Inflation Reduction Act, looming patent expirations, changes at the FDA, potential NIH funding cuts, and efforts to regulate drug pricing. This influx of pressure on the pharma industry has forced the industry to rethink how it conducts its R&D programs, which has also had an impact on companies that serve the industry like CROs. And to help us discuss these topics and more, I'm joined by Brian Whitlock, the founder and CEO of i3 Strategic Consulting. Brian has over 25 years of clinical development experience across the biopharma and CRO industries. Prior to i3, Brian was the VP of strategic sourcing and procurement R&D for Bristol-Meyer Squibb, and has also spent time at Amgen and Covance. Brian, thanks for joining me today.
Brian Whitlock:
Thank you, Charles.
Charles Rhyee:
So maybe to begin, the biopharma industry is facing a number of headwinds and that's starting to have some appearingly meaningful impact on their ability to conduct R&D operations, and certainly not in the same way it's done in the past. And as we've seen, it's led them to kind of rethink their operating models with many making large scale changes. So maybe the first question here is why do you think this is all taking place now?
Brian Whitlock:
Yeah, so Charles, thanks for the question, and you're absolutely right. The biopharmaceutical industry has faced several challenges over recent years. These headwinds have forced drug makers to rethink their delivery models so they can be more flexible, more productive, and more cost-efficient. At the same time, they have the responsibility to ensure patient safety. They need to meet all regulatory and legal requirements and do all of this while navigating complex global environments. It's important to acknowledge, from my perspective, that many of these large pharma organizations have been on the path to optimizing their operating models for many years, even pre-COVID. These biopharmaceutical organizations are complex, as I've mentioned, they're highly regulated, so making operating model changes is risky, it's complex, and it takes time. So while some drug makers have made more recent changes to their operating models, many of those made these changes in years past. And we're really now as an industry starting to see the impact and the outcome of those changes.
Charles Rhyee:
As we see the results of those changes then, you've seen more pronounced announcements over the last couple of years from some big names in the market looking to restructure their development operations, ostensibly to prepare for some of these coming headwinds. What do you think the end goal for these companies are in these restructurings? Is it just to be leaner? What are some of the wholesale changes that are being made under the hood, specifically into the development functions?
Brian Whitlock:
First and foremost, if you're a drug maker, I can confidently say your number one mission is to serve patients. These drug companies are under significant pressure to reduce the time it takes to discover, develop, manufacture, and put life-saving therapies in the hands of patients, save lives. They're under pressure to improve flexibility, again, in light of a highly dynamic environment, as well as drive operational and cost efficiencies. So while they're nurturing these complex pipelines, biopharma are asked to perpetually look for continuous improvement to make changes to these operating models so they can be more efficient and more effective. As an example, in clinical development, many of these larger pharma have transitioned their delivery model from more of an FSO, or a full-service outsourcing model, to more of a FSP model, or a functional service provider model.
Granted, there are numerous flavors in between the FSO and the FSP pillar, but the value that these biopharma organizations are seeking in these operating model changes, certainly as you go from FSO to FSP, is a feeling of greater control around the outcomes of these important trials. They're able to better streamline data collection and streamline their operational day-to-day processes because they're operating under a single model as opposed to adopting a model or using systems from the various different providers they may have used under a fully outsourced strategy previously. And then also when they have streamlined processes, a lot of those resources are more internal and they're having to do external outreach less frequently. It's believed that they can improve cycle time and make better decisions and those better decisions faster.
Charles Rhyee:
When you think about what the outcomes then would be, it seems like these are all in terms of how do we face those certain challenges? Let's talk about the challenges they're currently facing and how this impacting their decisions to make these kind of wholesale changes to their structures. Maybe let's start with the FDA. A lot of changes in the last several months under a new administration, this has been an area of concern, I think, for many in the industry, particularly given the number of layoffs and high profile exits within the agency. Maybe first, to step back, talk a little bit about the industry's relationship with the FDA and how that's changed over time.
