The financial health of the biotechnology  industry is crucial to the pharmaceutical industry and its suppliers. The  biotech industry is a source for building the drug pipelines of Big Pharma, and  also represents business opportunities for contract service providers. In 2007,  the global biotech industry, and the US biotech industry, which  represents a major portion of the global market, performed fairly well. Each  recorded higher revenues and moved closer to overall profitability. 

“In 2007, investors were drawn to the  tremendous value of biotech’s innovation, with impressive results, as venture  financing and deal making reached unprecedented heights,” says Glen Giovannetti,  

’s global biotechnology leader,” in a company release. “To  continue its multi-year track record of progress, the industry must meet the  current challenges of cooling public equity markets, greater regulatory  scrutiny, and higher product approval and reimbursement hurdles with fiscal  discipline and the creativity and innovation for which it is known.”


 Global revenues of  publicly traded biotechnology companies reached $84.8 billion in 2007, an 8%  increase compared with 2006, according to the Ernst & Young report. These  revenue gains were the smallest growth rate since 2002, when Ernst & Young  began tallying the numbers. Last year was also the first year since 2002 when  only single-digit growth was achieved by the global biotechnology industries. 

Ernst &Young  attributes the lower growth rates to the stronger deal environment for the  biotechnology industry. Two large companies, 

 (Geneva,  Switzerland), were both  bought by pharmaceutical majors, respectively, 

 (Darmstadt, Germany). Absent these  acquisitions, revenues of public biotech companies would have increased 17%  (1).

US-based companies  accounted for 76.9% of this total, or $65.2 billion. Although revenues of US  biotech companies increased 11% in 2007, this rate of growth was the lowest  annual increase during the past five years, which was also due to these large  acquisitions. Discounting the large acquisitions of 2007 (also including the  acquisition of California-based 

), revenues in the US  biotech industry would have increased 16% (1).   

European companies recorded  revenues of $12.9 billion, or 15.3% of the global total. Biotech companies from Asia-Pacific accounted for nearly $4 billion in revenues, or 4.7% of the global total, and Canadian  companies recorded revenues of $2.7 billion, or 3.1% of the global total (1).


 The global biotech  industry also moved closer to overall profitability, although the industry as a  whole still operates at a loss. In 2007, the industry posted a net loss of nearly $2.7 billion compared with a net loss of $7.4 billion in 2006, a  64% improvement (1). 

The US biotech  industry moved closer to profitability as well. In 2007, US public biotech  companies posted a net loss of $277 million, which was the closest the US market has  come to reach aggregate profitability. “The journey to aggregate profitability  in the US  was impeded by black-box safety warnings that impacted revenue growth,  acquisitions of profitable companies and large acquired IPR&D [in-process  research and development] charges,” notes the Ernst & Young report. “In the  absence of any of these developments, the US publicly trade biotechnology  industry would have been profitable in 2007.”


 Revenues of public biotech  companies, however, are only one measure of the industry’s health. Private  companies dominate the global and US biotechnology industry. On a global basis,  there were 4414 private and public biotech companie in 2007, and roughly 82% of these  were private companies, according to Ernst & Young estimates. A similar  domination is true for the US  market. In 2007, there were 1502 private and public biotech companies in the US, down  slightly from 1510 in 2006. Nearly three-fourths were privately held. The  number of public biotech firms increased slightly in 2007, from 366 in 2006 to  386 in 2007.


 Record financing was another positive development for public and private firms, In 2007, biotech companies in the US  and Europe raised more than $29.9 billion, a new  high after excluding the so-called outlier genomics bubble year of 2000. In  2007, US  biotech companies raised $21.4 billion, a 5% increase compared with 2006.  European companies raised $7.5 billion in 2007, a 27% gain compared with 2007.  The only negative development was a decline of financing for Canadian  companies. Canadian companies raised nearly $1.1 billion, which represented a 41% decline compared with 2006 (1).

