Biotech in Brief

The global biotechnology industry emerged from the recession last year with relatively little long-term damage, delivering solid overall results that enabled biotech companies to earn a profit for the first time in history, according to an annual report.

Biotechnology firms in the United States, Europe, Canada and Australia reported an aggregate net profit of $3.7 billion last year, a marked improvement compared with the $1.8 billion net loss the industry posted in 2008. Analysts attributed the industry’s historic achievement to a dramatic increase in net profit among U.S. biotechnology firms (and that profit was driven by cost-cutting and operational efficiency measures companies put in place to minimize the impact of the recession).

“In both the general economy and the biotech industry, the worst is clearly over, but things are not reverting to business as usual. In many ways, the experience of the global biotech industry so far has mirrored that of the global economy,” states a report from global advisory firm Ernst & Young titled,“Beyond borders Global biotechnology report 2010.”“On the surface, it would appear that the worst is indeed over. Aggregate funding levels rebounded nicely in 2009 and strategic alliance activity remains robust. Financial performance has been fairly strong—particularly under the circumstances—with remarkable improvement on the bottom line as companies have engaged in belt tightening. The market cap of smaller companies, which had taken a beating, has rebounded impressively, making up much of the ground that was ceded in late 2008 and early 2009.”

Indeed, the industry bounced back relatively well from shrinking investment capital, a spooked stock market and corporate cost-cutting measures: Biotechnology companies in the United States, Canada and Europe raised $23.2 billion in capital, a 42 percent increase compared with the amount of capital raised in 2008. American biotech firms, in particular, had a banner year—net income increased nearly 10-fold to $3.7 billion, due mostly to revenue growth, cost-cutting measures and a change in accounting rules for acquisitions. Total U.S. capital raised by the industry skyrocketed 39 percent to $18 billion, while venture capital raised mushroomed to $4.6 billion, the second-highest total in history (American companies raised $5.5 billion in venture capital in 2007).

Still, there were subtle reminders that the industry didn’t escape the worldwide economic firestorm totally unscathed. Revenues of biotechnology companies in the United States, Europe, Canada and Australia fell 9 percent to $79.1 billion, according to the report. Analysts attributed most of the decline to the exclusion of Genentech’s financial performance in 2009 (the firm was acquired by pharmaceutical firm Roche). If Genentech had been excluded from the 2008 results, industry revenue would have grown by 1 percent.

Revenues of public biotechnology companies in the United States fell 13 percent to $56.6 billion, while the value of merger and acquisition transactions involving American biotech firms (excluding the Roche-Genentech transaction) was sliced in half, amounting to $14.1 billion. Only three deals were worth more than $1 billion, the report stated. The gap between what analysts referred to as the “haves” (large biotechnology firms) and “have nots” (smaller companies) continued to widen in 2009, posing new challenges for emerging businesses. The distribution of funding became more skewed during the year, as did allotment of capital. Consider the following statistics: In the United States, the top 20 percent of fund-raising companies garnered 74.1 percent of capital raised in 2008, according to the Ernst & Young report. Last year, the proportion raised by the same quintile of biotechnology firms had increased to 78.5 percent. Conversely, the 20 percent of companies that raised the least funding received only 0.9 percent of capital in 2008 and got even less (0.6 percent) in 2009. A closer examination at the amount of capital raised furthers the “have”-“have nots” theory. More than 40 percent of the money raised by public biotechnology firms in the United States last year went to just four companies, two of which—Human Genome Sciences (of Rockville, Md.) and Dendreon Corp. (of Seattle, Wash.)—raised exceptionally large sums of money based largely upon positive clinical trial news.

“While the overall numbers—capital raised, alliance activity, profitability—are heartening, they only tell part of the story,”the report noted. “Economic dislocations produce winners and losers, and the real impact is found not in aggregates and averages but in measures of variance and standard deviation. While aggregate financing levels have held up well, the availability of capital is challenging for many companies.”