Beyond borders
Global biotechnology report 2009
“It is different this time because this crisis
is deep-rooted, systemic and persistent.
But, in spite of that, the industry has been
here before, in that biotech companies
have overcome seemingly insurmountable
challenges in the past, bucking trends and
defying odds.“
Glen T. Giovannetti and Gautam Jaggi, Ernst & Young Global Biotechnology Center
To our clients and friends
As the shockwaves from the global financial crisis rippled across the
world economy in late 2008 and 2009, they left little untouched.
The reverberations leveled long-standing institutions, triggered
unprecedented policy responses and revealed new risks. For the
biotechnology industry, the impact of these turbulent times has
deepened the divide between the sector’s haves and have-nots.
Many small-cap companies are scrambling to raise capital and
contain spending, while a select few continue to attract favorable
valuations from investors and strategic partners.
A number of this year’s articles focus on the acute challenges
created by the funding crisis. When we interviewed John Martin
of Gilead Sciences seven years ago, in the midst of a different
funding crisis, he was confident that his company could make the
long journey to sustainability. He was vindicated, of course, and
his guest article in this year’s report offers advice to companies
facing similar challenges today. Meanwhile, a roundtable of CEOs
from four next-generation companies discusses the outlook for
their enterprises and for the industry as a whole.
Challenging times have always inspired biotech’s creativity. So
it’s not surprising that the search for creative models — both
to overcome immediate operational challenges in the
current environment and to foster the sector’s long-term
sustainability — is a core theme in this year’s Beyond borders.
James Cornelius of Bristol-Myers Squibb discusses his company’s
model for reinventing itself by focusing on R&D and partnering
with biotechs. Adelene Perkins of Infinity Pharmaceuticals
emphasizes the need for partnering models that allow companies
the flexibility to evolve, while Samantha Du of Hutchison
MediPharma discusses how China can offer firms advantages that
address weaknesses in the Western business model.
But turbulent times can make the unimaginable possible, and
sweeping disruptions have often redrawn maps, changed playing
fields and altered rules and regimes. In “Beyond business as
usual?” — our Global introduction article — we present four
paradigm-shifting trends that have the potential to reshape the
healthcare landscape and create new opportunities: high-quality
generics, fundamental healthcare reform, personalized medicine
and globalization. To create a more sustainable biotechnology
industry, companies will need to understand these trends, prepare
for them and help shape them.
As biotech faces the future, it’s worth considering the responses
of our venture capital panel. We asked a number of leading VCs
to tell us whether biotech has “been here before” or whether it’s
“different this time.” It turns out that both interpretations are
correct. It is different this time because this crisis is deep-rooted,
systemic and persistent. But, in spite of that, the industry has
been here before, in that biotech companies have overcome
seemingly insurmountable challenges in the past, bucking trends
and defying odds.
Ernst & Young’s global organization stands ready to help you as
the business of biotech goes beyond business as usual.
Glen T. Giovannetti
Gautam Jaggi
Global Biotechnology Leader
Global Biotechnology Center
Ernst & Young
Managing Editor, Beyond borders
Global Biotechnology Center
Ernst & Young
Contents
Global section
Beyond business as usual? The global perspective
2
Global introduction
Beyond business as usual?
4
The interconnectedness of all things
How the housing markets sneezed and biotech caught a cold
p. 2
9
A closer look
10
Necessity is the mother of all models
18
Survival of the focused
19
Innovation from a string of pearls
Enlightened competition
How unprecedented changes are driving new approaches
John Martin, Gilead Sciences, Inc.
James M. Cornelius, Bristol-Myers Squibb
20
Venture capitalists speak out
The more things change, the more they stay the same?
22
Valuing innovation: new approaches for new products and
changing expectations
24
Global year in review
Andrew Dillon and Sarah Garner, NICE
Turbulent times
Americas section
A Darwinian moment? The Americas perspective
30
Americas introduction
A Darwinian moment?
37
A closer look
Compensation and benefits in turbulent times
38
CEO roundtable
Only the innovative survive: perspectives from biotech’s next generation
• Jean-Jacques Bienaimé, BioMarin Pharmaceutical Inc.
• Jean-Paul Clozel, Actelion Pharmaceuticals, Ltd
• Colin Goddard, OSI
• Louis Lange, CV Therapeutics
p. 30
45
The Darwinian challenge: why evolution is vital for
building biotech
Adelene Q. Perkins, Infinity Pharmaceuticals, Inc.
47
Connecting the dots: the impact of the global financial crisis
on biotechnology
48
US financing
Peter Wirth, Genzyme Corporation
Collateral damage
52
A closer look
State capital: incentive programs
53
US deals
Buying biotech, being biotech
56
A closer look
New rules for the M&A road
59
US public policy
Will biotech get the change it needs?
60
A closer look
63
US products and technologies
66
Canada year in review
The FDA: transforming an agency in crisis
Monitoring progress
A time of reckoning
ii
European section
Staying afloat? The European perspective
74
European introduction
Staying afloat?
77
Roundtable on deals
New deal structures for challenging times
• Naseem Amin, Biogen Idec
• Jeffrey Elton, Novartis Institutes for BioMedical Research
• John Goddard, AstraZeneca PLC
• Mervyn Turner, Merck & Co., Inc.
p. 74
84
European financing
Down, but not out
90
European deals
Dealing by dealing
94
A closer look
Up-fronts and bottom lines: accounting for up-front payments under IFRS
95
European products and pipeline
A surging pipeline and a trickle of products
98
A closer look
Growing pains in the European biosimilars market
101
Roundtable on industrial biotechnology
Evolution, progress and sustainability
• Karl-Heinz Maurer, Henkel AG & Co. KGaA
• Marcel Wubbolts, DSM Innovation Center
• Holger Zinke, BRAIN AG
Asia-Pacific section
Seeds of change? The Asia-Pacific perspective
106
Asia-Pacific introduction
Seeds of change?
