
Last year was certainly a year of change for the US biotechnology industry. Although financing from venture capital declined slightly in 2009, hurting smaller and emerging companies, financing from initial public offerings (IPOs) and partnering deals were up compared with 2008 levels. In fact, private and public financing reached a record high in 2009. Analysts say some of these positive trends will continue in 2010, but caution that investors will remain selective and risk-adverse in their financing strategies.




The performance of the US biotechnology industry in 2009 mirrored in large measure the trends seen in broader capital markets, according to a recent analysis by Burrill & Company, a San Francisco-based private merchant banking and venture-capital firm.  The industry’s stock values declined dramatically in the first quarter of 2009, and then improved beginning in the second quarter. Although not reaching the same percentage gains as the broader capital markets, the biotechnology industry did show overall positive stock valuations for 2009.

As of the end of 2009, The Dow Jones Industrial was up 19%. The Nasdaq increased 45%, and the S&P 500 index was up 24%, the strongest showing by the S&P since 2003, according to Burrill & Company. The Burrill Biotech Select Index, a price-weighted index tracking 20 blue-chip biotechnology companies, was up 4% in value in 2009.

"We have to thank a strong closing month for the Burrill Biotech Select Index, posting a strong 5% gain, as the reason for it finishing in the black at year end," said G. Steven Burrill, CEO of Burrill & Company, in a Jan. 4, 2010, press release.  "The index's fourth quarter performance, by contrast, was lackluster as a consequence of residual investor nervousness about the relative strength of the economic recovery, fears over healthcare reform, and continuing concerns about a mounting backlog of drug approvals at the Food and Drug Administration,” he said. Also weighing down on the industry was the performance of some of the biotechnology majors in 2009, noted Burrill. The share values of Amgen (Thousand Oaks, CA) and Genzyme (Cambridge, MA) declined 1.7% and 26%, respectively for the year. According to Burrill, Amgen's shares declined in the fourth quarter of 2009 following FDA’s request for more information on the company’s potential osteoporosis treatment Prolia. Genzyme’s shares were affected as manufacturing problems slowed sales of Cerezyme, a drug to treat Gaucher disease.

Overall financing for the US biotechnology industry increased 85% in 2009 compared with 2008 levels. In 2009, public and private financing for the US biotechnology industry totaled $55.8 billion, a record high, and well above the $30.1 billion in 2008, according to Burrill & Company. "Partnering was on a tear through much of the year with the industry raising almost $37 billion in total deal value, a record for the industry. With $55 billion raised, this will go down in history as our industry's largest financing year, albeit during one of the most difficult financing environments ever," explained Burrill. "The message—when companies have to raise capital, companies do, even when the cost of capital is unfavorable. It also reflects the urgency that Big Pharma places on accessing biotech innovation as its patent cliff gets ever closer. The number of deals inked in the year is unprecedented. What did come as a surprise to many was that they did not acquire biotech companies at the rate that was predicted,” he said in the release.

Financing raised from partnering deals increased 84% in 2009, from $20.0 billion in 2008 to $36.9 billion in 2009, according to Burrill and Company. Capital raised from IPOs also increased in 2009, from a near nonexistent level of only $6 million in 2008 to $1.1 billion in 2009.  The main contributor was Talecris Biotherapeutics (Research Triangle Park, NC), which raised $850 million. Cumberland Pharmaceuticals (Nashville, TN) also raised $85 million in its IPO. 

Money raised from follow-on offerings also increased significantly in 2009, up from $1.7 billion in 2008 to $5.6 billion in 2009. Funding raised through debt also increased from $2.8 billion in 2008 to $6.3 billion in 2009. Private investment in public equity modestly increased, from nearly $1.1 billion in 2008 to $1.6 billion in 2009. Meanwhile, private-venture capital declined slightly in 2009, by 2.6%, from nearly $4.2 billion in 2008 to approximately $4.1 billion in 2009.