Brian Whitlock:
Yeah, so pharma's relationship with the FDA has evolved significantly over the past several decades. If we think back to the 1980s and even before that, pharma primarily looked to the FDA as a regulator or a gatekeeper with little, what you might call, true collaboration. As we moved into the 1990s and certainly the early 2000s, we saw a collaboration between the FDA and industry strengthen, especially in light of bringing new modalities, studying new disease areas, and then the pressure to accelerate the drug review and approval process.
So when you look at that maturation today, we see a much closer, you could say, almost a partnership between the FDA and the pharma industry where the FDA is really no longer viewed as a regulator, but rather as a facilitator for new innovations to be a thought partner on new and emerging science. So as an example, you could look at the emphasis and the utility real world data has played in the guidance and the partnership the FDA has made with industry to use that real world data in development programs. And more specifically in the development of the COVID-19 vaccine we saw approximately five years ago.
Charles Rhyee:
I think some would argue the direction, perhaps, is now starting to change. Maybe what's your sense, or maybe when you speak with pharma companies, with drug companies. What do you think the perception is on which direction the FDA is looking to move and of some of at least the statements of Makary in terms of which direction they're trying to go in, what changes do you think are so far that's notable and what do you think might be proof to be meaningful over the next several years?
Brian Whitlock:
As I think about this, I reflect on the administration's first four years in office. And we saw improvements to streamline and expedite the drug approval process. The administration and the FDA put an emphasis on greater digitalization across the drug development value chain, and really help promote novel platforms like mRNA technologies and the like to really bring life-saving therapies to patients that had otherwise run out of options and choices. The industry responded well to these efforts. I would say we have to have a balanced view because there is mixed messaging when it comes to topics like drug pricing and pricing reform that certainly dampened some of the optimism from the other highlights that I shared. Unfortunately, it's difficult to separate political influence and those overtones from the important issues that we've talked about. As I see it going forward, I think there's cautious optimism, but folks are watching it very, very, very carefully.
Charles Rhyee:
I think one of the things that people have been also really watching carefully though is with all the cuts at FDA in terms of staffing, people have been worried about approvals and getting appropriate review time with the agency. We haven't yet seen really any drastic delays to PDUFA time aligns so far. I think there has been some concerns there. What sense do you have around FDA staffing levels and are you hearing anything in terms of that we're starting to maybe see some things dragging out?
Brian Whitlock:
It's a great topic. So staffing at the FDA and the ability for them to meet PDUFA dates is an ongoing concern. To your point, the FDA has largely been able to meet its PDUFA dates. However, there've been an increasing number of instances where those dates were missed. I mean, looking back at the performance data of the FDA was in 2023, I believe, they reported an 89% on time compliance metric, which is great unless you're in that 11%. If we look at examples on more recently, there's an NDA that's in the public domain from Stealth BioTherapeutics where they had a PDUFA date at the end of January. It was delayed 90 days. Those 90 days came and went, and there is still no target date from regulators.
So when you think about what's causing these challenges, staffing is part of the equation and not only in the ability to attract talent, but it's the evolution of science and the complexity of science that requires key specialists, cell and gene therapy specialists, specialists with orphan drugs, or combination products. So it's not only the complexity of what industry is asking FDA to review, but it's their ability to attract talent and then retain talent in a highly competitive environment.
Charles Rhyee:
Have we seen since maybe some type of backtracking, maybe not publicly, but behind the scenes to try to get folks to come back?
Brian Whitlock:
Yeah, I mean, I think there's absolutely been a call, whether it's bring folks back or partner with industry, partner with academia to bring new and emerging talent into the industry and into the agency. It's an ongoing effort and it's going to require patience and collaboration from all parties.
Charles Rhyee:
Any signs of success so far, or is that still... ?
Brian Whitlock:
I would say it's probably a bit too soon to tell, Charles.
