Real Science

"The big boom hasn't happened yet," says Lacey. "But it will, as companies figure out proteomics and the drugs people need to take."

Until now, the biotechnology industry has been largely confined to using a parts list of all the genomic sequences in the human body. That genetic information in itself has produced a mountain of scientific research, which biotech firms wade through electronically. But it's still only a small fraction of the research that will begin once all the proteins are discovered and companies begin using that information to speed the delivery of new drugs and other therapies to market.

The promise of all this work is that medicine will become personalized rather than rely on statistics and probabilities, creating therapies to treat the causes of disease rather than the symptoms. For biotechnology companies, that can mean huge dollars. And for consultancies that help these biotech firms bring their products to market, this could mean steady work for years to come both in the biotech world and in markets affected by their discoveries.

Ante Up

It also could mean sharing directly in the profits of biotech companies. While joint marketing agreements have been around for years in a variety of vertical markets, equity investments by consultancies in their biotech clients are becoming a routine occurrence. Just as landlords and marketing firms took payment in stock options during the dot-com explosion, consultancies are gambling on the future of these companies in lieu of up-front payment.

The downside is that this requires consultancies to manage client companies almost like a venture capital firm manages a portfolio. Historically, the biotechnology market has been viewed as a high-risk gambit for many investors. While companies like Genentech and Biogen have thrived, there are many more that have burned through their investment capital and disappeared. As with any relatively new industry, consulting firms say that they need to be extremely cautious about where to place their investments and how they structure a deal.

But there's a reason many consulting firms are willing to take that risk. Successful therapies can generate $1 billion to $2 billion per year — far more than even the most ambitious dot-com companies ever expected to earn.

This kind of revenue stream is so attractive, in fact, that it has large accounting-based consultancies looking at ways to tap into this market. Current rules prohibit accounting firms from taking a stake in their clients, but they don't prevent firms from spinning off their consulting arms. Tracy Lefteroff, global managing partner for life sciences industry services at PricewaterhouseCoopers, says that the need for a direct investment will provide a major impetus for large accounting firms to spin off their consulting arms.

Current accounting rules don't preclude joint marketing agreements, but Accenture executives say biotech companies increasingly want their consulting partners to put some skin in the game. "That's part of our commercial model, whether it's an alliance to go to market or in the equity space," says Lacey.

Bain & Co. likewise has been investing in the biotech companies that use its services when the upside opportunity looks significant. "We are very results-oriented and will put our own money at risk," says Ashish Singh, a Bain VP with biotechnology industry expertise (see Q&A, p. 20). "There have been attractive opportunities where we were aligned with the management of these biotech companies."

In large part, consultancies and biotech start-ups say that the goal is to minimize the burn rate of investment capital while maximizing their marketing clout by using the resources and global recognition of a well-known consultancy. Getting a consultancy to ante up money and services is a good first step.

Problem-solving

Most of the work in the biotech market falls into two categories: helping biotech start-ups to plan and build their go-to-market strategies, and providing the tools to run their businesses.

The go-to-market piece is a long-standing specialty of many traditional consultancies with vertical practices, and the life sciences market fits neatly into that area. For years, many of the big consultancies had focused their efforts on the pharmaceutical companies. But with those companies feeling the economic pinch these days, companies like PricewaterhouseCoopers have had no choice but to retrench downstream in contracts for smaller biotech companies.

"Taking stodgy companies and trying to reinvent them always presents tremendous opportunities for consultants," says PwC's Lefteroff. "But we're well past the 50 percent point of work that's completed in that market. Biotech, on the other hand, is just getting to the point where it will be a major consumer of consulting services. We're just starting to see services in sales and marketing, managing a sales force, and [U.S. Food and Drug Administration] compliance."

The other piece of the market, which is far more complicated, is the tools and operational side of the business. Generally known as bioinformatics, this is where the science of biology runs smack into IT functions such as data processing, data mining, and knowledge management.

The goal of bioinformatics is to reduce the time it takes to bring new drugs and genetic therapies to market. Until now, it generally has taken drug companies between seven and ten years to develop drugs, and another three for clinical trials. But with 70 percent of those drugs never even reaching clinical trials, and another 70 percent or more in clinical never actually resulting in products, the cost for developing drugs has proved exorbitant.

