Global and US Biotech Markets Show Strength

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, Ernst & Young’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 and US biotech revenues
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, MedImmune (Gaithersburg, MD) and Serono (Geneva, Switzerland), were both bought by pharmaceutical majors, respectively, AstraZeneca (London) and Merck KGaA (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 Molecular Devices by Canada’s MDS), 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).

Moving toward profitability
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.”

Private firms dominate
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.

Financing trends
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
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 Roche’s (Basel, Switzerland) alliance with Alnylam Pharmaceuticals (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).  

R&D expenditures
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).