A further analysis shows  different fundraising patterns in the US,  Europe, and Canada.  Venture capital reached an all-time high in the US, $5.5 billion, a 65%  increase compared with 2006. The $5.5 billion in venture capital raised by US  biotech firms was also the first time than more than $5 billion was raised and  was roughly $2 billion above the previous record of $3.6 billion. Venture  capital was similarly robust in Canada,  where biotech companies raised $352 million in 2007, up 72% year over year. In Europe, however, venture capital declined 16% to $1.6  billion in 2007 (1). 

The market for initial  public offerings (IPOs) rebounded in the US  and Europe in 2007, although it fell off significantly in Canada. In  2007, the US market had 22 IPOs that raised $1.2 billion, a 31% increase in the  amount raised compared with 2006, but only a 10% increase in the number of IPOs  (from 20 to 22). The average proceeds of these IPOs were $56 million, which was  similar to levels in 2006. Of the 22 IPOs in 2007, five companies traded more  than 20% above their debut price by year’s end, and eight companies traded more  than 20% below (1). 

European firms raised  roughly $1 billion through IPOs, an 11% gain, but Canadian firms raised only $5  million, a 48% decline compared with 2006 (1). Europe  had 21 biotech IPOs in 2007, down from 25 in 2006. The firms that had IPOs in  2007 showed greater product development than in 2006. One-third of products in  the pipeline of the European IPO class of 2007 were in preclinical development  compared with one-half of the products in the European IPO class of 2006 (1).  

Europe also sustained its financing strength in follow-on  and other offerings, reaching nearly $4.9 billion with these instruments in  2007, a 59% increase compared with 2006. US biotech companies raised $14.7  billion in follow-on and other offerings in 2007, down 9% over 2006, and the  lowest level since 2002. Similar to it weak showing in IPOs, Canadian companies  raised $703 million in secondary offerings in 2007, a 56% fall from 2006 (1).


 Deal-making such as alliances and mergers and acquisitions (M&A) was up substantially  in 2007, in large measure driven by Big Pharma’s continuing push to strengthen  its pipeline in biopharmaceuticals. In the US, the potential value of  strategic alliances exceeded $27 billion, eclipsing the record high achieved in  2006. There were eight transactions with announced potential values of at least  $1 billion in the US.  In the US,  the potential value of biotech–biotech strategic alliances increased by more  than 50% to reach $6.2 billion, a new record (1).

Perhaps one of the more  creative deals was 

 (Cambridge,   MA), a company specializing in  RNA interference (RNAi), according to the Ernst & Young report. Under the  deal, Alnylam granted Roche licenses to its patent portfolio so Roche can  perform its own RNAi experiments and product development. Alynlam also sold its Germany  subsidiary to Roche. In exchange, Roche paid Alynlam $331 million upfront and  could pay as much as $669 million in development and sales milestones (1).  

In Europe, strategic alliances reached a potential value of $13.5 billion, almost double the potential value of $7.0 billion of these deals in 2006 (1). Biotech–biotech deals increased 61%, and pharma–biotech deals grew by 86%. In 2007, there were six deals with values over EUR 500 million ($772 million) compared with only two in 2006 (1). 

M&A activity in 2007  provides a stronger indicator of the biotech industry’s lure. In the US, the value  of M&A deals grew by 87% to reach a new all-time high of more than $33  billion. In Europe, the value of M&A  increased from only $2.5 billion in 2006 to $20.2 billion (1). 

These substantial gains in  M&A was largely a product of several large deals in 2007, something which  was absent in 2006. AstraZeneca’s $15.6-billion acquisition of MedImmune and  Merck KGaA’s $14.5-billion stake in Serono were the two large deals of 2007.  The Ernst & Young report points out that there were no billion-euro  acquisitions (deals with a value of greater than $1.37 billion) in Europe in 2006, but there were three such deals in 2007.  These numbers exclude the $14.4-billion acquisition of Organon BioSciences by  Schering-Plough (Kenilworth,   NJ) (1).   