Charles Rhyee:
Yeah. Another area of big concerns is cuts to the NIH. Obviously, on the one hand, that won't have a large impact on clinical development, at least in the near term. But on the other hand, if you impact basic research, that's what feeds the drug discovery engine, and that could have a more meaningful impact on the drug industry, particularly in investments, as we move forward. What sort of impact do you foresee NIH funding cuts having on the broader biopharma space?
Brian Whitlock:
Yeah, so as you say, Charles, most of our biomedical research has roots in the basic research conducted by the NIH. Again, I've mentioned it before, I'll say it again. mRNA technologies, which have become widely known during the pandemic. This is work that started with the NIH. Commercial drug companies have always relied on the groundbreaking innovations and discoveries from the National Institutes of Health. So with funding cuts, the industry does have reason for concern. These reductions not only have a direct impact on innovations and discoveries, but it also increases the risk profile for biopharma organizations, especially it increases a risk profile in the earlier stages of drug development where the risk profile is inherently high already. Reducing NIH funding not only has a negative impact on employment and future talent in the sector, but it has a downstream impact on funding for smaller biotechs and ultimately has consequences on the industry pipeline for future innovations.
Charles Rhyee:
Do you think that we've already seen a bit of a trend of drug companies looking to companies in China? A lot of new innovation's starting to accelerate there, and certainly when you think of the assets being acquired for some of these technologies, do you think these NIH cuts threaten... I don't want to use the word supremacy, but the preeminence of a US innovation and opens the door for other countries to step and fill the void?
Brian Whitlock:
So the potential is absolutely there. And honestly, Charles, I see that happening with a move towards greater and greater globalization regardless of NIH cuts or not. I mean, having worked for drug makers for a quarter-century now, innovation does not come from a single point. Innovation comes from an ecosystem. It comes from partnership, it comes from collaboration. And the NIH for decades has been at the center of that, as I explained just a moment ago. While, yes, the funding cuts to the NIH do have negative consequences on the industry, not only in the United States but on a global basis, and I think what it does is it creates an opening for others, as you say, to fill that void, which will require the industry to adapt yet again.
Charles Rhyee:
Do you think some of this will get restored or any kind of sense on where you think that direction might be heading?
Brian Whitlock:
I'm a firm believer that things will work themselves out. Now, from an investment perspective, that doesn't give you a lot of solace, right? But what I would say is the life sciences industry as a whole is a very resilient one. The challenges the industry is facing today are, arguably, unprecedented. However, this is an industry that has faced headwinds in spades for more than a century. So I do have to believe that the industry will adapt. It will find a new way or new ways of innovating and benefiting patients, benefiting humanity. So I do see it turning around, but certainly in uncertain times is how I'd characterize today. It's kind of hard to see the long game, but I'm confident we'll get there.
Charles Rhyee:
Speaking of mixed messaging, you mentioned before, I think FDA Commissioner Makary has talked about wanting to streamline drug development, look at new tools. Obviously digital is one of them, maybe moving away from looking at non-animal models as well and things like that. But on the other hand, you have the administration trying to tackle drug pricing, has obviously issued an executive order around Most-Favored Nation. How would you describe the overall reaction from industry to the administration's efforts so far?
Brian Whitlock:
Yeah, so does the public at large want to pay less at the pharmacy for their medications? Yes. Is the path to doing this simple? No. So the supply chain of drugs from manufacturer to delivery to patients is a very complex series of events, and it involves a number of different players. In order to make, what I would call, an effective and sustainable change requires an objective and fact-based approach as opposed to political rhetoric. Hasty and uninformed and/or myopic tactics can have profound impacts on whether it's global pricing strategies, continued innovation, and/or drug launch timelines or the sequencing of those launches. Again, the headlines read, "Cheaper prices," folks love that. How we get there is really the challenge, a complex one, that I think the world as a whole is going to have to come to grips with.
Charles Rhyee:
Industry specifically though, what are you hearing from your clients in terms of how they're playing this? Obviously a lot of uncertainty right now. We don't even know what a proposed rule will look like. What's happening at the decision-making level right now in terms of current projects, the pipeline strategies around actually approved products? What's going on at the moment then?