The outlook for 2010 is measured with a degree of uncertainty as it will be reflected by the extent of the economic recovery and the performance of the broader capital markets. “The worldwide financing environment in 2010 will be more robust but choppy and selective at times,” according to the Burrill & Company release. “This environment favors risk-mitigated companies rather than earlier-stage development companies,” says the release.

Burrill & Company also expects IPOs to continue in 2010, with a least five companies holding IPOs in the first half of 2010 and up to 15 biotechnology companies completing IPOs in the US by the end of 2010. However, the firm cautions that capital markets will continue to be selective, thereby potentially affecting valuations.

The firm also expects that consolidation among small and emerging biotechnology companies will continue in 2010 as these firms will continue to find a more challenging financing environment. Burrill says that consolidation will continue in 2010 but at a slower pace than in 2009.

Burrill projects that more than $15 billion will be raised by US biotechnology companies, and that financing from partnering and mergers and acquisitions will be $35 billion. The firm also projects an increase in the market capitalization of US biotechnology companies from a current level of $350 billion to $400 billion.

“Overall, 2010 will be a productive year for the industry as companies learn to adapt to their new environment,” according to the Burrill & Company release. “The past 12 months has exacted a significant toll on the biotech industry (through bankruptcies, downsizing, and cost-cutting), and we have a very different industry today than previously existed. The companies that have survived the difficult financial conditions will have to adapt to this new environment.”

Articles

Biotech

Buoyed by an uptick in financing from partnering deals, the US biotechnology industry reached a record high in private and public financing in 2009, but caution remains for 2010.

Financing Outlook for the US Biotechnology Industry

We have reached the edge of the great pharmaceutical patent cliff—those years when a large number of blockbuster drugs lose patent protection and are open to generic competition. Right on schedule, the major biotechnology and pharmaceutical companies are making the big strategic and financial moves that the industry has been expecting: large mergers, massive staff reductions (especially in sales and marketing), and an intensified focus on in-licensing and acquisition of promising drug candidates from smaller companies. 

While preparing for the looming loss of blockbuster products, the big companies also have had to contend with the implications of the global financial crisis. The near meltdown of the financial system has heightened respect for risk and created a sense that a company can never have too much cash. Cash flow has not been a problem for major biotechnology and pharmaceutical companies for decades, giving them ready access to capital markets. In fact, five of the largest companies have raised more than $80 billion this year to fund acquisitions and other corporate activities. 

Still, the major firms are focusing on cash-flow management as never before. Working capital (i.e., cash used to finance current assets such as inventory and accounts receivable) has been a principal target in these efforts and is negatively affecting contract manufacturing organizations (CMOs). 

A primary concern for CMOs has been  inventory levels. Major biotechnology and pharmaceutical companies are trying to turn their inventories more quickly (i.e., reduce the amount of inventory they carry relative to sales volume). Back when good cash management wasn't such a big concern, the major companies would carry inventory equivalent to as much as nine months of product sales. Things have improved somewhat since then, but major firms are still carrying more than four months' worth of sales in inventories, despite working all year to reduce that volume. Consumer-products powerhouse Procter & Gamble (P&G) , by contrast, carries just two months' worth of inventory in its warehouses. 

There was a time when the major biotechnology and pharmaceutical companies could unload inventories by selling products at a significant discount to drug wholesalers such as Cardinal Health and AmerisourceBergen. However, after some of them got into legal troubles for this practice, the major companies switched to paying the wholesalers a fee for their distribution services. The change forced them to carry the entire inventory on their own balance sheets. 

With wholesalers out of the picture, major biotechnology and pharmaceutical firms are now cutting back on purchases from suppliers and curtailing their own manufacturing activities to reduce inventory. This practice is wreaking havoc on CMOs, which are experiencing unprecedented delays and canceled orders, as well as smaller orders. 

