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The biotec hno lo gy in du st ry is in a fund in g cri sis as comp an ie s r ee l fr om t he ef fect s of a str ugg li ng e con om y. The global biotechnology industry delivered a decent financial performance in 2008, despite the challenging economy worldwide. A general lack of funding, however, is placing strain on the industry’s growth. Revenue of publicly traded biotechnology companies increased 12% to $89.7 billion in 2008. The global industry’s net loss improved 53% to $1.4 billion. Revenue of U.S. public biotechnology companies grew 8.4% in 2008, down from 11.3% in 2007. The U.S. industry reached aggregate profitability for the first time, Er ns t & Young analysts report. Industry deal-making remained brisk, with the total value of mergers and acquisitions involving U.S. biotechnology companies reaching more than $28.5 billion. This was a record high when adjusting for “megadeals” that took place in prior years, Ernst & Young analysts say. In Europe, merger and acquisition transactions totaled $5 billion. “Like firms in most markets, European biotechs were clearly impacted by the financial crisis,” says Jurg Zurcher, Ernst & Young’s biotechnology leader for Europe, Middle East, India, and Africa. “Many are scrambling to raise capital, restructure operations, and use deals creatively to survive. Consolidation seems inevitable.” Throughout the industry, capital raised declined sharply in 2008, Ernst & Young analysts report. Companies in the Americas and Europe raised $16 billion in 2008, a 46% decline from 2007. Initial public offering funding fell 95% to $116 million. Biotech venture financing decreased 19% from 2007’s all-time record to about $6 billion in 2008. “This is not business as usual for the biotech industry,” says Glen Giovannetti, global biotechnology leader, Ernst & Young (ey.com). “Unlike prior funding droughts, this crisis is systemic, deep, and protracted. To thrive in this environment, firms will need to bring the creativity that has long been the industry’s hallmark to establishing more durable models for funding innovation.”
A report by the intellectual property company Mar ks & Cl erk shows that 93% of biotech executives believe that conditions have become more challenging during the last 12 months and that the terms for funding have become more onerous. Marks & Clerk surveyed 365 executives across the biotechnology and pharmaceutical sectors. Ninety percent of executives surveyed cited a lack of appetite for risk among investors as the principal problem they face in the current market. About 87% believe that the more speculative, early-stage companies will bear the brunt of the funding squeeze. Marks & Clerk found that although 60% of executives believe the outlook will start to improve for the industry within the next 12 months, almost the same proportion, 58%, expect it will take more than a year for investors to start to reappraise the sector. In this environment, 40% believe that a “significant” risk exists of further company failures. Ernst & Young analysts believe that four trends will eventually lead to new, more sustainable ways of funding drug development. These include a wave of generic drugs based on blockbuster products, the expansion of personalized medicine, healthcare reform in the United States, and the continued globalization of the industry. Generics based on today’s top blockbusters should loosen governments’ and insurers’ budgetary constraints and mitigate pricing pressures on innovative drugs, permitting better margins, Ernst & Young analysts say. Meanwhile, the potential shift toward universal healthcare coverage in the United States will likely incorporate pay-for-performance in reimbursement decisions. Incentives for true innovation should help biotechnology companies sustain returns. Personalized medicine will increase the relative value of research and early development – the biotechnology industry’s traditional strengths – giving companies more bargaining power and better valuations.More efficient drug development will lower R&D costs, making it easier for companies to reach self-sufficiency. Growing strengths in emerging markets will help bring about creative solutions, Ernst & Young analysts say, from new ways of allocating increasingly valuable ex-U.S. rights to creative alliances and new sources of capital. Meanwhile, Asian business models could provide struggling Western companies with new