Biotech business model unsustainable in current economic crisis
19 May 2009
The global biotechnology industry delivered a solid financial
performance in 2008 despite worldwide economic turmoil, according to
Ernst & Young's 23rd annual report on the biotech industry, Beyond
borders: Global biotechnology report 2009.
However, the prolonged and systemic funding drought is placing the
business model that fuelled biotech growth for the past 33 years under
The report says that four sweeping, 'paradigm-shifting' trends should
lead to new, more sustainable ways of funding drug development: a wave
of generic drugs based on today's top blockbusters, the expansion of
personalized medicine, fundamental healthcare reform in the United
States, and the continued globalization of the industry.
"This is not business as usual for the biotech industry," said Glen
Giovannetti, Ernst & Young's Global Biotechnology Leader. "Unlike prior
funding droughts, this crisis is systemic, deep and protracted. To
thrive in this environment, firms will need to bring the creativity that
has long been the industry's hallmark to establishing more durable
models for funding innovation."
Key financial results
- revenues of publicly traded biotech companies grew 12% to
US$89.7 billion in 2008. The global industry's net loss improved
53%, from US$3 billion in 2007 to US$1.4 billion in 2008. The US
industry reached aggregate profitability for the first time;
- capital raised declined sharply in 2008. Companies in the
Americas and Europe raised US$16 billion in 2008, a 46% decline from
2007. IPO funding fell 95% to US$116 million;
- biotech venture financing remained relatively strong,
falling only 19% from 2007's all-time record to about US$6 billion
in 2008; and
- industry deal making remained brisk. The total value of M&As
involving US biotechs reached more than US$28.5 billion — a record
high when adjusting for 'megadeals' that took place in prior years.
In Europe, M&A transactions totalled US$5 billion.
"Like firms in most markets, European biotechs were clearly impacted
by the financial crisis," said Jurg Zurcher, Ernst & Young's
Biotechnology Leader for Europe, Middle East, India and Africa. "Many
are scrambling to raise capital, restructure operations and use deals
creatively to survive. Consolidation seems inevitable."
New pathways to sustainability
The challenge for the industry, according to Beyond borders,
is turning an existential threat into a Darwinian opportunity. The
potential solution lies in four paradigm-shifting trends that promise to
accelerate the transition to sustainable business models:
- Generics: generics based on today's top blockbusters should
loosen governments' and insurers' budgetary constraints and mitigate
pricing pressures on innovative drugs, permitting better margins;
- US healthcare reform: the potential shift toward universal
healthcare coverage in the world's largest drug market will likely
incorporate pay-for-performance in reimbursement decisions.
Incentives for true innovation should help biotechs sustain returns;
- Personalized medicine: personalized medicine will increase the
relative value of research and early development — biotech's
traditional strengths — giving biotechs more bargaining power and
better valuations. Meanwhile, more efficient drug development will
lower R&D costs, making it easier for firms to make the journey to
- globalization: growing strengths in emerging markets will
facilitate creative solutions — from new 'win-win' ways of
allocating increasingly valuable ex-US rights to creative alliances
and new sources of capital. Meanwhile, Asian business models could
provide solutions for struggling Western firms.
"But these trends will also bring new market pressures — from a
higher bar on reimbursement to new sources of competition. To seize the
opportunities in these four drivers, companies need to be proactive,"
says Giovannetti. "Firms should understand how these trends impact them,
prepare for them, and where possible, help shape them."
Key regional findings
- revenues of US public biotechs grew by 8.4% in 2008, down from
11.3% in 2007;
- the US publicly traded industry posted an aggregate net profit
for the first time — US$0.4 billion; and
- despite the crisis, venture capital raised in the US
reached US$4.4 billion in 2008 — the second-highest total in
history, behind only the record US$5.5 billion raised in 2007.
- revenues of European public biotechs increased 17% to
€11.2 billion; and
- capital raised by European biotechs fell from
€5.5 billion in 2007 to less than
€2 billion in 2008.
- Asia-Pacific biotech revenues grew by 25% in 2008, led by strong
growth in Australia; and
- in Australia, public-equity funding fell to levels not seen
2002. There were a handful of IPOs in Japan and China and strong
private-equity funding growth in India.
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