What is the future of the biotechnology industry?

Historically, biotech has functioned under the same discovery paradigm as pharma — the one drug: one protein: one disease paradigm. Diseases are thought to be caused by the misfunctioning of a protein. The disease is addressed by finding a ligand which binds to that protein, causing it to behave in a manner more compatible with health.

The principal difference between biotech and pharma is that biotech uses the new tools of molecular biology to find large-molecule ligands to bind to target proteins, while pharma uses the tools of medicinal chemistry to find small-molecule ligands. Both are predicated on finding and validating drug targets that cause disease.

One might think that there are a large number of such targets, but one would be mistaken, at least for human targets (bacterial and viral targets are more abundant). Human targets are encoded by the human genome. There are about 19,000 genesthat encode protein targets. The number of these that are associated with human disease is in the neighborhood of 1,000. The number of these to which we already have drugs is estimated at 555, more than half.

Drug targets are a finite and exhaustible resource for pharma and biotech companies. Finding and exploiting them is much like mining gold – at first, the big fat nuggets are easily picked up, then you have to start building sluices to get the golden gravel and sand, finally gigantic and enormously expensive mines and mills are required to recover the microscopic specks that remain.

Drug companies – both pharma and biotech – are now mining the dust. The cost of discovering and bringing a drug to market increases 9% a year. This rate has held steady for decades, through various regulatory regimes and technological innovations. It is so constant that there is a name for it: Eroom’s Law (Moore’s Law in reverse).

From Eroom’s Law

A few simple calculations show that pharma’s return on investment is now only about the same as the cost of capital. In a few more years, a dollar spent on R&D will net no return at all, on average. We’ve reached peak pharma (and biotech).

From Pharma’s broken business model: An industry on the brink of terminal decline

Some companies will continue with the current discovery paradigm and occasionally strike it rich, just as mining ventures do. But these profitable strikes will become rarer and more random. The days in which the pharma industry reliably churns out 15% profits (3–4X that of most other industries) are over.

Smarter pharmas and new biotechs will seek to exploit paradigms other than one protein: one disease. They will focus on altering processes and systems, often by re-engineering them altogether: programming cells to act as semi-autonomous agents within the body.

We are already seeing this trend with CAR-T therapy, in which immune cells are programmed to attack tumors. Others will be programmed to remedy inflammatory disorders. We will soon see engineered microbes which alter the microbiome and alleviate metabolic diseases.

No doubt there will be technological advances that allow biotechs to squeeze a little more value out of the one drug: one protein paradigm. But they just won’t matter all that much. Humanity’s theories of disease have proceeded from spiritual to mechanical to molecular, and the practice of medicine has changed accordingly. Systems concepts of disease are the next phase, and those companies who learn to master it will dominate health care innovation (and profits) in the next decades.