 Higher levels of R&D  spending were another positive development for the global biotech industry in  2007. On a global basis, R&D spending among public biotech companies  reached $31.8 billion in 2007, a 7% increase over 2006. US companies  accounted for the lion’s share of this total. US companies spent $25.8 billion  on R&D, European companies nearly $4.6 billion, Canadian companies $915  million, and Asia-Pacific biotech companies $488 million (1). 

References
 1. Ernst & Young,  “Beyond Borders: Global Biotechnology Report 2008,” (New York, 2008). 

Articles

Global Feature

The global and US biotechnology industries performed well in 2007 as each recorded higher revenues and inched toward aggregate profitability.

Global and US Biotech Markets Show Strength

 Supply-chain integrity is a critical issue for the  pharmaceutical industry. Recent proposals by the 

 to  impose stricter anticounterfeiting measures on drugs in Europe  include tightening requirements relating to manufacture and related  supply-chain issues for active pharmaceutical ingredients (APIs). 


In March 2008, the EC issued a public consultation on  proposed anticounterfeiting measures that would amend European Union  legislation. A major thrust of these reforms are to address problems in  packaging and related supply-chain activities. The proposal requires  tamper-evident packaging on all products, use of overt and covert  authentication features, strengthening product identification at an individual pack level through a harmonized coding standard, banning repackaging of drugs,  and strengthening measures for liabilities and criminal penalties.


In addition to addressing problems in packaging and the supply chain from the manufacturer to end-product users, the EC also noted the  problem of substandard APIs. “The risk of counterfeit or substandard active  substances entering the supply chain towards a medicinal product poses  additional risks to patients,” said the EC in its proposal. “For example, in  the early 2000s, numberous side effects were connected with antibiotics  containing gentamicin as an active substance. These effects were assumed to be  related to faulty manufacture and impurities of active substances.” 


The EC is considering several measures to tighten requirements  for good manufacturing practices (GMPs) for APIs and inspections. One measure  would require a mandatory notification procedure for manufacturers and  importers of APIs. The EC proposal points out that the legal framework for APIs  applies only to the manufacturing stage, and that the activities of  distributors, traders, agents, and brokers, are outside the scope of EU  legislation. The EC proposes to subject the manufacturing and import of APIs to  a mandatory notification procedure and to enter such information into an EU  database, such as by extending the EudraGMP database. The EudraGMP database contains information on all  manufacturing and importation authorizations issued by competent authorities in the European Economic Area. It also contains information on GMP certificates,  which member states issue following each GMP inspection.

European Federation of Pharmaceutical Industries and  Associations

 (EFPIA), the trade association representing European pharmaceutical  manufacturers, largely agreed to the measures, but also emphasized the  importance of using risk-based strategies. 

“Accountabilities and roles and responsibilities for any API  notification procedure needs to be clearly defined for the ‘different actors’  in the supply chain,” said EFPIA in a prepared response. “Minimum  qualifications and experience for ‘qualified auditors’ for APIs should be  specified.” 

EFPIA emphasizes that a risk-based approach is  necessary and that cooperation with and acceptance of inspection reports from  other agencies should be sought to avoid duplication of effort. 

Member states also weighed in on the debate. The 

Medicines and Healthcare products Regulatory Agency (MHRA)

, which regulates pharmaceutical  manufacturers in the United Kingdom, pointed out that mandatory notification should not only include APIs manufactured in a given country but should also include product that is “passing through” a member state such as from one country to  another. It also noted that the manufacture of atypical APIs, where the end user of the material may be unknown, needs to be addressed. 

Enhancing  audit and enforceability of GMPs


The EC is further recommending ways to improve audit and  enforceability of GMPs. Currently, the manufacturing and importation of APIs is regulated in the EU by requiring the  manufacturing authorization holder to use APIs manufactured under GMPs.  Although manufacturers are required to test APIs supplied to them, such testing  does not address residues or inappropriate use of toxic solvents and  impurities, says the EC in its public consultation. The EC is proposing to:

• Make regular audits of API suppliers on GMP compliance by  manufacturers and importers of medicinal products mandatory and require that  auditors by sufficiently qualified.