Most companies are looking to cut the whole development process in half, and in cases where there is no existing therapy but there is a need, they can win fast-track status from the government and slice the clinical trials to two years.

At the same time, these companies are looking for hints about how to develop drugs more effectively from the mountain of research in the public domain to improve their odds of successful development.

"These are not typical consulting skills," says Thomas Swen, a managing director at Deloitte Consulting who heads the firm's life sciences practice in the Americas. "Research and development consulting is different than business consulting."

Swen says that the mantra among all biotech start-ups is reducing the time it takes to get to market, making the whole process less cumbersome while improving the odds of creating successful therapies from the outset.

Big Five vs. Boutique

All of this activity has pushed giant consultancies into the biotech market, but they definitely are not alone. Many smaller companies, as well as individual consultants with some history in this market, are targeting this space as a future growth market.

Consider, for example, Blackstone Technology Group, which began life in 1996 as a value-added reseller for Sun Microsystems, Inc. As the Worcester, MA–based company began serving local biotech companies, it was getting repeated requests to help solve problems of information management. Sensing this opportunity was going to be significant, CEO Brian Ritchie guided the company into the consulting space, buying two separate consulting firms and pushing into bioinformatics and electronic design automation.

The company also decided to push one step further. "As we were selling our consulting services, we developed software tools," says Ritchie. "These tools were just the tip of the iceberg. We were already involved in integrating business goals with the computing architecture, and so we started our own R&D effort."

By last spring, that effort had gained enough momentum that Blackstone began looking for venture capital funding to finance its software development. Its tools, which it now sells as part of the Powercloud architecture, are aimed at dynamically modifying the computing infrastructure of biotech companies to marry business with science and design.

"Our goal was to solve these problems in a more standard way, so each time we're not out to custom-develop a solution," says Ritchie.

Blue-chip strategy firms such as Bain also are finding opportunities in this market. Unlike companies like Blackstone, the larger, more generalized consultancies can pool resources from a number of different areas of expertise to jump into a specific vertical market. Biotechnology is no exception, although the bioinformatics piece tends to be highly specific to this industry.

"What we're selling is a combination of technical assessment and answering a business question about how you commercialize a product and put a business model in place," says Singh. "Over the last decade, there have been four key pockets. There are true suppliers, who are trying to enable faster drug discovery. There are companies that are trying to figure out new ways of doing drug discovery. There are the true biotech companies. And there are pharmaceutical companies that are trying to improve their productivity, which traditionally has been very poor."

Singh says that at the start of the biotech market, which began in earnest in the early 1980s, every company wanted to be involved in drug discovery. He says that the market has matured to the point now where companies see that they need to focus on specific areas, which in turn has increased the need for consulting services.

That may help explain why companies such as IBM Global Services and Sun Professional Services are getting involved, as well. With the compute-intensive nature of bioinformatics, requiring biotech companies to sift through huge amounts of data and extract relevant pieces of information, these companies see a windfall in consulting services as well as the possibility of selling huge quantities of hardware and software. Many IBM executives say privately that they view biotechnology as holding the same potential as the dot-com market did five years ago.

The Future

Still, the opportunity that has cracked open so far in this market is only a hint of what lies ahead. If biotech delivers on its promise and begins developing therapies based upon individual needs and tolerances, the whole healthcare industry will be turned upside down.

"This is all about moving from process to discrete manufacturing, and it creates a world of issues," says Deloitte Consulting's Swen. "Process manufacturing operations are high-volume and use standardized processes, so the throughput is much higher. In discrete manufacturing, you are manufacturing to [specification]. If you're designing a drug for me, it's a more expensive process."

But that's only the beginning. Just think about what would happen in an oncology practice, for example, if a therapy were developed that could cure cancer, or at the very least make it a treatable chronic illness. Or consider what would happen if other ways than a hypodermic syringe were developed to deliver a therapy. The ripple effect across a variety of different industries would be enormous.