107
The dream of the sea turtles: can China offer a new model for
Western biotech companies?
108
Changing realities
110
Australia year in review
Samantha Du, Hutchison MediPharma Limited
p. 106
A conversation with M.K. Bhan
Haves and have-nots
114
India year in review
Nurturing growth
115
A closer look
If you build it, will they come?
117
China year in review
On the road to innovation
120
Japan year in review
Seeking investors, seeking innovation
122
New Zealand year in review
122
A closer look
124
Singapore year in review
Strong research and creative approaches
Attracting new investment: New Zealand’s new LP structure
Looking beyond borders
Resources
125
Acknowledgements
126
Data exhibit index
128
Global biotechnology contacts
iii
Beyond business
as usual?
The global perspective
1
Global introduction
Beyond business as usual?
biotech funding has ebbed and flowed
as IPO windows opened wide and then
slammed shut with seeming inevitability.
Ernst & Young has been tracking the
biotech industry since its early days,
and by our count the current crisis is
at least the sector’s fifth major funding
drought. And while it is far from over,
it is not the longest — not yet, anyway.
Interestingly, when biotech veterans
are asked to compare the current
situation to prior downturns, most point
to the “nuclear winter” of the early
1990s that was precipitated by the
Clinton administration’s proposals for
sector and the viability of its business
and financing model. Even by the
standards of an industry where “business
as usual” is a gauntlet of unpredictable
initial public offering (IPO) windows,
shifting investor sentiment, daunting
product-development odds and tightening
regulatory pressure, this feels different.
In late 2008, the biotechnology industry,
like the rest of the global economy, was
blindsided by the tsunami that is the
global financial crisis. Biotech companies
now face a host of challenges as they
attempt to navigate through a systemic
financial meltdown and deep-rooted
uncertainty. In market after market,
valuations of precommercial biotechs
have plummeted, capital has dried up and
the landscape is littered with companies
struggling to survive. While the crisis will
almost certainly wipe out many of these
firms, it could also, at the extreme, have
implications for the sustainability of the
The question, of course, is whether it
truly is different. Certainly, biotechnology
companies are no strangers to financing
challenges. There have been biotech
funding droughts for almost as long
as there has been a biotech industry.
Through much of the sector’s history,
This is neither the industry’s first IPO drought, nor (so far) its longest
2.5
25
Capital raised in US IPOs
Number of US IPOs
Q2 01–Q3 01
2 quarters
2.0
20
Q3 02–Q3 03
5 quarters
Q4 88–Q3 89
4 quarters
Q2 08–present
4 quarters and ongoing
1.5
15
1.0
10
0.5
5
0.0
0
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
Source: Ernst & Young
2
Beyond borders Global biotechnology report 2009
00
01
02
03
04
05
06
07
08
Number of US IPOs
Capital raised in US IPOs (US$b)
Q2 84–Q3 85
6 quarters
fundamental healthcare reform. But even
in the depths of that period’s uncertainty,
IPOs and follow-on offerings made it to
market with some regularity.
In the past, biotech companies survived
funding crises through a combination of
creativity and nimbleness. As investor
sentiment shifted, firms reinvented their
research focus and market orientation,
transforming themselves in short order
from vaccine companies to biodefense
firms or from bioinformatics providers to
drug developers. They opportunistically
formed strategic alliances, pared back
their already-lean operations and found
creative ways to go after untapped
sources of capital. In extreme periods,
they closed highly dilutive financings
that included warrants and other deal
“sweeteners” to bring investors on board.
But over the industry’s history, very few
companies actually ended up filing for
bankruptcy or being liquidated.
Several characteristics of the current
crisis make it unlike any previous funding
challenge faced by the biotech industry.
Each of these distinguishing features, as
we discuss in this article, has implications
for biotech companies trying to weather
the storm as well as for the industry’s
sustainability, approaches and models.
Pervasive uncertainty
There is much about the current crisis
that has taken practically everyone
by surprise: the speed with which it
unfolded, the sheer size of the financial
institutions it has leveled, and the extent
and nature of public policy responses it
has unleashed. There is now a consensus
that this, whatever this is (it has been
variously labeled a credit crunch, a
liquidity crisis, a recession and even
sometimes a depression), is huge. But just
Even by the standards of an
industry where “business
as usual” is a gauntlet of
unpredictable initial public
offering (IPO) windows, shifting
investor sentiment, daunting
product-development odds and
tightening regulatory pressure,
this feels different.
how huge, no one really knows. We don’t
know how deep the crisis will run, how far
it will extend, or when it will all end.
This uncertainty is one thing we’re all sure
of — and as a result, cash has become
king. Companies and consumers are
cutting spending. Investors and bankers
have become increasingly conservative,
making it even more difficult for firms to
raise capital. While funding crises in the
past have typically lasted about 12–18
months, it is quite likely the current
downturn will run considerably longer.
The interconnectedness
of all things
In the past, biotech funding droughts
have largely been driven by investor
sentiment toward the biotech industry.
When investors were bullish about the
sector’s prospects — buoyed, for instance,
by product approvals in the industry’s
formative years or by media excitement
over the sequencing of the human genome
around the turn of the millennium — money
rushed into the sector, and companies
rushed out to conduct IPOs. Unfortunately,
the boom was inevitably followed by a bust
a few years later, when investors realized
that the path to commercialization was
considerably longer than they had initially
assumed or when business models failed to
live up to their promises. Funds withdrew,
bubbles burst, windows slammed shut.
The current funding crisis is different.
