Biotech had a good year in 2010 but in terms of finance, there is a “growing funding chasm” between established players and start-ups.
That is one of the key points in Beyond borders, Ernst & Young’s 25th annual report on the sector. The analysis notes that the industry on a global level delivered solid top- and bottom-line growth in 2010, achieving aggregate profitability for the second year in a row.
Companies in the industry’s established biotech centres of Australia, Canada, Europe and the USA had a record-breaking aggregate net profit of $4.7 billion, a 30% increase from the previous year, E&Y notes. The latter three territories enjoyed “aggregate funding rebounds” – $25 billion was raised, equaling the average for the four years before the global financial crisis.
US biotech earnings climb
The USA is of course still way ahead, as revenues of publicly-traded biotechs grew to $61.6 billion, a 10% increase and equal to the growth rate of 2009 when adjusting for the acquisition of Genentech by Roche. Net income increased from about $3.7 billion in 2009 to $4.9 billion.
Total US industry funding reached $20.7 billion, up from $18 billion the previous year but driven largely by dept raised by profitable companies to refinance existing debt and for stock buybacks and acquisitions. Venture capital raised dipped slightly to $4.4 billion.
As for Europe, revenues of for its public biotechs grew 12% to 13 billion, a significant increase from the 2% growth seen in 2009. Net loss for biotechs in the region improved slightly to 459 million euros, while total funding was unchanged, with 2.9 billion euros raised. VC capital hit 1 billion euros, up from 790 million euros raised in the previous year.
‘Skewed funding’
However, the E&Y report notes that last year saw “more skewed funding” in the sector. 82.6% of cash went to just 20% of US companies, and the bottom 20% of companies raised 0.4% of funds, down from 0.6% in 2009. It adds that “alliances remain strong”, but upfront payments from partners to biotech companies dropped 37% to $3.1 billion. Merger and acquisitions involving European or US biotech firms dropped from 58 deals in 2009 to 45.
The report adds that companies must prove their products are truly differentiated and be “willing to engage in creative pricing”, including outcomes-based approaches. They have to be creative in “raising, optimising, preserving and investing scarce capital — from new ways of magnetising existing intellectual property to pursuing ‘virtual’ company models to reduce fixed infrastructure”.
Target drugs for smaller populations
E&Y also suggests that targeted products for smaller populations is a more efficient way for biotechs to ponder and they are advised to “collaborate for coordinated action”, eg to push for a system of adaptive clinical trials and conditional drug approvals and realigning payment mechanisms around health outcomes.
Glen Giovannetti, E&Y’s global biotechnology leader, noted that while the biotech industry’s aggregate performance improved in 2010, “there is now a widening gap between large, established companies and those at earlier stages for whom access to capital continues to be difficult”. As such, he claimed that firms will need to adapt creatively to this environment by doing more with the funding that is available “and by working from the earliest stages of development to demonstrate the potential value of their products to investors, payers and regulators”.
Mr Giovannetti noted that the pressure to rein in costs worldwide is “creating continued downward pressure and uncertainty on the prices that innovators can secure for their products”. This lack of sustainability in healthcare “is also leading to a sweeping movement under which companies will need to move from simply producing new medicines to demonstrating improvements in health outcomes”, he concluded.