• Require, where scientifically feasible, control of APIs via  discriminating analytical techniques such as fingerprint technologies, and  require near infrared spectroscopy as a mandatory method for identification.  Such testing is meant to identify deviations of the manufacturing process and  manufacturing site for each batch. 

• Turn GMPs for APIs placed on the European Community market  into EC Directive in order to enhance enforceability.

Although agreeing that minimum qualifications and experience should be specified for qualified auditors, EFPIA is uncertain whether more GMP  audits would enhance product safety. “The key question is whether the  manufacturing process has followed the registered manufacturing practice–a  question of regulatory compliance more than a GMP question,” said EFPIA in a  prepared response. 

EFPIA also agreed that an API should undergo testing for unknown  impurities using fingerprint technologies, but expressed concern over mandating  specific types of testing. “The cost implications of introducing near infrared  spectroscopy tests for all APIs needs further review,” said EFPIA. “…Imposing  this type of testing could risk promoting reliance on receipt testing which is no substitute for good supplier management based on a risk assessment,  technical agreements, change control, knowledge of products, process  performance, etc.” 

MHRA also pointed out that although NIR is effective for  fingerprinting finished dosage forms, its potential in testing APIs has yet  to be established. 

As to the level of API inspections, the EFPIA concurred that  there is variability as to which EC member states do routine API inspections  and those who do not, again citing a need for increased cooperation with and  acceptance of inspection reports from other agencies.  


 The EC is also proposing to strengthen the inspection process.  Currently, inspections by competent authorities in the European Community are  restricted to cases of suspected noncompliance. “This limitation raises  particular concerns with regard to the manufacturing of active substances in  third countries where GMP are not equivalent to those laid down in the  Community or where inspections and control mechanisms are insufficient,” said  the EC in its consultation. 

To address these problems, the EC is recommending that competent  authorities be able to carry out announced or unannounced inspections of API  manufacturers to verify GMP compliance for APIs that are sold in the European  Community. This requirement would further apply to manufacturers in countries  outside of the European Community that export APIs into the European Community  by requiring member states, the EC, or the European Medicines Agency to inspect  those facilities if noncompliance to GMPs are suspected or the country in which  the APIs are exported from do not have equivalent GMPs.  

The EC is evaluating public input on its proposals and plans to offer a  summary of the outcome of the public consultation.

APIs

As part of a larger effort to address drug counterfeiting, the European Commission is seeking to tighten manufacturing and related supply-chain requirements for active pharmaceutical ingredients.

European Commission Seeks to Tighten the API Supply Chain

Contract research organizations (CROs) offering clinical research services had a terrific year in 2007. Revenues of the publicly-traded clinical CROs jumped 20% during the year, well ahead of the respectable 15% growth they achieved in 2006. What is really eye-popping is the phenomenal performance of some of the largest CROs. Kendle International (Cincinnati), which had 2006 revenues of $283 million, grew 40% in 2007 to $398 million. ICON (Dublin) grew almost as fast when it jumped to $631 million in 2007 from $455 million in 2006.  Parexel (Boston) grew its revenues 25% to $741 million. 

The large clinical CROs benefited from several favorable trends, including growth in the drug development pipeline and efforts by the major pharmaceutical companies to reduce the number of vendors they work with. At the same time, however, big CROs are reaping the benefits of important investments they've made in recent years in anticipation of changes in the pharmaceutical industry. These changes include:  

Greater capabilities in electronic data capture and management are helping to feed back trial results faster 

Expanding networks of offices and clinical site relationships in Asia, Eastern Europe, and Latin America are opening doors to more patients and establishing new markets 

Increased clinical pharmacology capacity is serving the expanding Phase I pipeline and the emphasis on proof of concept

Scalable organizational models are enabling companies to improve service quality as they grow.

