Bleak Times for the Global Biotech Industry
The US biotechnology industry reached aggregate profitability for the first time ever in 2008, representing the only bright spot in an otherwise dismal year for biotechnology financing and performance.
Jun 08, 2009
PTSM: Pharmaceutical Technology Sourcing and Management
The global financial crisis has hit the biotechnology industry hard, and the industry as a whole is seeking to recover from what all accounts was a very difficult year in 2008. Financing to the global and US biotechnology sectors was markedly down, valuations of small to mid-sized companies fell, cash reserves were depleted, and restructuring increased significantly. A recent analysis by Ernst & Young, released last month at the Biotechnology Industry Organization’s annual meeting and exhibition, provides the financial details of an industry under duress (1).
Biotech financing stalls
“The current funding crisis is different,” according to the Ernst & Young Report. “The bubble that burst was not in biotech, but fueled by real estate, financial instruments, and an environment of easy credit…While biotech’s past financing droughts were localized and industry-specific, the present downturn crosses national boundaries and impacts industries across the economy. It is, in a word, systemic.”
Overall, capital raised by biotechnology companies in North America and Europe fell 46% in 2008, from $30 billion in 2007 to $16 billion, according to the Ernst & Young analysis (1). The total amount raised by the US biotechnology industry declined 39% in 2008 to $13.0 billion, the lowest level since 2002 (1).
The decline was greatest in capital raised from initial public offerings (IPOs) in North America and Europe, which experienced a 95% decline from $2.3 billion in 2007 to only $117 million in 2008. The bulk of IPO financing came from Europe, where three companies went public and raised $111 million. In the US, there was only one IPO in 2008, which was valued at only $6 million, and there were no IPOs of Canadian companies. In 2007, $1.2 billion was raised through IPOs in the US, and $1.0 billion was raised in Europe.
Financing from secondary and other offerings, which has accounted for the majority of the financing for the biotechnology industry in recent years, also declined significantly in 2008. Follow-on and other offerings, which consist primarily of follow-on equity transactions, debt offerings, and private investments in public equity, accounted for 68% of the biotechnology industry’s financing in 2007. In 2008, money raised from such financings was only $9.9 billion, less than half of the $20.3 billion raised in 2007 (1).
Venture capital, although declining in 2008, fared better than other forms of financing. Venture capital financing in the US fell by 19% in 2008 compared with 2007, from nearly $5.5 billion in 2007 to $4.4 billion in 2008. In Europe, venture capital financing declined approximately 15% from $1.6 billion in 2007 to $1.37 billion in 2008. The decline in Canada, however, was dramatic, where venture capital financing declined 41% from $352 million in 2007 to $207 million in 2008.
Small- and mid-sized companies were particularly hard hit by the global financial crisis in 2008. The aggregate market capitalization of mid-cap biotechnology firms (i.e., defined as those companies with market valuations between $2 billion and $10 billion as of Jan. 1, 2008) fell 30% during 2008. The market capitalization of small-cap companies (i.e., defined as those companies with market valuations between $200 million and $2 billion as of Jan. 1, 2008) declined 33%. The market capitalization of micro-cap firms (i.e., defined as those companies with market valuations less than $200 million as of Jan. 1, 2008) declined 52%. By the end of 2008, 85 companies were trading at values below the cash on their balance sheets.
The difficult times for the biotechnology industry is further reflected in higher cash-burn rates. In the US, 44% of publicly traded US companies, or 162 companies, had less than one year of cash as of the end of 2008, up from 25%, or 98 companies, in 2007. Only 20%, or 76 companies, had more than five years of cash, compared with 31%, or 124 companies, in 2007 (1).
Ernst & Young, which has been producing its annual biotechnology report for 23 years, observes that typically there are approximately 25% of publicly traded biotechnology companies with less than one year’s worth of cash. The difference in the current situation compared with prior years is that firms typically would be able to raise capital to address dwindling cash reserves, a more unlikely scenario in the current financial environment. “While many firms are restructuring their operations to stay alive, we are likely to see a sizeable number of firms declare bankruptcy or cease operations,” says the report (1).
The increased level of restructuring in the biotechnology industry is another sobering statistic. The number of restructuring announcements by US publicly traded biotechnology companies held steady through the first nine months of 2008 at about 10 announcements per quarter. In the fourth quarter of 2008, the number jumped to 35 and was 31 in the first quarter of 2009 (1).
