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Overview Ernst and Young 2012 Global Biotech Tech Report

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At the BIO 2012 Convention in Boston, Ernst and Young released their 26th Annual Global Biotech Report which summarizes the global financials of about 620 public biotech/biomedical companies in North America, Europe and Australia. The financial details of many of the biotech companies outside of these regions are relatively limited but Glen Giovannetti, Global Life Sciences Leader for Ernst and Young mentioned that they have anecdotally looked at the Japanese, Chinese and South American markets and none would “move the needle much” with respect to the analysis—at least not yet.

Biotech Is Recovering from the 2009 Crisis

Total revenue for biotechs is up about 10% to $83 billion after adjustment for acquisitions since three pharmaceuticals (Genzyme Corp., Cephalon and Talecris Biotherapeutics) were purchased by companies outside the biotech/pharmaceutical industry sector. This is a marked turnaround from the 9% decline when the economy hit bottom in 2009. Ironically though, profits were the highest in 2009 due to the major cut backs that year.

R&D Is Increasing Again

In 2009, when the financial crisis hit, about two-thirds of the companies decreased R&D spending in that year producing an overall decrease of ca. 29% in drug development R&D spending. In contracts, in 2011, about two-thirds of the companies increased R&D producing a 9% increase across the industry and a 4% increase in hiring. However, there was an overall loss of a couple percent in pharma/biotech profits. Investment is being made in the pipeline again but all is not back to “normal.” In fact, there seems to be a new “normal” developing.

Biotech Investment Is Back, or Is It?

Although the $33 billion in biotech investment approached levels not seen since the venture boom 12 years ago in 2000, there is a major difference in the nature of the current investment compared with 12 years ago. Only about half the 2011 capital investment went to companies with revenues smaller than $500 million. This portion means only a bit more than $16 billion was venture or small capital investment. The rest is larger pharmaceutical companies taking advantage of low interest rates to finance acquisitions and stock buybacks.

The Venture Investment Outlook Is Not Good

The $16 billion amount of small company investment is pretty consistent with the previous few years. There has been a reduction in venture capital for new enterprises since 2009. Further, this situation is not expected to change. In fact, it is likely to worsen as capital funds are shrinking due to overall economy of the last few years, so there is less money to spread around. Not good news for companies trying to raise funds.

The Patent Cliff’s Effect on Large Biotech Operations

However, what is going on with the larger biotech companies that they are taking on so much debt? Simply, big pharmaceuticals are now plunging over the much discussed drug patent cliff.

Most companies saw some of their key proprietary drugs become public domain in 2011 resulting in significant revenue loss as generic versions entered the market. The resulting scramble to fill in the revenue gap or maintain share price produced new acquisitions, stock buybacks, etc. As a result, Ernst and Young estimate that major pharmaceuticals have lost about 30% of their “firepower” in the last 5 years. They just don’t have the liquid cash they used to, so they are reducing upfront payment amounts on deals and borrowing to maintain dividend payments, buy back stocks, and finance mergers and acquisitions.

Maintaining R&D Innovation in This New Biotech Financial Environment

As an industry that relies on innovation, how can robust drug R&D efforts continue in this new tighter cash, lower margin environment? According to Ernst & Young, biotech companies may need to address current redundancies and inefficiencies that have been tolerable in the industry up until now. Gautam Jaggi, Lead Analyst on the report, specified three areas that where this inefficiency is evident:

(1) Intellectual property is often fragmented across several companies making it difficult to pursue research efforts without licensing costs.

(2) There is a lot of R&D overlap between organizations generating larger overall costs.

(3) The investment timing cycle is short relative to the drug discovery and development pipeline which complicates financing development of new therapeutics.

The solution to address these points and make drug discovery and development more economical and efficient is a much more open and cooperative R&D environment across the industry. The Report describes this environment as an holistic open learning network (HOLNet) that moves all development along faster.

A Holistic Open Learning Network for Drug Development

A HOLNet environment uses more cooperative standards, collects and centralizes information, and directly connects drug development with patient medical data. Jaggi and Giovannetti are not suggesting that these HOLN practices would be introduced into the drug R&D pipeline for idealistic reasons, but rather, business pressure will require these sort of changes for many biotech companies to survive. Wider and more open cooperation across in research across the industry will enable access to a broader range of critical information for more effective and rapid drug product development.

In fact, these cooperative research trends are already occurring with the formation of various multi-company R&D consortia expressly for the purpose of accerlating treatment advancements in particular disease areas. Examples of some of these research coalitions are One Mind for Research that is targeting brain disease, SAGE Bionetworks open source community for computational biologists, and the BioMarkers Consortium to a public-private partnership to identify and qualify more predictive biomarkers. Hopefully, this trend will expand and continue.

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