The bubble that burst was not in biotech,
but fueled by real estate, financial
instruments and an environment of easy
credit. This time, irrationally exuberant
investors were seduced by loose lending
practices, high-leverage models and
the assurances of complex financial
derivatives that promised to hedge and
reduce risk. And so, while biotech’s past
financing droughts were localized and
industry-specific, the present downturn
crosses national boundaries and impacts
industries across the economy. It is, in a
word, systemic.
As the impact of the crisis spreads
wide — infecting everything from investment
portfolios in remote Norwegian fishing
hamlets to the financial aid packages
of undergraduates at leading US
universities — it can produce unexpected
ripple effects. We have listed some
examples of these effects below, though
the list is by no means exhaustive. (For
a simplified graphical representation
of these connections, refer to “The
interconnectedness of all things” on page 4.)
• Investment banks and hedge funds.
The financial crisis has taken a
significant toll on investment banks,
as some of the most venerable names
on Wall Street have been humbled by
investments in subprime mortgages.
But these investment banks also
often acted as prime brokers to
hedge funds, and hedge funds have
in recent years served as a major
source of capital for publicly traded
biotech companies. Consequently,
while much has been made of those
now-infamous links between distressed
continued on page 6
3
The interconnectedness of all things
How the housing markets sneezed and biotech caught a cold
Current crisis
US property
values fall
Subprime
mortgage
default rates
increase
Foreclosures
climb
Public capital
for biotech
constrained
Biotech IPOs
disappear
Mortgage-backed
securities become
“toxic”
Risk
aversion
Biotech
stocks fall
Credit
crunch
Less debt
for biotech
Less capital
for hedge
funds
Lower
valuations
in M&A and
alliances
Challenging
exits for
biotech
investors
Less capital
for venture
funds
Biotech venture
funding could
fall
Less capital
New risks
Source: Ernst & Young
4
Beyond borders Global biotechnology report 2009
Lower valuations
All prior crises
Investors’ enthusiasm
for biotech stocks
declines
Banks
distressed,
fail
Less lending
to households
Less lending
to businesses
Layoffs
Corporate
earnings
decline
Stocks
plummet
Household
wealth shrinks
Institutional
investors’
portfolios
diminish
University
endowments
down
Nonprofit and
foundation
endowments
down
Sector-specific
withdrawal from
biotech
Household
spending
declines
Household
income
declines
Tax revenues
drop
Drug usage
could fall
Ranks of
uninsured
swell
Pricing
pressure
could
increase
Increased
counterparty
risk from suppliers
and partners
Research
funding could
fall
Increasing pricing pressure?
Lower drug usage?
5
mortgages in Las Vegas, Nevada,
and the investments of taxpayers in
Narvik, Norway, considerably less has
been written about the fact that those
same distressed mortgages are linked,
through the fortunes of highly leveraged
investment banks and hedge funds, to
the capital invested in scores of biotech
companies. A significant portion of the
capital available to the industry has been
decimated, not because of changes
in investors’ attitudes toward biotech
companies, but simply because of the
way the dominoes line up in the modern
financial system. (See Peter Wirth’s
article, “Connecting the dots,” for a more
detailed discussion.)
In addition, many of the investment
banks that have traditionally backed
the biotech industry are now focused
elsewhere, including on shoring up
their own balance sheets. It is unlikely
that the biotech industry will provide
enough fee potential in the near term
to grab significant mindshare at these
institutions. As a result, the industry
may see the return to prominence
of the boutique, early-stage-focused
investment bank.
• Venture capital. As the stock market has
tumbled, we have all become collectively
poorer. The separation between the real
economy and the financial economy
has become ever more blurred in recent
decades, as an increasing portion of
6
financial assets in the economy has come
to be invested in the stock market. So,
as plunging share prices dragged down
everything from the endowments of
large universities to the investments of
public pension plans, the portfolios of
many major institutional investors have
been diminished. Many of these investors
are, in turn, limited partners (LPs) in
the venture funds that invest in biotech
companies. Since these funds make
portfolio allocations by asset class, they
have less money to invest in the sector
simply because their overall portfolios
have shrunk — the pie is smaller, and
everyone gets a smaller slice.
This “denominator effect” raises the
risk that venture capitalists (VCs) may
not have as much “dry powder” in
their funds as they assume they do,
and that some LPs may not be able
to fulfill the capital calls when the
funds come knocking. So far, there is
no indication that this has happened
to any large degree, and anecdotal
evidence suggests that at least the
most substantial life sciences VCs will
have access to the funds they need to
continue investing. But the risk is out
there, and it is possible that there could
be a somewhat slower deployment
of capital in the future because of
these linkages. VCs needing to raise
new funds will likely find a much more
challenging environment. So the
Beyond borders Global biotechnology report 2009
bar for new company formation has
been raised and venture investors are
becoming very selective about the firms
they back.
• Convertible debt. The simultaneous
implosion of credit markets and stock
markets in the current crisis may create
a ticking time bomb in an industry where
convertible debt has been a significant
source of capital. Convertible debt
first became popular in a significant
way around the time of the genomics
bubble, when a combination of factors
made it an attractive way to raise
money. For many public companies that
expected their stock prices to rise over
time with the achievement of clinical
milestones, convertible debt offered
a way to raise capital in a less dilutive
manner. Meanwhile, it offered investors
relatively more security and a hedging
strategy — certain funds invested in
biotech companies by buying convertible
debt while simultaneously shorting
the companies’ stocks. The large debt
overhang became a potential problem
for many companies after the genomics
bubble burst in the early 2000s, but
the crisis was averted because markets
recovered and companies were able to
refinance the debt.
Today, a similar crisis looms, but
this time several factors are in play.
The plunging stock prices of biotech
companies have meant that converting
debt to equity is improbable, while the
prospects for refinancing are bleak
because of the credit crisis. Meanwhile,
hedge funds, which provide much of the
capital for convertible debt, have seen
their portfolios diminished by the stock
market downturn and by a reduction in
their own borrowing power, and are also
constrained by new rules on shorting
stock. Already we are seeing companies
trying to negotiate new terms with debt
holders to forestall bankruptcy.