This fits squarely into the definition of a disruptive technology, such as the invention of the electric light bulb or the railroad, which radically altered a whole slew of other businesses and which created their own boom-bust cycles on Wall Street.

"I'm not even sure that it's clear how the economics will work," says Swen. "But it's clear that our role will change as we see clients struggling for new ways to deal with this."

The good news is that change on this scale typically precedes a need for increased consulting services. It's just a matter of trying to figure out where this will take root and pinpointing when it will happen, so you can have the resources available to take advantage of it.

Sidebar: A Biotech Expert Hopes to Make Drug Creation Easier to Swallow

Bain's Ashish Singh Sees New Prescriptions for Biotech and Big Pharma.

CM: What type of work does the biotech sector currently offer consultants?

Singh: A lot of our work has really been focused on bringing new drugs to market. And what clients are asking is, "How do we get the manufacturing scale up?" Growth projections are now calling for a rate of productivity relative to new drug launches that the industry has historically never delivered. If we look at the next ten years or so for the big pharma companies, they are on average expected to launch two drugs per year in order to just meet their growth expectations. These launches are built into their valuations, and if a big pharma company has launched more than 1 or 1.3 on average annually for the last ten years, that has been a huge accomplishment. And to get to that number is where the innovation and the whole rise of the biotech sector are playing a very important role.

CM: What's the biggest challenge facing large pharmaceutical companies?

Singh: They just haven't been able to bring drugs to market at a rate that will sustain their valuations. There is a combination of different factors. Historically, a lot of the up-front investment in drug discovery takes place in R&D, and if you sift through compounds, the attrition rates as you go from pre-clinical trials to phase one, phase two, phase three are incredibly high. Only one in a thousand compounds is making it through to the pipeline at the end of phase three.

What's happened now is that there has been a lot of innovation occurring, where they're escalating the discovery of drug targets. Until only recently there were only 500 drug targets out there that all the different companies were trying to hit by creating compounds. Now, the number of targets is expected to go up to anywhere from 5,000 to 10,000. So there are tremendous productivity improvements on the front end.

The challenge now shifts to making sure those targets are validated and that they are real targets or "drugable" targets. And that the compounds that need to be created to go off on these targets can be created more effectively and faster than in the past, which is where some of the new technologies around computational chemistry are a factor. So, there is a lot of promise right now just in terms of the number of targets that have been identified and then the number of technologies that are available to help discover leads against those targets.

CM: Describe the relationship between biotech firms and large pharmaceutical firms?

Singh: We've done a lot of work with large pharmaceutical companies and small biotechs, and the relationship between the two is quite symbiotic. The big pharma companies view the biotech sector as critical suppliers of innovation and compounds and suppliers of growth. The big pharma look for the small biotechs to provide them with a growth engine and the small biotechs are looking at big pharma to provide them with an outlet for their technology and an outlet for their services. The big pharma model historically has not delivered in terms of the growth and productivity that's been expected. They are now really relying on some of these smaller biotechs to help.

CM: What types of expertise can Bain offer biotech firms?

Singh: The small biotech is very focused on technology validation and strategy validation and addressing such questions as where in the value chain should we be playing, and these are all strategy-related issues that we have found our experience is ideally suited to address. So, the issues that we have helped some smaller biotechs grapple with are should they be really a technology platform, should they be focused on broader discovery, or should they be thinking in terms of commercialization of their technology and commercialization of their drug discovery. It's about helping them find out what their core is and what is a sustainable basis for getting to full potential in that core. And they need to be thinking of moving outside that core to new areas of value creation.

CM: When comparisons are made between the biotech marketplace and the dot-com marketplace, what should we keep in mind?

Singh: What we've seen with the dot-coms is that the underlying business model was not sustainable, whereas the value of innovation and the ability to turn that innovation into real revenue, real profit, and real market value is much stronger on the biotech side. And I think that's just because of the tangibility of the intellectual property that these biotech firms have developed. … The return on investment should be significantly greater in terms of there being something sustainable. Virtually every company has ended up creating things, and that in itself should sustain some valuation — whereas we just haven't seen any ability to do that in the dot-com sector.