The global biotechnology industry achieved record levels in financing and deal making in 2007, as investors and strategic partners showed strong confidence in the sector amid tightening global financial conditions that will continue to test the industry in 2008.
Record venture capital and heated deal environment propel global biotechnology industry fo...
These and other findings are highlighted in Beyond Borders: Global Biotechnology Report 2008, Ernst & Young’s annual report on the trends shaping the biotechnology industry, released yesterday (Tuesday).
“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.
“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.”
Key industry findings described in the report include:
* The global biotechnology industry had a very strong year on the financing front. Companies in the Americas and Europe raised more than US$29.9 billion – a new high excluding the outlier genomics bubble year of 2000.
* Venture financing reached an all-time high in 2007 with investment totalling about US$7.5 billion, fuelled by a record total of US$5.5 billion in the US and 72% growth in Canada.
* Global public biotechnology company revenue rose by 8% in 2007, crossing the US$80 billion threshold for the first time. Absent the acquisition of several leading biotech revenue producers by big pharma, revenue would have increased by about 17% – in line with the industry’s historical compound annual growth rate.
* The global industry’s net loss decreased from US$7.4 billion in 2006 to US$2.7 billion in 2007. In the US, the industry came closer to aggregate profitability than in any previous year.
* Deal making reached new heights in 2007. In the US, the total potential value of deals announced during the year – including mergers, acquisitions and strategic alliances – was close to US$60 billion, outdistancing all other years by a wide margin. In Europe, the total potential value of such deals skyrocketed to about US$34 billion.
European industry cultures its own success story
The strength of the global biotech industry is mirrored across Europe, which saw strong growth across pipelines, platforms and products in 2007.
Commenting on the state of the European sector, Ian Oliver, of Ernst & Young’s biotechnology team in the UK said, “Today’s European biotech industry is vastly stronger than it was just a few years ago, with firms able to draw strategic buyers and achieve remarkable growth in deal values, thanks to their maturing pipelines and rise in product approvals.
“As the industry faces a more challenging environment for raising public equity finance, as a result of the credit crunch, it will need to successfully translate its maturing pipeline into marketed products over the next couple of years if it is to continue to succeed.”
Serono deal skews Europe’s underlying growth trend
Taking last year’s figures on face value, the sector’s European financial results appear poor in comparison to 2006. However, Oliver says that when you dig deeper it becomes evident that the 2007 figures have been skewed by removing Serono, one of Europe’s largest biotech companies, from the 2007 data after its acquisition.
“Although publicly traded biotech companies saw their aggregate revenues fall by 6% compared to 2006, this decline was as a result of the loss of publicly quoted biotech Serono, which was acquired by Merck KGaA.
“Without this acquisition, revenue growth of public companies would have been 20%, suggesting that after years of lacklustre growth the European sector is sustaining robust financial performance.”
The report also reveals that Serono’s acquisition had a similar impact on other financial results. Research and development expenditures would have increased by 24% instead of a relatively low 7%, and the industry’s net loss, which more than doubled in 2007 to €1.2bn, would have instead remained steady with a 3% increase.
Innovation engine keeps deals and financing driving forward
The European deal environment also boomed in 2007 with acquirers and investors alike attracted to companies with healthy product pipelines. The total value of M&A transactions in the sector ballooned, increasing by more than 600%, from just over €2bn in 2006 to €14.8bn in 2007.
From a debt and equity perspective, the European industry raised a total of €5.5bn, an increase of 18% compared to €4.6bn raised in 2006.
Commenting, Oliver says, “This was the largest ever total for the European industry, excluding the bubble year of 2000, and represents the fifth consecutive year in which capital raised has grown by double digit rates. As companies continue to advance innovative products in their pipelines, investors and acquirers are drawn to these assets.”
A challenging future lies ahead
While industry performance was strong on several fronts in 2007, emerging global trends, coupled with the credit crunch, have made the road ahead appear more challenging for the industry. The report identified three key trends that are transforming the global industry.
Reinventing big pharma: As they face unprecedented patent expirations, pharma companies are trying to boost earnings by cutting costs and making deals. But the report points out that these approaches can only buy so much time – longer term, pharma companies need to fundamentally reinvent their structures and incentives to improve the productivity of their innovation efforts. For biotech firms, the opportunity is to work collaboratively with big pharma, using creative business models that give them increased flexibility and a larger share of the value they help create.
The rise of personalised medicine: The adoption of personalised medicine is being hastened by business drivers such as pricing pressures and safety concerns. The Beyond Borders report predicts that personalised medicine will fundamentally alter the competitive landscape, changing the bargaining power of small and big drug companies and forcing firms to reassess traditional sources of competitive advantage.
Globalisation: Similar to personalised medicine, globalisation is radically altering the traditional competitive advantages of pharma and biotech companies. While the initial focus has been to lower drug development costs, these financial gains will be temporary, according to the report. The real opportunity is for western companies to work with partners in emerging markets to develop innovative products suited specifically for local market conditions.
Oliver concludes, “We believe that the move away from the ‘blockbuster model’, the rise of personalised medicine, and the continued globalisation of the biotechnology industry will all have a huge impact in 2008 and beyond. To flourish in this environment biotech companies will need to continue doing what they have always done best – continue to innovate.”
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