• Patient behavior. Between December
2007, when the slowing US economy
officially entered a recession, and March
2009, the number of unemployed in the
US increased by 5.1 million — pushing
the official unemployment rate to a
26-year high of 8.5%. The US economy
is now shedding over 600,000 jobs
a month, and layoffs are becoming
increasingly visible in other countries
as the recession spreads globally. While
the uptick in European unemployment
has not been as sharp (in part
because many European countries had
higher unemployment rates to begin
with), China is concerned about the
potential fallout as large numbers of
manufacturing jobs are lost and migrant
workers return to their villages.
While health-related industries such
as biotech are generally regarded as
being fairly recession-resistant (people
fall sick and need healthcare regardless
of the state of the business cycle), the
conventional wisdom may not hold true
in a recession of this magnitude. In the
US economy, where health benefits are
largely provided through employers,
a significant swelling in the ranks of
the unemployed could bring the loss
of health insurance for large portions
of the population. Consequently,
we could see changes in patient
behavior such as reduced compliance
with drug regimens, lower levels of
preventive care, and selective seeking
of healthcare for non-life-threatening
conditions. Meanwhile, in many
emerging economies, where health
insurance is not as prevalent to start
with, job losses could leave significant
swaths of the nascent middle class
less able to afford drugs — which
could present a temporary setback for
Western companies that are counting
on emerging markets for future growth.
• Government spending and
reimbursement. The economic
slowdown has diminished tax revenues
and strained government budgets — a
situation that will only be heightened
in the months ahead, either because of
stimulus spending (such as in the US)
or because of increased spending on
social safety-net programs as citizens
lose jobs (as in many Western European
countries). In the US, where healthcare
reform is a top priority of the new
Obama administration, budgetary
pressures could be further exacerbated
by the high cost of expanding
healthcare access. As governments face
increasing pressure to rein in healthcare
costs, it seems almost inevitable that
the scrutiny of drug prices will grow.
Meanwhile, more people could become
dependent on governments for health
coverage, increasing the purchasing
power of the public sector and
strengthening its ability to drive down
prices in negotiations with industry.
The bottom line is that biotech
companies — in both pre- and
post-commercial stages — face a far more
complex environment than in previous
funding crises. This time, it’s not about
biotech, but about everything. And when
it seems that everything is impacted,
the impacts may not be everything they
seem. More than ever, companies may
find many unexpected sources of risk
beneath the surface.
The fact that the current crisis is driven
by larger economic forces rather than
a change in investor sentiment toward
biotech companies also has implications for
the length of the drought and the path to
recovery. In the past, conditions improved
when investor sentiment recovered, but
this time the global economy is undergoing
a significant deleveraging which could
As funding options have dried
up, many companies with little
cash may also have little in the
way of options. For many at the
low end of the survival index,
survival may truly be at stake.
constrain the flow of money into equity
markets for an extended period. Things will
only get better when the overall pie — the
global economy — grows. And that, by all
accounts, will take time.
Against the backdrop of an industry
where it can take well over a decade
to successfully take a product from
early research to regulatory approval,
a crisis that lasts several years may
appear short-lived. But, of course, for
companies with dwindling cash reserves
and few funding options, it could be an
insurmountably long period.
Contraction ahead
For most of the 23 years that Ernst & Young
has produced an annual biotechnology
report, we have included a “survival index”
comparing the rate at which companies
were spending to the amount of cash
on their balance sheets. And in each of
those years, there has always been a
sizeable cohort of firms — typically around
25% — with less than one year’s worth of
cash on hand. But even though about a
fourth of publicly traded biotech companies
have perennially been a few months
away from going out of business, the
survival index was never followed by the
mass extinctions its name appeared to
portend. Our chart, it would seem, had
been misnamed. It’s not a survival index if
everyone survives.
What was missing in those annual
charts — and the answer to the apparent
paradox — is that there was relatively little
overlap between the “at risk” companies
in any two consecutive years. Instead
of closing shop, most companies simply
7
Large companies will not
start buying assets en masse
that do not fit their strategic
objectives simply because
they are relatively cheaper.
Misallocated resources and
distracted energies are no
bargain at any price.
replenished their dwindling cash balances
by raising more capital.
In the current environment, of course, all
of that has changed. As funding options
have dried up, many companies with little
cash may also have little in the way of
options. For many at the low end of the
survival index, survival may truly be at
stake. While many firms are restructuring
their operations to stay alive, we are likely
to see a sizeable number of firms declare
bankruptcy or cease operations.
We are also likely to see increased merger
activity in this environment, as some
financially distressed biotechs combine
operations with similarly sized firms to
improve their odds. And while depressed
biotech valuations might seem to predict
increased pharma-biotech mergers, we
are unlikely to see a dramatic uptick.
Large companies will not start buying
assets en masse that do not fit their
strategic objectives simply because
they are relatively cheaper. Misallocated
resources and distracted energies are no
bargain at any price.
However, pharma companies are likely to
remain actively interested in more mature
firms. Over the last year or so, several of
the biotech sector’s bigger names have
attracted the eye of pharma buyers,
including Genentech, MedImmune,
Millennium and ImClone. In early 2009,
two big pharmas merged with each other,
and there is speculation that more could
follow. But here, too, the outlook could
become cloudy because of the financial
crisis. Large acquisitions will inevitably
need some degree of debt financing,
particularly as prospective buyers see
revenue-generating blockbusters go off
patent in the years ahead. And getting
credit has become more difficult, even for
entities with significant cash flows. While
huge sums have been raised to finance
the Pfizer, Merck and Roche transactions,
there is a limit to how much debt will be
available, and at a minimum, buyers will
confront a higher cost of capital from
borrowing than they faced in the past.