Brian Whitlock:
Yeah, so biopharma is actively preparing for drug pricing reform, especially given the provisions you had mentioned as part of the Inflation Reduction Act. What are some of the preparation steps they're taking? They're reprioritizing research and development pipelines towards biologics and other high-value therapies. They're looking to accelerate launch timelines, and they're reevaluating commercial strategies so they can optimize earlier revenue. Many are in scenario planning, you would call it, to better understand the financial impact, adjusting Medicare exposure, exploring indication filing sequences, as I had just previously mentioned, to manage the timing of price negotiations. So it's a very complex environment. In addition, teams are focused internally on policy tracking and pricing strategies and value demonstration, but at the same time, they're outwardly encouraging advocacy to influence policy implementations. As we discussed earlier, drug makers are evaluating and optimizing their operating models and exploring partnerships as ways to preserve margins and mitigate long-term risks of drug development.
Charles Rhyee:
One of the impacts of IRA would suggest that drug companies would want to change the sequencing of new indications studies to expand label. We were at the DIA show the other week, and on a panel there was an analysis kind of suggesting that, whereas in the past, you might've waited a few years for getting approval for new indications. You have to accelerate that by several years now in hopes to still have a positive NAV for the whole project. In light of that, are drug companies really equipped to speed up timelines that quickly? And maybe give some other examples. When you mentioned reauthorization of pipelines, what does that actually entail as well?
Brian Whitlock:
Whether companies are equipped or not, and I would say some better than others, they really have no choice. Again, this is part of, as we've discussed, an ever-changing in environment. And one the industry is being forced to adapt to. So from firsthand experience, you're right, under prior policies and administrations and legal parameters, you could develop a drug, you could wait, you could then do an add-on indication and then do another one and another one. So you could stretch out for a particular therapy, a filing strategy for many, many years. But in light of some of the provisions in the IRA, those timelines now get truncated and you compress as much as possible. So what sponsors and their CRO partners are being forced to do is how do they take time? How do they make quantum or transformational changes to how they operate, how they make decisions, and ultimately what that means in terms of timelines because if you take a very serial approach to your filing strategy, you can, quite frankly, just run out of time. There's no simpler way of putting it.
Charles Rhyee:
When you're reprioritizing pipelines, what are drug companies looking at within their pipelines to say that this is worth doing versus something not?
Brian Whitlock:
You're looking at the assets probability of technical and/or regulatory success. You're looking at the competition. What is their timing, what is their sequencing? You're looking at your differentiating factors and you're putting these complex multi-variable decisions on the table. And drug companies, again, I've sat in these boardrooms, you're making very difficult trade-off choices, but you're having to focus your capital to accelerate your most promising assets, not only from an efficacy and a safety perspective, but also which ones are going to create the greatest patient benefit and the greatest commercial outcomes for that biopharma company.
Charles Rhyee:
And, obviously, all these decisions are being made at a time when we're hitting another big cycle of big patent expirations over the next five to 10 years. When we look back historically, let's say in the two thousands when we had a large wave of small molecule drugs losing patents, we saw R&D budget growth slow. And I guess the general thinking is drug companies like to at least match a little bit their R&D spend growth at least somewhat in line with revenue growth, with sales growth. I think that's the expectation as we move into the next cycle. Is that the right way to think of it, or does the fact that maybe with biologics and biosimilars, it plays out a little bit differently? What are you hearing in terms of biopharma strategies as it relates to R&D budget growth?
Brian Whitlock:
From what I'm hearing is there's a lot of focus on cost containment, given the uncertainty on top line projections. Drug companies, I've not seen make a significant pullback in their R&D investments. Rather, they're being very choiceful, they're being very thoughtful, and very rigorous in their prioritization and decision-making processes so that that precious capital can go towards those opportunities that are going to create the greatest outcomes. So organizations continue to see growth, albeit at a slightly slower rate than perhaps what we've seen previously. But I think when you look at, again, service providers or drug manufacturers, folks continue to move pipelines forward but with an additional level of scrutiny and rigor because of the current environment and uncertainty in which.
