The global financial crisis presents biopharmaceutical companies with real opportunities to tackle some of the root causes of the industry’s underperformance over the last five years, according to a new report from the Boston Consulting Group.
The crisis will likely affect biopharma directly to a lesser extent than other industries, given that the fundamental drivers of demand for drugs – disease prevalence, unmet medical needs and an aging population – are relatively independent of the wider economy, it says, although the current tough economic conditions will of course have an impact on society’s ability and willingness to pay for drugs.
Moreover, compared with some other sectors, biopharma is relatively underleveraged and many of its companies have significant cash reserves. However, this does vary from company to company, and smaller specialty pharmaceutical firms, which conduct little in-house research and often have lower credit ratings that limit access to capital markets, are likely to face difficulties raising the funds they need to fuel the flow of new products on which they rely.
The credit crunch is also making things significantly harder for smaller biotechnology companies, says BCG; valuations of existing firms are depressed, and those without a listing are finding that their other funding sources and paths to commercialisation have been further restricted.
All this presents an opportunity for a new wave of mergers and acquisitions in the sector and, specifically, for strong biopharma companies to strengthen their pipelines through some relatively cost-effective licensing deals and acquisitions says BCG. In the last two years, there has been a continued fall in the volume of biopharma-biotech licensing deals (down 18% per year since the start of 2006), but the credit crunch makes the conditions for both licensing and acquisitions more favourable to well-resourced biopharma companies.
Therefore, the report advises, companies in the sector should actively search for attractive deal opportunities, whether licensing arrangements or acquisitions, and re-examine deals that might not have made sense three to nine months ago. There is also an increased opportunity for cash-rich biopharma firms to effectively fund the liquidity-starved biotech sector, for example, through internal venture capital-type funds.
BTG also suggests that biopharma firms should further use the disruption caused by the financial crisis to address its problems by:
– focusing closely on cash management, trade credit and working capital, and proactively assessing the risks faced by other companies in the supply chain;
– making significant improvements to operational efficiency including major structural moves – eg, consolidating manufacturing operations, accelerating changes to business models and decreasing fixed infrastructure – that have been put off for too long. However, it cautions that the wider economic climate may make such moves more costly, particularly in Europe, if governments begin to take policy steps to protect employment levels; and
– looking closely at the specific ways in which the financial crisis has affected industry dynamics and actions to capitalise on them. For example, in some countries the labour market for managers has changed dramatically; in the past, it has been very difficult to find experienced candidates for jobs but now, multiple candidates are available and willing to work at “more competitive” salary levels, it says.