examples of how to operate. “But these trends will also bring new market pressures – from a higher bar on reimbursement to new sources of competition,” Mr. Giovannetti says. “To seize the opportunities in these four drivers, companies need to be proactive. Firms should understand how these trends impact them, prepare for them, and where possible, help shape them.” According to the Marks & Clerk report, 83% of surveyed executives believe that the combination of constricted investment and a more aggressive play from big pharma will lead to the independent biotechnology sector shrinking before the recession ends. More encouragingly, 89% believe that this consolidation could prove advantageous, with traditional pharmaceutical companies bringing to the table their experience in the manufacture and large-scale commercialization of drug development. Seventy-nine percent believe that the appetite among big pharmaceutical companies has already increased in the last 12 months, as they made strategic alliances or
outright acquisitions. According to the survey, executives are divided on the benefits of consolidation, with a slim majority of 59% believing it is a good thing for the industry. “Our research clearly signals that the next 12 months represent a critical watershed for the industry, before conditions and investor appetite begin to improve,” says Mike Gilbert, partner at Marks & Clerk Solicitors (marks-clerk.com). “In that time, we can expect to hear some bad news among the biotech’s minnows but also witness much greater consolidation. This will be important to the maturity of the industry in turning the hopes and promises of the sector into a commercial reality for backers.” Tou gh f irst q ua rter In the first quarter of 2009, the biotechnology market performance was down on weak drug sales. Certain companies, such as Gile ad Sciences Inc. (gilead.com), Nov avax Inc. (novavax.com), and Bio Cr ys t Pharmaceuticals Inc. (biocryst.com), received a boost in the wake of the H1NI flu virus scare, but the industry overall did not fare as well as the general market, according to G. Steven Burrill, CEO, Bur ri ll & Co . (burrillandco.com). The Burrill Biotech Select Index was down 3% in April. “The first-quarter 2009 financial results from biotech’s elite companies did not inspire investor confidence and confirmed that the worldwide economic crisis is taking a tougher-than-expected toll on drug sales,” Mr. Burrill says. Amge n Inc. reported lower-than-expected first-quarter 2009 earnings as sales of virtually all of its key drugs fell short of Wall Street estimates. Amgen’s total revenue decreased 8% during the first quarter of 2009 to $3.31 billion. The company lowered its 2009 revenue forecast, blaming deterioration in the global economy. Amgen executives now expect total revenue for 2009 to be in the range of $14.4 billion to $14.8 billion, a decrease from the previous range of $14.8 billion to $15.2 billion. Amgen continues to expect 2009 adjusted earnings per share to be in the range of $4.55 to $4.75. Amgen’s shares closed down 2% in April. According to the Burrill index, other companies followed suit, with Genzyme Corp.’s (genzyme.com) shares falling 10% in April. Shares of Biogen Idec Inc. (biogenidec.com) fell almost 8% on weaker-than-expected first-quarter sales, although its per-share earnings beat Wall Street estimates. Cel ge ne Corp. (celgene.com) beat lowered first-quarter earnings expectations on weak sales of its cancer drugs. However, company management blamed the first-quarter financial shortfall on weakening demand for Celgene’s cancer drugs, including Revlimid, due to the global recession. “It is not just biotech that is feeling the pain of the economic downturn,” according to Mr. Burrill. “IMS Health has reported that it now expects the global pharmaceutical market to grow by an anemic 2.5% to 3.5% in 2009, down two percentage points from the forecast it issued six months earlier, and the lowest growth rate in at least 25 years.” (See the story in Sales & Marketing on page 44 of this magazine for more details regarding the IMS projections.) Hel p fr om Wash in gt on The biotechnology industry may begin to find advantage from policy makers in Washington. President Barack Obama has already pledged a significant monetary investment toward the cause of science and innovation (see “The 3% solution” sidebar) in addition to other reforms, in particular the lifting of the ban on stem cell funding.