Charles Rhyee:
Maybe switching gears then a little bit for companies that serve the biopharma industry and for pharma service companies, let's say. I'm thinking in this case maybe specifically about CROs. When we think about everything that's going on with the industry right now, particularly under an R&D, how can CROs and other pharma service companies position themselves to be of greater value to the biopharma industry?
Brian Whitlock:
Yeah, Charles, I love the question because it's one very near and dear to my heart. Given I started my career and spent the first decade at a global CRO. So let's be clear, you cannot bring a life-saving medication to a patient entirely by the drug manufacturer themselves. At stages of discovery, development, manufacturing, commercialization, service providers are integral to the success of these major processes and aspects of the value chain. As the complexity of drug design and bringing these therapies to market increases, CROs are ever more looked to for their know-how, for their scalability, and for their innovation.
Over the years, CROs have invested in industry-leading talent, developing novel capabilities, and driving operational excellence to bring value to their biopharma clients. And as the service provider industry continues to play a more integral role in the development, manufacturer, and commercialization of these therapies, their customers are seeking increasingly deeper relationships. And it's these deeper relationships that not only create incremental value over time, but they create the fertile soil that you need for innovation as well. So trust and focus on value in these partnerships is key to their strategic alignment.
Charles Rhyee:
But at the same time, at the beginning you talked about particularly large pharma shifting models away from a full outsourcing model to one that's more in sourced model that's having significant ramifications on the industry, particularly for CROs. So in that kind of model where it's, in some ways, become maybe a little bit more of a commodity type service, perhaps, maybe that's not the right way to say it. But how do then service providers and CROs in particular differentiate themselves in this kind of market? When biopharma is trying to bring more in-house?
Brian Whitlock:
Charles, it can absolutely sound like a conflicting statement. We've talked about large biopharma customers moving more from full service outsourcing to an FSP model, which even still, when a sponsor adopts an FSP model, they're still reliant on a service provider to source that talent and keep that talent active on their trials. But when we take a step above clinical operating models, biopharma is becoming increasingly reliant on CROs and are looking for opportunities for more meaningful partnerships. And the time is right for that. We've talked about a number of complex and interdependent headwinds facing the industry, but each company's challenges are nuanced and service providers have to really thoughtfully assess and carefully understand the needs of their clients because from sponsor to sponsor company to company, those challenges, at a macro level are similar, but the way each company tackles it and how it impacts them is different.
So CROs really need to propose solutions that are a tailored fit to meet those unique challenges of their customers. And while some aspects of the industry naturally give way to general offerings and capabilities, they're pushing for services higher on the value chain. With more commodity solutions like lab materials or providing lab equipment in comparison to developing complex biochemical assays, where the industry is evolving is the intersection of those commodities versus these higher order, more complex technical services. And it's creating an opportunity for service providers to add value differently.
So being able to tie, for example, lab infrastructure to complex technical and scientific services adds a level of value that sponsors either may have had in a limited fashion or perhaps missed altogether historically, these are now being brought front and center, again, back to creating more efficient and more effective operating models. And, ultimately, back to the customization aspect, the customization for CROs to develop these solutions is time-consuming and it is resource intensive, but it's also a very high reward environment and creates that potential for deeper long-standing partnerships with their customers.
Charles Rhyee:
That's interesting. And it does seem like an opportunity then for companies if they have some type of differentiating technical capability that is not readily available to sponsors themselves. And then speaking of technology, then maybe let's talk about the role technology plays now that might be different than in the past. And obviously AI is the big buzzword, and we've heard that being spoken of, not just from CROs, but drug companies themselves have all been talking about the development and use of AI to help in the... I guess across the spectrum, but particularly in development. What role do you see technology having in drug development currently, and then where do you see that moving over the next several years?
