The UK biotechnology industry still has Europe’s largest and most developed pre-clinical and clinical product pipeline, but it faces “unprecedented” uncertainty as when public and private investment will return, says a new report.

The key to driving investor confidence in the UK sector lies in achieving and advertising product success, concludes professional services company Ernst & Young’s latest annual report on the biotech sector. The challenge is for companies with “great science” to be as creative as possible in sustaining product development, by leveraging all possible sources of traditional and non-traditional funds – including government contributions, charities and disease foundations – and partnering/merger opportunities, says Ian Oliver of E&Y’s biotechnology team in the UK.

Despite worldwide economic turmoil, the global biotechnology industry delivered a solid financial performance in 2008, but the prolonged and systemic funding drought is placing the business model that fueled its growth for the past 33 years under unprecedented strain, says the report.

In 2008, revenues of publicly-traded biotech firms grew 12% to $89.7 billion, with the global industry’s net loss improving 53% to $1.4 billion from $3 billion in 2007. Revenues of European public biotechs increased 17% to 11.2 billion euros and, for the first time, the US industry posted an aggregate net profit, of $0.4 billion.

However, the amount of capital raised declined sharply, with companies in the Americas and Europe raising $16 billion, down 46% on 2007. The capital raised by European firms fell from 5.5 billion in 2007 to less than 2 billion euros, and funding from initial public offerings (IPO) plummeted 95% to $116 million.

On the other hand, biotech venture financing remained relatively strong and industry deal-making remained brisk, with the total value of mergers and acquisitions (M&A) involving US biotechs reaching more than $28.5 billion, a record high when adjusting for megadeals that took place in prior years. In Europe, M&A transactions totaled $5 billion.

E&Y’s analysts believe that four “sweeping, paradigm-shifting trends” present potential new pathways to sustainability for the industry. These are:
- a wave of generic drugs based on today’s top blockbusters, which should loosen governments’ and insurers’ budgetary constraints and mitigate pricing pressures on innovative drugs, permitting better margins;
- the expansion of personalized medicine, which will increase the relative value of research and early development, giving biotech firms more bargaining power and better valuations. Also, more efficient drug development will lower R&D costs, making it easier for them to achieve self-sufficiency;
- fundamental healthcare reform in the US, with the potential shift toward universal healthcare coverage, will likely incorporate pay-for-performance in reimbursement decisions while incentives for true innovation should help biotech firms sustain returns; and
- the industry’s continued globalization, with growing strengths in emerging markets, will facilitate creative solutions, while Asian business models could provide solutions for struggling western firms.

These trends should lead to new, more sustainable ways of funding drug development but will also bring new market pressures, from a higher bar on reimbursement to new sources of competition, says E&Y.

- Meantime, the UK government is due today to publish its response to the concerns set out in the Review and Refresh of Bioscience (BIGTR2) 2015 report published earlier this year by the Bioscience Innovation and Growth team headed by Sir David Cooksey. Among other things, BIGTR2 called for new tax incentives for the pharmaceutical industry to invest in bioscience and take steps to improve the uptake of innovative medicines, including an independent assessment of the long-term impact of the National Institute for Health and Clinical Excellence (NICE).

Also today, Lord Drayson, head of the new Office for Life Sciences (OFL), will set out the next steps following the government’s response, including the work of the OFL, which has been tasked to “make a real difference to the operating environment for life sciences companies” by the end of July.