United States: B2B Revolution Is Reaching Biotech

As investors turn away en masse from dot-com companies, Internet business-to-business companies are continuing to bring efficiency and cost reduction to every phase of drug discovery, development, and manufacturing.

There are 50 percent more new drugs in development today than there were five years ago, and the traditional profitability rewards associated with a first-to-market product (as well as the enormous expense of development) persist. Forrester Research projects a $350 billion Internet B2B life science market within the next four years.

The traditional attributes of content, connectivity, and commerce resonate throughout the business models of the recent wave of successful B2B life science companies.

The front end of the drug development process - drug discovery - is being streamlined by companies like Lion Bioscience AG, based in Heidelberg, Germany, with its two U.S. subsidiaries located in Cambridge, Massachusetts.

Lion sells bioinformatics software that permits a researcher to search through more than 400 databases of genetic information to first identify and learn about a drug target, and then add information from drug screening and animal experiments to determine the class of chemical compound most likely to prove effective against the target. As the quantity of genetic information expands with the mapping of the human genome and related efforts, Lion's portfolio of software tools is correspondingly growing in value.

Following the lead of its fellow German software company, SAP AG, Lion is using its software products to wedge its way into client companies and then dramatically expand its business with consulting and infrastructure-related services.

Its flagship deal with Bayer AG is worth up to $100 million, comprised of five years of support, upfront and license fees, milestones, and an equity investment in Lion. Lion is providing a complete corporate bioinformatics solution to Bayer's seven research sites, where the company's genomics researchers, chemists, pharmacologists and toxicologists can use it to search for new drugs.

Lion is, in effect, developing a corporate intranet through its central bioinformatics systems in Cambridge, while at the same time training Bayer scientists to use the system. Bayer gets exclusive rights to the software for 12 months, after which Lion is free to sell it to third parties.

But the key to the deal is people, not software. Bayer benefits from 20 to 25 Lion employees focused exclusively on its needs, and it can hire these people at the end of the project. The deal is reminiscent of ArQule's $100 million-plus nonexclusive transfer of its combinatorial chemistry technology and accompanying personnel to Pfizer late last year.

The business model is directly in line with SAP's formula: SAP's software sales revenues are only a fraction of its total revenues, which mainly derive from implementation, customization, and training services. Lion aspires to be the pharmaceutical and biotechnology industries' equivalent of SAP, by convincing customers to analyze the torrent of new genetic data by structuring their research activities around a Lion software platform.

The Internet, as eBay has definitely shown, can create more efficient markets by bringing together diverse and scattered buyers and sellers. Health care has already experienced this trend, through the growth of hospital equipment and supply marketplaces established by companies such as Ventro Corp., Neoforma.com and MedAssets.com.

Last week, a Massachusetts company, LifetecNet.com, raised nearly $20 million in a first round of venture capital financing, with the goal of providing B2B e-commerce services to an equally inefficient phase of the drug development process: contract manufacturing of pharmaceutical products.

LifetecNet will be an ASP to its pharmaceutical and biotech company customers by allowing them to outsource their third party manufacturing needs, by ranking potential suppliers, automating the entire order-to-invoice process, ensuring compliance by suppliers with applicable FDA regulatory requirements, and providing real-time communication between the customer and its suppliers over a secure extranet.

LifetecNet aims to drive efficiency in a marketplace characterized by hundreds of contract suppliers, of which a selected few must be chosen to participate in the manufacturing, packaging, and distribution of a pharmaceutical product in accordance with strict (and periodically audited) FDA-regulated processes.

The B2B connectivity provided by LifetecNet should create value in the supply chain by streamlining order entry and eliminating unnecessary paper records, as well as by potentially reducing the customer's required inventory levels. The information gathered about material prices and reduced purchasing cycles should lower supply costs.

Thus, there is reason to be optimistic about at least the B2B segment of Internet activity focused on the life sciences. The business-to-consumer sector, meanwhile, is suffering from the same malaise that has afflicted B2C companies generally; the novelty has worn off, and the consumer is now faced with a mind-boggling range of content options which can only be located after hours of surfing.

Competition among content sites is fierce on account of the low barriers to entry and lack of easily discernable quality standards; the difficulties of companies like DrKoop.com have been well-publicized. The only hope for these content aggregators may be in linking content, connectivity and commerce together to serve not only consumers but also health care providers, payers and other businesses, thereby gradually migrating to the successful business models developed by the B2B players.