In spite of these difficulties, we can expect
considerable industry consolidation in the
months and years ahead, driven by big
pharma’s growing need to fill the pipeline
and achieve cost efficiencies and the
existential funding crisis faced by many
small biotech companies. Whether by
merger and acquisition (M&A), bankruptcy
or liquidation, the number of companies
in the industry will contract over the
remainder of 2009 and into 2010.
New models for new necessities
Some of the most sweeping implications
of today’s unprecedented challenges,
however, may be for the industry’s
long-standing models. Over the 33-year
history of the biotech industry, companies
have gravitated toward some enduring
operational models — approaches for
financing, partnering, conducting
research and development (R&D) and
bringing products to market. These
operational models, in turn, collectively
drive the overall business model — helping
determine, for instance, how vertically
integrated companies become and the
degree to which they specialize in specific
aspects of the value chain.
The world’s longest relay race
To understand why certain models have
evolved in this industry — and why we
think approaches that have largely
withstood the tests of time will become
increasingly unsustainable in the months
and years ahead — we need to start by
presenting an axiom: necessity is the
mother of all models. The models that
companies and investors adopt are, in
other words, not developed in a vacuum.
They are instead compromises shaped
by a number of constraints — resources,
funding options, bargaining power and
the inescapable reality that it takes
US$1–2 billion and upwards of a decade
for a biotech company to become a
mature, financially sustainable enterprise.
Few investors have the means and
patience to endure such a journey — after
all, they face constraints of their own on
investment horizons and rates of return.
Consequently, the business model that
has evolved in the biotech industry is akin
to a marathon relay race, in which biotech
companies work with a series of investors
and partners to raise capital and share
risk. From venture capitalists through
strategic-alliance partners and public and
other investors, each set of buyers carries
the baton for a few years.
Not surprisingly, these necessities move
biotech companies to behave in certain
ways. Their overwhelming objective is
often to survive long enough to reach
the next value-creating milestone,
where existing investors can pass the
baton and companies can raise more
The business model that has
evolved in the biotech industry
is akin to a marathon relay race,
in which biotech companies
work with a series of investors
and partners to raise capital and
share risk.
capital. Consequently, firms often
keep R&D spending very lean and are
forced to choose short-term priorities
over long-term ones — focusing on the
most advanced pipeline candidate, for
instance, instead of a later-generation
one with more scientific and commercial
potential. And given the industry’s
sequential, pass-the-baton funding
continued on page 12
8
Beyond borders Global biotechnology report 2009
A closer look
Enlightened competition
Perhaps more than any other sector, the biopharmaceutical
industry depends on innovation for its very survival. While
the term “innovation” is usually applied to scientific or
technological advancement, financial and organizational
innovation has also played a critical role in shaping the industry,
especially during periods of constrained capital investment.
At such times, companies have sought to access capital,
reduce burn rates and share risk through a variety of creative
transactions and deal structures. In 2008, when pharmaceutical
companies represented the primary buyers of technology
assets and companies, the concept of “precompetitive”
collaborations surfaced at companies and venture firms.
The idea is that, as pharmaceutical companies face growing
pressures to find new ways to innovate, they could benefit
from arrangements where several firms collaborate on the
development of early-stage platforms or enabling technologies.
Enlight Biosciences, launched in 2008 by Boston-based
PureTech Ventures, has translated this vision into a reality,
in the process developing a novel collaboration and financial
structure. PureTech has assembled a number of big pharma
backers so far: Eli Lilly, Johnson & Johnson, Merck & Co.
and Pfizer. With venture investors seeking to mitigate risk by
investing in later-stage companies with clinical compounds,
Enlight’s founders and pharma members saw a risk of
underinvestment in platforms and enabling technologies. Yet
developing new platforms is critical — they could, for instance,
significantly enhance the drug discovery and development
Enlight corporate structure
Enlight
Biosciences, LLC
Endra
Holdings, LLC
Endra, Inc.
Holding company 2
Holding company 3
(LLC structure)
(LLC structure)
Operating
company 2
Operating
company 3
process in areas such as molecular imaging, drug delivery,
personalized medicine and early prediction of safety.
The pharmas work closely with Enlight to identify the most
pressing needs in the industry and to help guide Enlight’s
search for, and development of, novel technologies that address
those needs. The goal is to form start-ups that will develop
and commercialize the most promising technologies. Via an
approach that the PureTech team applies across its portfolio,
Enlight adds an entrepreneurial component to the pharma
collaborative model: the company serves as an institutional
entrepreneur, pulling together transformational intellectual
property (often from multiple sources), assembling preeminent
scientific thought leaders and providing interim management
to its new companies. The pharma partners provide the initial
funding (they have committed to provide financing of up to a
combined US$65 million) with additional investment coming
from the partners, venture investors or other third parties.
Enlight’s model addresses a critical structural impediment
to funding innovation in the biopharma industry, namely the
fundamental tension between entrepreneurs and investors
around how to apportion financial returns. Enlight’s pharma
partners are focused primarily on the impact Enlight-supported
innovations make within their organizations. As such, they are
looking for not just financial returns but strategic returns, and
turning what was once a zero-sum game (dividing up financial
returns) into a symbiotic relationship where each party can
derive benefit in a different way.