According to Marks & Clerk’s survey of biotechnology and pharmaceutical executives, 59% of respondents believe that the proactive measures taken by the U.S. government will help restore a more benign climate. However, only 15% believe that European governments have done enough to help the biotechnology sector recover. Ninety-six percent believe that the recent lifting of the stem cell funding ban in the United States will level the playing field of the U.S. biotechnology industry once more, or may in fact trigger the revival of U.S. regenerative research. About 59% of the surveyed executives believe that talent will migrate to the United States in the wake of Mr. Obama’s reforms, and 84% believe that the position of the United States under the policies of the new administration has been strengthened over other geographies. In light of the policies of the Obama administration, the Marks & Clerk study reveals that a small majority of 53% believe that there is now a “serious danger” of Europe being left behind the United States, rising to 75% among biotechnology executives based in the United Kingdom. This pessimism emerges at a time when the United Kingdom in particular has sought to strengthen its biotechnology industry. Marks & Clerk analysts note that in his recent budget, Chancellor Alistair Darling committed £750 million to a Strategic Investment Fund that will focus on emerging technologies, including biotechnology. In tandem, the UK government is looking at tax breaks relating to IP-backed research. “There has been some good news from the U.S. particularly in relation to newfound support for regenerative medicine under the Obama administration,” says Paul Chapman, partner at Marks & Clerk. “Moreover, regulatory news has been welcome, not least the FDA allowing Geron to commence the first trial in the U.S. using cells developed from embryonic stem cells. While the global outlook remains finely balanced for the industry, the U.S. is undeniably signaling that it is once again a friendly environment for the industry. Europe and the UK cannot afford to watch from the sidelines and should move speedily in terms of policy to ensure they are not left behind.” The industry’s belief that the United States may now become even more dominant may be partly explained by its views on the likelihood of a broader economic revival across the globe, Marks & Clerk analysts say. Overall, respondents express the most confidence in the prospects of a U.S. recovery and least confidence in the United Kingdom, which lags behind Europe and Asia. Four out of five respondents express confidence in the prospects of a U.S. recovery. This compares with only 58% who are positive on the United Kingdom’s recovery, of which only 6% describe themselves as highly confident.
The 3% Sol uti on
The scientific community is getting a boost from Washington. Speaking at the annual meeting of The National Academy of Sciences, President Barack Obama promised to devote more than 3% of the country’s gross domestic product to scientific research and development. The goal is to invest in basic and applied research, create new incentives for private innovation, promote breakthroughs in energy and medicine, and improve education in math and science.
“This represents the largest commitment to scientific research and innovation in American history,” Mr. Obama said. Speaking specifically about medical science, Mr. Obama noted that history shows the greatest advances in medicine have come from scientific breakthroughs, including the discovery of antibiotics, improved public health practices, vaccines for smallpox and polio and many other infectious diseases, antiretroviral drugs, and drugs that can control certain types of blood cancers. “Because of recent progress –- not just in biology, genetics, and medicine, but also in physics, chemistry, computer science, and engineering –- we have the potential to make enormous progress against diseases in the coming decades,” Mr. Obama said. “And that’s why my administration is committed to increasing funding for the National Institutes of Health, including $6 billion to support cancer research -- part of a sustained, multi-year plan to double cancer research in our country.” Citing the need to engage the scientific community directly in the work of public policy, Mr. Obama announced appointments to the President’s Council of Advisors on Science and Technology, which is charged with advising the President about national strategies to nurture and sustain a culture of scientific innovation. According to Mr. Obama, in the area of biomedicine, the Council of Advisors on Science and Technology can harness the historic convergence between life sciences and physical sciences that is under way today by undertaking public projects to create data and capabilities that fuel laboratory discoveries, identifying and overcoming scientific and bureaucratic barriers, and translating scientific breakthroughs into diagnostics and therapeutics that serve patients. Biotechnology Industry Organization President and CEO Jim Greenwood thanked Mr. Obama for setting the ambitious goal of devoting more than 3% of the U.S. gross domestic product to scientific research and development. “Biotechnology is uniquely positioned to fulfill the President’s vision of a robust science sector,” Mr. Greenwood says. “The more than 1.3 million Americans in the biosciences are providing advanced therapies and cures for patients suffering from debilitating diseases, developing new energy sources, and enhancing sustainable agriculture. More, our industry can help drive economic growth in innovation industries. We look forward to working with the President, the Congress, and all other interested parties in continuing U.S. leadership in innovation.”
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