In the 20 years that Biotech international magazine has covered developments in biotechnology, the industry has been faced with a significant number of challenges as the economic climate has heated and cooled over time. According to financial experts, Ernst & Young, the current economic crisis is at least the sector’s fifth major funding drought. According to them, while it is far from over, it is not the longest period of hard times that the sector has seen. In their 2009 global biotechnology report ‘Beyond borders’ Ernst & Young looks at how the biotech industry is dealing with the current economic crisis, and places it in the context of past events. One of the major questions to arise from the report is whether the biotech industry will continue to survive on the current business model it employs - that of a marathon relay race - or is it perhaps time to change the game plan?
Innovation
Innovation is the key to biotech’s survival and helping biotech companies move to a sustainable business model. Over the next few years experts predict that existing paradigms will be shifted – out of a necessity to survive. Changes we may see in the future include:
The growth of generic drugs:
Generic equivalents of drugs will be improved, meaning that patients will have access to some of the best generics the industry has ever seen, and at the same time competition will be created within the industry.
Healthcare reform:
Fundamental healthcare reform in the US, to universal healthcare coverage is possible. For drug companies, expanded coverage will likely bring new pricing regimes where buyers have concentrated bargaining power.
Personalised medicine:
Among other effects, more targeted and efficient ways of developing drugs should lower R&D costs, reducing the length of biotech’s marathon relay race. The move to personalised medicine should bring more bargaining power to biotech companies.
Globalisation:
The global financial crisis has not fundamentally altered the outlook for the burgeoning biotech industries in many Asian economies, where cost-cutting drives by Western firms could lead to more business for local companies. Globalisation promises to bring large changes to the drug industry, with implications for the business models of Western firms.
Passing on the baton
The overall conclusion is that in this time of financial uncertainty, biotech’s existing business model has never been under more strain, with funding dramatically reduced and considerable innovation at risk. If we look to the future we are confronted with the question of whether the industry will find new ways to reach a ‘sustainable model’. If the marathon that is biotech is to continue, then runners need to be kept in the race. Companies will need ways to improve returns on investment and if they can find ways to shorten the race itself, the model could work with fewer runners.
The current csrisis is different from any other. Yet tremendous change also calls for harsh adaptation. According to Ernst and Young's 2009 Global biotechnology report, the major changes that are near the finishing line include a wave of high-quality generics, fundamental healthcare reform, personalised medicine and globalisation. These, it is hoped, could dramatically shift existing paradigms and generate opportunities to build sustainable business models – creative and innovative models that can carry biotech through the next few decades.
A focus on Europe
The global financial crisis hindered biotechnology companies’ access to capital so that by amount of capital raised, 2008 was the third-worst year in the past decade, ahead of only 2002 and 1999. The European industry’s fundraising fell from E5.4 billion (US$7.4 billion) in 2007 to less than E2 billion (US$2.9 billion) in 2008.
For many privately held and small-cap European biotechnology firms, access to capital has now become very difficult following the global financial crisis. Without funding options, many companies currently treading water will either have to sink or be 'rescued' by an acquirer.
“In 2008 and early 2009, a number of firms took measures to jettison noncore assets and operations as part of restructuring programs. Companies terminated or froze pipeline projects, reduced headcount and spun off divisions. Those that had the means to do so sometimes acquired cash-generating assets, while several firms were able to raise capital from nontraditional sources such as government grants and royalty financing transactions. It is likely that many firms will survive through measures such as these, but it is also clear that others will not. Indeed, a number of companies have already gone into administration or liquidation in 2008, and more are expected to follow suit in 2009.”
Examples of action at the European level
UK:
In December last year, executives from the UK’s biotechnology industry sent a dossier to the UK government proposing a national £1 billion (US$1.85 billion) biomedical public-private partnership. Half the money was proposed to come from public funds and half from private investors. The creation of two funds was envisaged, one to fund mergers and acquisitions between smaller biotech companies, and to drive consolidation and generate critical mass, and the other to provide capital
for 'high-potential' candidates.
France:
In February 2009, France Biotech called on the French government to enact a stimulus plan to rescue smaller companies following a collapse in biotech funding. The group called for a wide-ranging package of interventions, including boosting the budget of the state innovation agency OSEO; distributing R&D tax credits more equitably between small/ medium sized businesses and multinationals; refocusing the government’s Strategic Investment Fund (FSI) toward innovative companies; and enacting tax breaks for investment in small
innovation-led companies.
Norway:
In January 2009, one European country did take positive action: the Norwegian government included a E318 million (US$467 million) provision for life sciences research as part of a wider stimulus package. The government hopes that the intervention — the first such action in Europe this year — will help support companies through the funding crisis.
How Europe will shape up
The sustained growth seen in Europe's biotech industry in 2008, came from a handful of mature companies. These leading firms will remain largely unaffected by the crisis, however, many smaller European companies will struggle to survive. According to the 'Beyond borders' report, many small-cap and private companies will continue to take urgent measures to raise capital and reduce cash burn, but the number of companies in the industry is still expected to decrease in 2009 and 2010 through M&As, bankruptcies and liquidations. The proof will be in the pudding - as the coming years will put European industry to the test. Creativity and flexiblity will be the key to sucess alongside a rethink of the industry’s funding model.
According to the 2009 biotech report, the sustainability of European biotech companies could be improved by partnering with pharma companies earlier in the company's lifecycle and using financing structures that provide a steadier flow of capital. There is a lot at stake for a large number of players if the biotech industry cannot come out fighting from the current economic downturn. The best we can hope for is that the pressure to adapt will make the industry leaner and stronger, and ready to take on the next challenge.
The above information was based on the Ernst and Young 2009 biotechnology
report ‘Beyond borders’. For more detail on how the biotech industry is coping
with the current economic downturn and proposals for future survival strategies,
the full document can be downloaded at:
www.ey.com/Publication/vwLUAssets/Beyond_borders_2009/
$FILE/Beyond_borders_2009.pdf