Key activities/purpose
Ownership
• Identifying new technologies
• Enlight leadership
• Forming new companies
• PureTech
• Investment vehicle for
• Pharma partners
new companies
• Enlight
• Holding companies
• Operations
• Management
• Venture capitalists
Source: Enlight Biosciences
9
Necessity is the mother of all models
How unprecedented changes are driving new approaches
New necessities
More flexibility to retain rights, upside and independence
Exploit
choices
Top
innovators
Unprecedented changes
Bargaining power shifts from big pharma to top innovators
Patent expirations
and big pharma’s
reinvention
Boost R&D productivity
Foster innovative cultures
Capture external breakthroughs
Change
Big pharma
(see Beyond borders 2008)
Cut costs, maintain earnings
Leverage globalization
Sustain ecosystem
(see “The interconnectedness
of all things”)
Raise capital
Retain some upside
Survive
Global
financial
crisis
Small-cap companies
Small caps see further erosion of bargaining power
Greater focus to contain costs and reduce burn
VCs
Seek novel ways to enhance returns
Source: Ernst & Young
10
Beyond borders Global biotechnology report 2009
Sustain
returns
Find path to exits
New models
Buy and leave alone
Nonexclusive
licensing
Takeda/Millennium
Roche/Alnylam
License and leave alone
Purdue/Infinity
Option and
leave alone
Amgen/Cytokinetics
Cephalon/Ception
Larger up-fronts
for sustainability
Acquisitions with
earn-outs
Genzyme/PTC
Viropharma/Lev
Precompetitive cooperation
Early IP lockups
Enlight Biosciences
Pfizer/UCSF
CRO/PE “at risk”
transactions
TPG-Axon/Lilly
More options
around
geographic rights
Rifle shots
(lean companies)
VCs investing in
public companies
(VIPEs)
Consolidate to survive
(roll-ups)
Monetize
noncore assets
The Medicines Company/
Targanta Therapeutics
Paul Capital,
Royalty Pharma,
others
Later-stage
specialty
pharma
approaches
Build it to slot it?
(medtech model)
Creative project
financing
Symphony Capital
VCs with
extended
fund lives?
11
model and the inherent uncertainty
of investor sentiment over time, firms
attempt to strike a balance between
taking money when it’s available and not
raising capital in ways that overly dilute
existing investors or give away too much
potential upside.
Among the key constraints that biotech
companies have traditionally faced are
their limited resources and bargaining
power. As a result, the conventional
wisdom has been that biotech companies
“sell their first born” — licensing their
initial product candidate to big pharma
out of necessity — in order to sustain
operations with the hope of controlling,
or at least materially participating in,
the commercialization of subsequent
products themselves. In other words,
most biotechs aspire ultimately to
become fully integrated pharmaceutical
companies (FIPCOs) because of one
simple reason — that’s where the money
is. Companies with top-line revenue earn
higher returns than what is generally
possible by outlicensing to another
company and settling for a royalty.
Of course, not all companies can go the
distance, and successful biotech enterprises
often choose the ultimate baton pass — to
a strategic acquirer — after concluding
that such a move is in the best interest of
shareholders and other stakeholders.
Unprecedented challenges
If models are functions of necessity,
it follows that unprecedented
challenges — and the new necessities
they create — should be fertile ground for
seeding new models. This is, of course,
precisely the situation in which the
industry now finds itself. Companies of
all sizes are operating in a landscape that
is profoundly different from anything
they have seen before, because of some
historic shifts.
12
These trends create new necessities
with potential implications for the
biotech industry’s existing business and
operational models. (For a simplified
representation of some of these new
necessities, see “Necessity is the mother
of all models” on page 10.) The most
immediate changes will stem from the
issues that are confronting companies in
the near future: big pharma’s reinvention
and the global financial crisis.
New necessities:
big pharma’s reinvention
Biotech companies have already started
seeing the impact of big pharma’s
pipeline problems on biotech operational
models, since pharmaceutical firms
have been taking serious measures to
boost R&D productivity for some time
now. Not surprisingly, some of the initial
consequences have been for partnering
models. As pharma’s pipeline problems
became more acute, bargaining power
shifted toward biotech firms with highly
promising products and platforms. Big
pharma companies, many of which had
initially steered clear of the biologics
revolution, were determined not to
miss the “next big thing.” As a result,
competition for technologies such as RNAi
became heated in recent years. Biotech
companies developing these desirable
technologies benefited, commanding high
premiums in acquisitions and structuring
deals that gave them greater flexibility
while allowing them to retain more rights.
Beyond borders Global biotechnology report 2009
Yet the benefits of this power shift accrued
to a relatively small group of companies
developing assets that are widely regarded
as having tremendous commercial
potential. For these “top innovators,” even
the arrival of the global financial crisis did
not alter their power equation with big
pharma. Indeed, while other companies
were buffeted by roiling capital markets,
plummeting valuations and wary investors,
these firms have continued to structure
deals and access capital at favorable
terms. Examples include Alnylam’s
nonexclusive licensing deal with Takeda
and Infinity Pharmaceuticals’ innovative
alliance with Purdue Pharmaceuticals.
(These transactions, and other creative
deals involving top innovators, are
discussed in the US deals article, “Buying
biotech, being biotech.”)
Big pharma’s challenges are also
motivating it to cut costs and maintain
earnings. Once again, this is driving
creative approaches through deal-making.
In at least one prominent example, the
creation of Enlight Biosciences, we have
seen several big pharmas collaborate in
a precompetitive space. (See “A closer
look” on page 9 for details.) We’re likely
to see more structures along these
lines. The concept — bringing together
many big companies to jointly develop
a platform or address a scientific
quandary — could certainly be applied
more broadly at a time when big pharma
needs both scientific breakthroughs and
cost containment.
New necessities:
the global financial crisis
While the global financial crisis may not
have had much impact on big pharma and
the top innovators, it has certainly taken a
toll on small-cap biotechs. This has always
been an industry of haves and have-nots,
but the disparity between those two
camps has probably never been greater.
As described above, small companies
are now struggling to survive, and these
firms have fewer funding options and
considerably less bargaining power than
they did even a few months ago.
