Stelios Papadopoulos brings the long view on biotech on The BioCentury Show

Company building, pricing pressure, innovation from China, and the future of big pharmas

In historical terms, this is not a bear market, says Stelios Papadopoulos. There’s volatility, which is unnerving, and major issues to reckon with, but the level of anxiety in biotech doesn’t reflect the “extraordinary science, the likes of which we’ve never seen — and it’s getting better,” said Papadopoulos on The BioCentury Show.

Papadopoulos is one of the long-term leading voices of biopharma, recognized for his influence in shaping the industry. Former chair of Biogen Inc. (NASDAQ:BIIB) and current chair of Exelixis Inc. (NASDAQ:EXEL), with roles on several boards, and a background of nearly two decades as an investment banker, he brings a long view to how the industry has grown and the forces driving where it is headed. 

Acknowledging it may not be unique to this sector, Papadopoulos believes that many people in biotech are too narrowly focused on their immediate environment, which feeds their “fears, anxieties, excitement,” at the expense of seeing the bigger picture. The recent raise of over $3 billion in 24 hours is unprecedented, he said. “The stocks have done reasonably well this year, coming from a low point.”

Still, he said, there are two dominant forces that are slow moving but need to be understood: pricing pressure and China.

“There’s price pressure on drugs, no doubt about that.” Going back 10 years, he said, the expression was, “We’ll take price.” At the beginning of the year, pharmas could decide, “we’ll boost prices across the board 5-10%; mid-year, a similar amount, easy.” That is no longer the case. “We cannot take price anymore the way we used to. So the industry needs to really understand this, and assume that it’s only going to get worse,” said Papadopoulos.

The emergence of China is remarkable, said Papadopoulos. “It is extraordinary what’s going on there.” He continued, “And let me add South Korea, and somewhat Europe as of late — you see more and more innovation creeping in all those places.”

He ascribed the success, at least in part, to the concerted effort made by China to repatriate leading scientists, using incentives, the creation of a biotech-enabling regulatory environment, the ability to do rapid clinical trials, and the work ethic, “which reminds me of the work ethic in biotech in the eighties.”

 “Ten years from now, my prediction is, they’ll be the true innovators, and we need to take this into consideration.” 

Papadopoulos also believes the contours of the biopharma industry will continue to evolve, in particular for pharmas, where the reality of sustaining huge companies long-term is complex.

“Wall Street is infatuated with growth — you need to be a good stock, a stock people want to own and talk about.” Growth is driven by occasional discoveries or clever M&A deals, and keeping top-line and bottom-line growth over time is challenging. “It’s very hard to programmatically have it in place for 20, 30 years,” he said.

“I’m not convinced there is real economy of scale, and having a very large pharmaceutical company, like a $30, $40, $50, $60 billion business. The only competitive advantage any of us have in the business is domain expertise.” So the idea of sustaining large businesses to enable collateral or orthoganal learnings from one area to another, he says, is not a compelling argument. 

It’s unlikely, according to Papadopoulos, that companies and their boards will choose to break themselves into smaller pieces to get a better return on invested capital. That is typically driven by external pressures, such as regulatory, antitrust or private equity. 

“I suspect in the next 10, 20 years, private equity, as funds are getting bigger and wiser and a lot more informed about specific industries, may step in and recognize that you’ll get better return on invested capital with focused smaller enterprises than the large one.”