Brian Whitlock:
Yeah. Artificial intelligence is already playing a role in an increasingly transformative role for the biopharma industry, and it's doing so by helping accelerate pipelines, improving decision-making, optimizing operational processes across the drug development value chain. So let's look at research as an example. AI will enable faster target identification, compound screening, and predictive modeling for drug-drug interactions. And this has the potential to significantly shorten the time to bring novel therapeutics into the clinic. So then as we look at development, AI is being used to support trial design, site selection, patient recruitment, by leveraging real-world data and advanced analytics. AI is also being used to clean and monitor data to improve trial efficiency and success rates.
AI is not just being used in R&D, but it's being used in the commercial setting as well to create more efficient forecasting, better pricing strategies, and market segmentation. And then let's not forget about manufacturing as well, where AI is being used to streamline not only manufacturing processes, but global supply chains and regulatory submissions using automation and advanced pattern recognitions. So I expect to see AI adoption to continue to increase it is, and will continue to be, more and more embedded in the day-to-day operation of a biopharma organization. It should also be mentioned when I say biopharma in this context, CROs are on exactly the same journey. And the shift to utilizing AI more and more and embedding in their day-to-day will move AI from today. What is more of a supportive tool to more of a strategic enabler that helps companies innovate faster, it helps them reduce their expense burdens and improve pipeline outcomes like better precision medicine therapies for patients.
Charles Rhyee:
Drilling down on your comments on use of, let's say, AI within in the clinic. As biopharma and sponsors are able to use more of that in the clinical setting, does that lessen the need for services from providers like CROs?
Brian Whitlock:
It does not. I really see kind of a mixed model when it comes to biopharma companies and when they're going to use or develop AI capabilities internally versus relying on a CRO. So as I mentioned before, AI can and continues to play a more and more transformative role. When you look at whether a drug company is going to utilize or build an AI capability internally versus externally, I often think back to what are that organization's strategic differentiators? For many drug companies, trial design, one unto itself, is a very complex and highly iterative process. Trial design is also looked at by many biopharma organizations as a competitive differentiator or a core competency.
So many of these biopharma companies have enabled their trial design and other study startup activities using generative AI enabled technology platforms. Whether they developed in partnership with a technology organization or whether it's something they developed solely in-house. So while these types of activities may be retained more internally as a differentiator, service providers are also developing AI aided trial design that can benefit smaller or less mature drug developers. It's not just the large organizations that will benefit from AI, it is everyone. So as for more routine or you call it non-differentiated capabilities, this is where CROs are a great alternative for their biopharma customers so that they're not investing the time, money, and resource to building something that's already and available for use.
Charles Rhyee:
We'll have to wait and see how this all kind of plays out here. Just wanted to finish up maybe any final thoughts here. A lot going on. It sounds though generally you're kind of optimistic about the future for the industry and for service providers. One or two key things you're watching out for then to give you a sense that things are moving in the right direction or maybe things might be shifting the other way\?
Brian Whitlock:
So Charles, I do appreciate that you find me to be an optimist. That's always welcome feedback. So things that I'm looking out for is I'm looking at, one, what is the collaboration that's happening as we've discussed between government entities, between academia and between industry, whether it's drug makers themselves or it's service providers that are enabling their business? I am encouraged because there continues to be strong collaboration despite a high degree of uncertainty and dynamic change within the industry. The life sciences industry is a very resilient one, one that I think absolutely will come out of these uncertain times much stronger than even we went into it. Again, this is part of my optimism, but we're coming into earning season time, certainly at the midpoint in the year. So I think what we're going to hear from a variety of organizations, whether biopharma or service providers, really in the next four to six weeks are going to be very telling not only for the rest of '25, but what we might expect as headwinds or tailwinds going into '26.
Charles Rhyee:
I'm sure there's a lot that a lot of people will be focused on. So we'll end it there. And, Brian, really appreciate you coming on and joining us for this and want to thank everyone for tuning in. And I look forward to having you join us on a future episode. Thanks everyone.
Brian Whitlock:
Thank you.
Speaker 1:
Thanks for joining us. Stay tuned for the next episode of TD Cowen Insights.