The immediate response of many
small-cap companies has been to suspend
development of secondary products in
the pipeline, seek to sell noncore assets,
cut costs and focus resources on the
most promising pipeline candidate. While
this response is understandable, it is
also, ironically, more of the same. The
existing model — building “rifle shot”
companies around lean R&D operations
in order to reach the next value-creating
milestone — is now in overdrive as
companies pare back even further in
bare-bones approaches that can risk
everything on the fortunes of a single
clinical candidate.
Here, too, many companies are looking
at creative deal-making approaches
to address their challenges. We could
see deals where two or more small
single-product biotech firms “roll up”
their enterprises into a single franchise
to lower burn rate, take advantage of
scale efficiencies and attract investment.
To close the valuation gap between
sellers’ expectations and market realities,
acquisitions with earn-outs have become
increasingly regular even in purchases
of public companies — an unprecedented
development. Companies that choose
not to sell out will likely be pushed to
partner assets earlier than they would
have otherwise. To still retain rights and
flexibility for an attractive exit down the
road, these firms will seek deals with an
increased use of options or creative ways
to divide geographic rights.
Seeking sustainability
Clearly, big pharma’s reinvention and
the global financial crisis are driving
companies of all sizes to seek new
solutions to the quandaries confronting
them. Much of what we’ve discussed so
far has involved relatively minor changes
to long-standing transaction models.
This is not entirely surprising — after
all, deal-making has been an integral
part of the biotech business model
since the industry’s earliest days, and
the sweeping changes currently under
way are fundamentally realigning the
balance of power between different
groups of companies.
But there is also a much deeper question
at play in this crisis, and it strikes at the
very heart of the industry’s business
model. As we articulated earlier,
operational models can help companies
address challenges of funding, partnering,
developing and commercializing products,
but these approaches ultimately feed
into a larger business model. Is the
business model that biotech has always
known — built, as it is, on a lengthy
relay race — still sustainable? Will
various runners — investors, partners,
buyers — still enter their legs of the race if
they don’t know whether the next runner
will be there to take the baton? Will the
race be run by different sets of runners?
Will it be run at all?
What we’re talking about, in short, is
sustainability. At a time when many firms
are struggling to remain in business, the
real question is not whether individual
Is the business model
that biotech has always
known — built, as it is, on
a lengthy relay race — still
sustainable? Will various
runners — investors, partners,
buyers — still enter their legs
of the race if they don’t know
whether the next runner will be
there to take the baton? Will the
race be run by different sets of
runners? Will it be run at all?
13
companies will survive (many won’t) but
whether biotech’s basic business model
is itself sustainable. As we articulate
below, several major trends in the current
market suggest that the biotech business
model will not be sustainable in the same
form as it has existed in the past. For the
model to survive, it needs to sustain both
its inputs and its outputs. In other words,
it needs steady supplies of the fuel that
keeps it going: funding. And it needs to
continue to deliver the results that justify
its existence: innovation.
Relay runners wanted
Sustaining funding:
relay runners wanted
To sustain an adequate supply of funding
for the industry’s relay-race business
model, we need a constant supply of
willing runners. Over the next few years,
however, the runners that biotech
companies have come to rely on — venture
capitalists, public investors and big
pharma — will face constraints that could
limit their participation.
For VCs, the existing venture funding
model — which was already facing
considerable pressure in recent years
because of longer paths to exits,
increased regulatory uncertainty and
lower returns from IPOs — has come under
unprecedented pressure due to the global
financial crisis. Exits have become even
more difficult, thanks to an extended
IPO famine, depressed public-company
valuations and big pharma buyers that
may be distracted by their own internal
challenges and less able to use debt
for acquisitions. Bargaining power in
acquisitions has shifted toward buyers,
to the detriment of smaller companies
and their VC backers. Raising capital from
LPs is becoming more challenging as
LPs see their portfolios shrink — meaning
that there is now more competition for a
smaller pool of money and that LPs are
more likely to demand better performance
from their investments.
Meanwhile, public investors — who account
for the majority of the recent decline in
biotech funding — are not expected to
14
New investors?
Better valuations?
More effective
drug development?
return in force any time soon. The era of
easy money and high leverage has come
to an end, and public biotech companies,
which had attracted significant funding
from highly leveraged hedge funds in
recent years, will simply have less capital.
Lastly, many pharma firms will likely find
their ability to invest in biotech increasingly
Beyond borders Global biotechnology report 2009
Quicker
exits?
constrained, both because of the need to
focus on integrating mega-mergers and
because the pharma industry will spend
less on R&D (and, likely, R&D alliances with
biotechs) as its revenues decline.
Creative partnering models — including
deals with larger up-fronts or deals that
give VCs partial exits now in exchange
for a sale at a prenegotiated price if the
product succeeds — could find ways around
some of these constraints. Such solutions
could help overcome immediate hurdles
and allow individual runners to remain in
the race. But they cannot entirely address
the larger sustainability issue: with the
industry’s existing business model, it
costs US$1–2 billion to build a sustainable
enterprise, and there will simply not be
enough capital to sustain a large number
of today’s companies at that level.
Sustaining innovation:
watch what you cut
This lack of funding will inevitably lead
to reduced R&D spending and slow
innovation. In addition, ultra-lean business
models are likely to put innovation at
risk. The use of these approaches is not
surprising, given the paucity of financing
alternatives. It is also not entirely
without precedent. Indeed, in dire times,
this industry is used to reverting to
cheerleader mode. Biotech companies
are exhorted to focus on innovation and
only pursue the targets that are most
likely to deliver true advancements in
meeting patients’ needs. While that’s an
understandable response, the unfortunate
reality — as we noted in our discussion
of the “drug development lottery” in last
year’s Beyond borders, and as Merv Turner
of Merck argues in this year’s Roundtable
on deals article — is that even the smartest
minds and best technologies are unable
to separate the winners and losers early
on. If drug development is still dependent
on a good deal of serendipity, the culling
of large numbers of “less promising” R&D
programs raises the very real prospect that
we might be killing the next big thing. It’s a
sobering thought.
