Models of Innovation in the Biotechnology Industry

We have previously noted the highly research intensive nature of the biotech industry. R&D provides a major source of a firm's overall expenditure, and consequently leads to the extremely high 'burn rates' of new firms.

The biotech drug discovery process is typically described as a modified linear process, as indicated in Figure 3.1. This is somewhat typical of the life sciences industries generally that are driven by findings from R&D. Human health applications of biotechnology, in particular, are characterized by very long lead times to production due to extensive regulatory requirements (see Chapter 9). Applications in agribiotechnology are also subject to regulation and testing before approval for release onto the market, whereas environmental biotechnology is constrained to a lesser degree by need for testing and approval.

There is some debate over whether post-market surveillance is actually part of the R&D process, although it does impinge on the final success of the innovation process.

Generally, the shorter the approval time, the less the return; high-risk products, such as new drugs, if successful, generate a much higher return than a medical diagnostic test, which has a much shorter lead time.

10 12 14 16

Time (years)

10 12 14 16

Time (years)

Source: Adapted from BIO, 2004: EVCA, 2004.

Figure 3.1 Drug discovery process and type of funding

Approval times for new drugs in the USA have been increasing, from just over nine years in the 1960s to over 14 years in the 1990s (Burrill 2004). This is despite the 'quicker' drug testing and approval process introduced by the FDA and described in more detail in Chapter 9.

It should be noted that the timeframe for the approval process may vary between different countries, with Japan and European approval times for new molecular entities taking longer than the USA (Japan by a factor of almost two, and Europe by 1.5).

Figure 3.1 also shows typical sources of finance for the biotech firm as it moves through the various testing stages. In the next section, we explore these in more depth. We begin by considering R&D funding, and then various types of seed and equity finance offered by private and public sources. Finally we consider the firm becoming publicly listed on a stock exchange through an initial public offering (IPO).

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