The biotechnology industry is suffering from a lack of funding and firms specialising in biologics are going to become more attractive to potential partners or buyers through the rest of this year.

This is the conclusion drawn by PricewaterhouseCoopers in a new report which claims that “dried-up credit, an anaemic IPO market and a reluctant investor pool have taken their toll on the biotech industry”. It adds that a 60% drop in the Nasdaq Biotech Index from March 2008 to the same month “this year has spurred a drop in the valuations of private biotech companies”.

These factors will “likely result in an uptick in biotech M&A and alliance activity in 2009”, says PwC, “with a number of specific therapeutic and diagnostics segments driving the activity”. Specifically, the biologics sector's appeal “lies not only in their pipeline-filling capability, but also in the perceived difficulty for generic drugmakers to replicate the original branded biologic”, the report adds.

There is still cash to be had, however, and the report notes that venture capitalists invested $2.7 billion into 245 human biotech deals in 2008. Therapeutic and diagnostic biologics helped drive VC investment, led by therapeutic monoclonal antibodies.

Investment in the latter rose 34% in 2008 to $640 million in 46 deals, while the immune response effectors subsector also saw a jump in investments, capturing $494 million in 31 deals in 2008, up 90% on the year before. Four of the top 10 human biotech deals in 2008 were companies focusing on monoclonal antibodies.

Tracy Lefteroff, a partner at the VC arm of PwC, said that in 2008 and early 2009, biotech stocks outperform the S&P 500 and the Nasdaq Composite “for the first time in years''. She added that this show of investor confidence “is a harbinger for an increase in M&A and alliance activity in the sector”.

Ms Lefteroff concluded by saying that biotech startups “will be attractive acquisition targets for larger pharmaceutical companies interested in diversifying their portfolios”. A “significant increase in this sort of activity” is expected before the end of 2009.