Despite the negative news on financing, revenues increased in 2008, but at a lower rate compared with previous years. The revenues of publicly traded global biotechnology companies increased 12% in 2008 from $80.3 billion in 2007 to $89.7 billion in 2008 (1). In the US, top-line growth was only in the single-digits and increased 8.4%, which is reflective of some notable mergers and acquisitions (M&A) and slowing revenues from some large biotechnology companies. Adjusting for the impact of three large deals, namely Takeda Pharmaceuticals’ (Osaka, Japan) acquisition of Millennium Pharmaceuticals (Cambridge, MA), Eli Lilly’s (Indianapolis, IN) purchase of ImClone Systems (New York), and Invitrogen’s (renamed Life Technologies, Carlsbad, CA) acquisition of Applied Biosystems (Foster City, CA), US revenues would have increased 12.7%. Revenues at Amgen (Thousand Oaks, CA), perennially one of the top biotechnology companies, increased only 1.6% in 2008 and 3.5% in 2007 compared with compound annual growth rate (CAGR) of 27% between 2002 and 2006 (1). The 8.4% revenue growth of the US biotechnology industry is well below historical levels. In 2007, revenues increased 11.3%, and the historical CAGR is about 15% (1). Revenue performance was better outside the US, which is the largest biotechnology market. In Europe, revenues of publicly traded biotechnology companies increased 26%, and in the Asia-Pacific region, revenues increased 25% (1).
Despite the downward decline in financing and revenues in 2008, the US biotechnology industry did reach an important milestone in 2008. In 2008, the US biotechnology industry reached aggregate profitability for the first time and posted a net profit of $400 million (1). However, as the Errnst & Young report points out, this accomplishment is likely short-lived, given Roche’s (Basel, Switzerland) acquisition of Genentech (South San Francisco, CA). The positive profit contribution from Genentech will be absorbed by a Big Pharma company and no longer will be tallied in the biotechnology industry's aggregate revenue figures (1). Buoyed by the US, the global biotechnology industry’s bottom line improved 53% from a net loss of $3.1 billion in 2007 to a net loss of $1.4 billion.
As would be expected from the financial downturn, the number of biotechnology companies declined in 2008. The number of public companies fell 5% from 815 in 2007 to 776 in 2008. The number of private and public companies declined 2% from 4799 in 2007 to 4717 in 2008.
Deal-making on the rise
M&A activity was robust in the US and Europe in 2008. There were 53 M&A transactions involving US biotechnology companies in 2008, representing a total value of $28.5 billion, a record high not counting megadeals in recent years (1). In Europe, M&A activity was $5.0 billion. The value of strategic alliances also increased. The potential value of strategic alliances involving US companies reached an all-time high of nearly $30 billion. The potential value of alliances involving European companies was $13 billion (1).
The report also points to increased M&A activity among biotechnology firms of similar size to improve cash positions, but does not necessarily see increased M&A activity by Big Pharma. “Large companies will not start buying assets en masse that do not fit their strategic objectives simply because they are relatively cheaper,” says the Ernst & Young report. Instead, the report points out that Big Pharma will remain interested in more mature biotech companies, pointing to recent acquisition targets such as Genentech, MedImmune (Gaithersburg, MD), Millennium Pharmaceuticals, and ImClone. Roche acquired Genentech in 2009, and AstraZeneca (London) acquired MedImmune in 2007. Takeda acquired Millennium in 2008, and Eli Lilly acquired ImClone in 2008.
The report points out that the traditional funding sources for the biotechnology industry as a whole, namely venture capital, public investment, and financing through Big Pharma, will likely be constrained in the near term. As a result, alternative financing models may emerge, which could include more creative partnering models that involve larger upfront financing or deals that provide venture capitalists partial exits in exchange for a sale at a prenegotiated price if a product succeeds (1).
The lack of funding in the biotechnology sector as a whole will likely lead to reduced spending for research and development, concludes the report. It points to several important underlying conditions that may help support further innovation. These include increased competition from a new wave of generic drugs, the move to pay-for-performance under healthcare reform, personalized medicine, and globalization (1).
Increased market penetration of generic drugs, which will have strong financial implications for the large pharmaceutical companies, may help create more favorable conditions for drug innovation. As more generic drugs enter the market, “companies will need truly innovative products to secure reimbursement from payers; it could remove some of the pricing demands that the industry has faced in recent years as payors’ budgetary constraints are loosened by lower-priced generics,” says the Ernst & Young report. “This, in turn, could allow for better margins for innovative products and help make the numbers work for sustainable business models” (1).
Healthcare reform is an important consideration for the drug industry. Expanded medical coverage is likely to create new pricing regimes where buyers have concentrated bargaining power. Also, as part of healthcare reform, the push for electronic medical records to increase efficiency may provide access to data that could be used to develop better treatments. Furthermore, the likely adoption of pay-for-performance metrics in healthcare reform provides a further impetus for innovation since it would create a system of measuring and rewarding companies based on the products they deliver, says the report (1).
Also, globalization, specifically the role of Asia in pharmaceutical development and commercialization, will affect the direction of product innovation. The global financial downturn may affect Big Pharma’s emerging market strategies as the rise of the middle class in developing nations is hindered by slowing global and domestic growth. On the plus side, the biotechnology sector as a whole may look to Asia for strategies that Asia has used or is using to develop its life-sciences industry. The emerging economies in Asia have had to build their biotechnology industries without the traditional tools available in Western markets such as strong university support, technology transfer laws that support commercialization, and venture capital.
1. “Beyond Borders: Global Biotechnology Report 2009,” Ernst & Young (New York, May 2009).