Deals thrust biotech forward

“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,” said Glen Giovannetti, Ernst & Young’s Global Biotechnology Leader.

But he added, “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 findings include:

• The global biotechnology industry had a very strong year on the financing front, with companies in North America and Europe raising more than $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 US$7.5 billion, fuelled by a record total of $5.5 billion in the US and 72 per cent growth in Canada.

• Globally the revenues of publicly quoted biotechs revenue rose by 8 per cent in 2007, crossing the US$80 billion threshold for the first time. Were it not for the acquisition of several leading biotech companies by big pharma, revenue would have increased by about 17 per cent, in line with the industry’s historical compound annual growth rate.

• The industry’s net loss decreased from $7.4 billion in 2006 to $2.7 billion in 2007. In the US, the industry came closer to aggregate profitability than in any previous year.

• Deal making reached a new high 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.

Strong growth in Europe

In Europe, the total potential value of such deals rose to $34 billion.

Ernst and Young says the strength of the global biotech industry was mirrored across Europe, which saw strong growth across pipelines, platforms and products in 2007.

Commenting on the European sector, Ian Oliver, of Ernst & Young’s biotechnology team 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.”

The European deal environment boomed in 2007 with acquirers and investors alike attracted to companies with healthy product pipelines. The total value of M&A transactions increased by more than 600 percent, from just over €2 billion in 2006 to €14.8 billion in 2007.

The European industry raised a total of €5.5 billion, an increase of 18 per cent compared with 2006.

“This was the largest ever total for the European industry, excluding the bubble year of 2000,” said Oliver. “[It] represents the fifth consecutive year in which capital raised has grown by double digit rates.”

But while industry performance was strong on several fronts in 2007, emerging global trends, coupled with the credit crunch, have made the road ahead more challenging. The report identifies three key trends that are transforming the global industry.

1. Faced with 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, in the 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.
   
   
2. The adoption of personalised medicine is being driven by factors such as pricing pressures and safety concerns. The report predicts that personalised medicine will alter the competitive landscape, changing the bargaining power of small and big drug companies, and forcing firms to reassess traditional sources of competitive advantage.
   
   
3. Globalisation is shifting the relative competitive positions 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 products suited specifically for local market conditions.

“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,” said Oliver. “To flourish in this environment biotech companies will need to continue doing what they have always done best, continue to innovate.”