The problem has been noted by several CMOs during the past year, but the issue came into dramatic relief at the end of October when Lonza (Basel, Switzerland) warned of a substantial shortfall in expected revenues and earnings. The warning was brought on by a cascade of order cancellations and delays that started in late September and continued through October in both its biopharmaceutical and small-molecule active pharmaceutical ingredient businesses. Lonza CEO Stefan Borgas blamed the cancellations largely on working capital-management efforts by Lonza customers. The reduced volumes forced Lonza to reduce its projected year-end profits (as measured by earnings before interest and taxes, or EBIT) by more than CHF 200 million ($202 million). 

Lonza said in an Oct. 29 company press release that, "This environment of high volatility is expected to continue for the next few years." As a result, it launched an aggressive program to counter the negative developments, including reductions in operating costs that it said would save CHF 60–80 million ($61–81 million) over two years and cutbacks in capital expenditures of more than CHF 100 million ($101 million) annually. 

CMOs are likely to face other challenges from these efforts to manage working capital, including having to wait longer to get their invoices paid. However, the impact of the inventory reduction drive is potentially catastrophic. As Figure 1 indicates, the major biotechnology and pharmaceutical companies would have to reduce their inventories by another 50% in order to match the efficiency of P&G.  

Figure 1: A comparison of Big Pharma inventory turns with those of Procter & Gamble (P&G). An inventory turn is the ratio of of cost of goods sold (CGS) to inventory. (FIGURE 1 IS COURTESY OF AUTHOR; DATA FROM COMPANY INFORMATION.) 

It is unlikely that things will get quite that bad for CMOs. At most major firms, more product is produced in-house than at CMOs, so in-house manufacturing operations should absorb more of the impact, along with raw-materials suppliers. However, as the Lonza announcement demonstrates, the transition period is likely to be painful for CMOs. 

In fact, working capital is likely to create opportunities for some of the most capable and savvy CMOs. Inventory-control efforts include initiatives to producing in response to demand rather than producing for inventory. CMOs that demonstrate the flexibility to respond to short-term ebbs and flows in product demand, rather than insisting on the traditional 90-day lock-in of orders, will prove themselves capable partners for the major industry firms. These efforts by CMOs can lead to even more business opportunities with clients. Should the biotechnology and pharmaceutical companies decide to close facilities as part of their ongoing restructuring efforts, those CMOs that have been able to deliver product on short notice will benefit. 

Some of the best opportunities in business have come about as a result of extreme adversity. The inventory challenge is likely to provide such an opportunity for CMOs.  

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

Outsourcing

Big Pharma's efforts to reduce working capital will hurt CMOs for years to come.

Squeezed for Cash

In starting a new year and decade, a critical question affecting the pharmaceutical industry is the extent and sustainability of an economic recovery. Macroeconomic conditions, combined with industry-specific challenges, are important determinants for the industry and its suppliers. 




Recent macroeconomic results show some improvement in the performance of the US economy. Real gross domestic product (GDP), the output of goods and services produced by labor and property located in the United States, increased at an annual rate of 2.2% in the third quarter of 2009, according to an estimate issued Dec. 22, 2009, by the Bureau of Economic Analysis (BEA) of the US Department of Commerce. Third-quarter performance improved compared with the second quarter of 2009, when real GDP declined by 0.7%. 

According to BEA, the increase in real GDP in the third quarter primarily reflected positive contributions from personal-consumption expenditures, exports, private-inventory investment, federal-government spending, and residential-fixed investment. Gains in these areas were partly offset by a negative contribution from nonresidential-fixed investment. Imports, which decrease GDP, also increased.

Corporate profits also showed positive gains. Profits from current production (i.e., corporate profits with inventory valuation and capital consumption adjustments) increased $132.4 billion in the third quarter of 2009, compared with an increase of $43.8 billion in the second quarter of 2009, according to BEA. Current-production cash flow (net cash flow with inventory valuation adjustment), meaning the internal funds available to corporations for investment, increased $28.4 billion in the third quarter of 2009, in contrast to a decrease of $30.5 billion in the second quarter.