While it was a blow-out year for clinical and preclinical CROs (toxicology services grew 21%), the year was dismal for contract manufacturing organizations (CMOs). For the second straight year, the dose manufacturing and small-molecule active pharmaceutical ingredient (API) segments experienced overall growth of less than 5%. CMOs were hurt by a number of factors, including the shrinking number of new drug application and biologic license application approvals coming out of the US Food and Drug Administration, declining sales for key client products, clients repatriating products as utilization of their in-house manufacturing assets falls, and overcapacity that generates increased price competition. The two bright spots in the manufacturing universe were biomanufacturing (cell culture and fermentation) and manufacturing of clinical-trial supplies. 

A look at the new pharamceutical environment 

The immediate prospects for CMOs could improve if their clients are able to get more products approved in the next year or so. However, CMOs may be in trouble over the long term because most of them continue to operate with business models and strategies based on old perceptions that don't reflect the current realities of the pharmaceutical industry. This is especially true in several key areas outlined below. 

Most CMO strategies were established in the early part of this decade, and included substantial capacity expansions and aggressive acquisition campaigns. This was a time when new product approvals were expected to be plentiful, and drug prices and unit volumes were rising. The assumption was that growth would continue, meaning there would always be a need for capacity and CMOs could expect annual price increases. It was also a time when industry assumed "price doesn't matter" (i.e., drug sales were so high and profitable that pharmaceutical companies were more concerned about assuring a dependable supply than they were about the cost of goods). 

The pharmaceutical industry's growth prospects have changed considerably in the past few years. FDA approvals have continued a 10-year decline, governments and private insurers have fought back against drug-price increases, and safety concerns and utilization guidelines are limiting the growth of blockbuster drugs, especially biologics. 

Five years ago, CMOs geared their strategies to the North American and European markets, where prices were highest and usage was growing most rapidly. CMOs geared their facility design and quality assurance practices to meet FDA and European Medicines Agency (EMEA) standards of compliance.  

Today, the market focus of the major pharmaceutical companies is turning to the emerging economies, the so-called "BRIC" countries (Brazil, Russia, India, and China). Serving these countries is an entirely different challenge: they either have their own stiff regulatory requirements, as in the case of Brazil, or lower compliance standards that make the costs of maintaining FDA and EMEA compliance uneconomic. In many cases, laws and/or regulatory practices require local manufacture and discourage imports. Most Western CMOs lack facilities in the emerging economies to take advantage of these expanding opportunities. 

While major pharmaceutical companies have made major announcements about their intentions to outsource more, they have continued to invest heavily in new facilities and equipment, especially for development and manufacture of large-molecule products. Capital investment by the 15 largest pharmaceutical companies grew 14% in 2007 to almost $22 billion. With the major pharmaceutical companies on a spree to acquire or in-license large-molecule candidates, the high-value opportunities that CMOs were counting on are likely to be staying in-house. 

CMOs are also being hurt by sourcing strategies that are increasingly global. Not only has global sourcing introduced new low-cost competitors in countries such as India and China, it has also greatly extended the pharmaceutical supply chain. Dose CMOs more frequently are dealing with the inability of clients to ship adequate supplies of APIs, resulting in schedule disruptions and revenue shortfalls. 

Like the French military planners that built the Maginot Line after World War I, CMO executives find that the scenario they planned for is no longer relevant. In next month's column, I'll cover what the new CMO business model might look like going forward. 

 is president of PharmSource Information Services, Inc., and publisher of 

Outsourcing Outlook

CMO business models are out of touch with current pharma industry realities. It's time for new thinking.

PTSM: Pharmaceutical Technology Sourcing and Management-06-04-2008

Global and US Biotech Markets Show Strength

European Commission Seeks to Tighten the API Supply Chain

CMOs are Planning for the Last War