Some positive signs in the overall economy are matched by some favorable, although historically lower, expectations for the pharmaceutical industry. The value of the global pharmaceutical market is expected to increase 4–6% on a constant-dollar basis in 2010 and reach $825 billion, according to estimates issued in October 2009 by IMS, the research firm’s latest estimates. IMS projects comparable growth in the near term, with the global pharmaceutical market increasing at a compound annual growth rate of 4–7% through 2013, when the market is expected to reach in excess of $975 billion.

Better growth prospects in the US, the single largest national market, are helping to lift demand. “Overall, market growth is expected to remain at historically low levels, but stronger-than expected demand in the US, is lifting our short- and longer-term forecasts,” said Murray Aitken, senior vice-president of Healthcare Insight at IMS, in an Oct. 7, 2009, press release. “The economic climate will continue to be a dampening influence in more mature markets, particularly in those countries with rising budget deficits and publicly funded healthcare systems.” 

The US pharmaceutical market was expected to increase 4.5–5.5% in 2009 and 3.5% in 2010, according to October 2009 estimates by IMS. Although prospects in the US market are better than earlier projected, the global market will continue to be pressured by the patent expiry of innovator drugs and fewer new product introductions over the several years. This imbalance is the primary factor limiting global pharmaceutical market growth to the mid-single digits through 2013, according to IMS. Products now generating $137 billion in value are expected to lose patent protection through 2013.

Despite economic conditions affecting some emerging markets, projected growth in the BRIC (Brazil, Russia, India, and China) countries, Turkey, South Korea, and Mexico is still strong as these markets are expected in aggregate to increase by 12–14% in 2010, and 13–16% through 2013, according to IMS. China’s pharmaceutical market, alone, is expected to increase in excess of 20% per year and contribute 21% of overall global pharmaceutical growth in 2013. 




Near-term prospects for pharmaceutical outsourcing are fairly strong, according to a recent analysis by BCC Research, a Wellesley, Massachusetts-based market research firm. The global market for contract pharmaceutical manufacturing, research, and packaging was estimated at $177 billion in 2009, and is expected to increase to $299 billion by 2014, representing a five-year compound annual growth rate (CAGR) of 11.1%, according to BCC Research. 

The largest segment of the market, contract manufacturing for over-the-counter (OTC) drugs and nutraceuticals, is projected to increase at a CAGR of 11.4% through 2014. This market segment was valued at $103.1 billion in 2009 and is expected to reach $177 billion by 2014. 

Contract manufacture of bulk and dosage-form drugs is the second largest segment. BCC estimates the market at nearly $44 billion in 2009 with projected CAGR of 10.8% to $73.1 billion in 2014. 

The market for contract research, the third largest sector, was valued at $24.4 billion in 2009. This segment is projected to increase at a CAGR of 10.7% through 2014, when the market is expected to be $40.6 billion. 

Contract packaging is the smallest sector, both in absolute size and in projected growth. The market for contract packaging was valued at $5.5 billion in 2009, according to BCC. It is forecast to increase at a CAGR of 8% and total $8.1 billion in 2014. 




Excipients represent another element in pharmaceutical ingredient supply, and the outlook for this market is also fairly good. BCC estimates that the global market for pharmaceutical excipients at $5 billion in 2009. The firm projects a CAGR of 6% through 2014, when the market is expected to be $6.6 billion.

Organic excipients represent the largest part of the market, worth an estimated $4 billion in 2009. This sector is expected to increase at a CAGR of 6.4% to $5.5 billion in 2014, according to BCC. Inorganic excipients account for a much smaller piece of the global excipients market both in terms of value and growth. The market for inorganic excipients was valued at $861 million in 2009 and is expected to increase at a CAGR of 3.8% and reach more than $1 billion in 2014.

Global Feature

Despite a challenging current economic environment, the five-year outlook for pharmaceutical outsourcing and ingredients supply is fairly healthy.

PTSM: Pharmaceutical Technology Sourcing and Management-01-06-2010

Financing Outlook for the US Biotechnology Industry

Squeezed for Cash

A Pharmaceutical Ingredients Outlook