What’s at stake?
Let’s take a minute to remind
ourselves about what’s at stake, and
what we stand to lose if innovation
slows down.
While we’ve made impressive progress
in treating scores of diseases in recent
decades, we still have a ways to go in
addressing unmet or underserved medical
needs. There is absolutely no doubt,
however, that the answers to those
needs — from curing cancers to fighting
new strains of treatment-resistant
infections and tackling neurodegenerative
diseases — will principally be found
through biotechnology.
As a society, we urgently need to
contain our rapidly growing healthcare
costs — a problem that will only get worse
in the decades ahead as populations age,
setting off demographic time bombs in
the West, China and Japan. Again, the
innovative power of biotechnology has
the potential to provide an important
part of the answer — through the promise
of more efficient drug development and
interventions that are safer, more timely
and more effective.
If we are to have any hope of improving
the quality of millions of lives through
better treatments and interventions — and
do so while containing healthcare
costs — then we need not just to sustain
biotech innovation, but to unleash its full
transformative potential.
Paradigm shifts
So how do we jump-start innovation?
If biotech’s existing business model is
becoming unsustainable, how do we
accelerate the transition to sustainability?
In last year’s Beyond borders, we talked
about big pharma’s “existential moment,”
referring to the fact that many large
pharmaceutical companies need to either
fundamentally reinvent themselves
or risk disappearing, at least in their
current form. This year, on the 100th
anniversary of Charles Darwin’s birth,
another analogy seems more fitting: the
“Darwinian moment.” At a time when the
biotech industry faces the prospect of
significant contraction and consolidation,
the question is whether this will be a
destructive process or an evolutionary
The process of evolution has
been neither linear nor smooth.
Every now and then it has been
shaped by cataclysmic events …
one. Clearly it’s an issue on the minds of
industry executives, since the metaphor
is used repeatedly by this year’s guest
contributors. From the titles of guest
articles (“Survival of the focused,” “The
Darwinian challenge”) to our roundtable
with four next-generation CEOs, much of
the discussion in this year’s book revolves
around a central question — how do we
create a Darwinian opportunity out of an
existential threat? How do we ensure that
this is not the start of a mass extinction
but rather a process of advancement in
which biotech’s best and fittest survive?
If we’re going to use the Darwinian
metaphor, then it’s worth remembering
that the process of evolution has been
neither linear nor smooth. Every now and
then it has been shaped by cataclysmic
events — a helpful meteor or two, a
mega-volcanic eruption — that completely
altered the environment and created
opportunities for new species to evolve.
And that is where we are today — on the
cusp of a world of change that could quite
possibly change the world.
Over the next few years, several trends
currently in play have the potential to
shift existing paradigms and, in doing
so, to create new, sustainable business
models. We highlight a few of these here:
• Generics, generics, generics. We have
written extensively, in this article as
well as in last year’s Beyond borders,
about the financial implications of big
pharma’s patent cliff. Pharma’s revenues
face a precipitous drop. The products
themselves, however, are not in peril.
To the contrary, they will probably serve
more patients than ever before, as
generic equivalents reach the market.
These are, it should be remembered,
some of the most successful blockbuster
15
drugs in the world — meaning that
patients will have access to some of
the best generics the industry has
ever seen. Even as this creates new
competitive pressures — companies will
need truly innovative products to secure
reimbursement from payors — it could
remove some of the pricing demands
that the industry has faced in recent
years, as payors’ budgetary constraints
are loosened by lower-priced generics.
This, in turn, could allow for better
margins for innovative products and help
make the numbers work for sustainable
business models.
• Healthcare reform. The United States
may finally be on the verge of making
its much-delayed, long-anticipated,
often-feared transition to universal
healthcare coverage. Like the coming
wave of generics, this change would
be nothing short of momentous — a
dramatic expansion in the world’s
largest (and most laissez-faire)
drug market. Indeed, recognizing
healthcare’s paradigm-shifting
power, the Obama administration
is positioning healthcare reform
as one of three investments in the
future (energy and education are the
others) that will lay the foundation
for a more competitive 21st-century
economy. For drug companies,
expanded coverage will likely bring
new pricing regimes where buyers
have concentrated bargaining power.
Meanwhile, the push for electronic
medical records to increase efficiency
could produce vast volumes of data for
companies to mine in developing better
treatments — creating new winners
and losers, including perhaps from
competitors and collaborators that
emerge from outside the traditional
healthcare sector. Once again, there
are opportunities to build sustainable
business models in this uncertainty.
Healthcare reform will likely include
the adoption of pay-for-performance
metrics. The challenge for the drug
industry will be to make sure that these
metrics maintain the right incentives
16
Sweeping changes that are
on the horizon — a wave
of high-quality generics,
fundamental healthcare
reform, personalized medicine
and globalization — could
dramatically shift existing
paradigms and generate
opportunities to build
sustainable business models.
for innovation rather than simply
aim to lower costs. The movement
to a system that measures and truly
rewards companies based on the
value their products deliver could give
investors the returns they need and
create the basis for a more sustainable
business model.
• Personalized medicine. Some of the
paradigm-shifting trends discussed
above, such as competition from a
new wave of generics and the move to
pay-for-performance under healthcare
reform, could also accelerate the
adoption of personalized medicine.
We discussed personalized medicine
in considerable detail in last year’s
Beyond borders and won’t cover the
same ground here, but this is another
development that promises to be truly
transformative, with implications for
the entire business model from early
research through commercialization
and marketing. 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. With the use
of biomarkers to identify promising
targets up front, personalized medicine
will also make early stages of the
value chain — research and early
development — more valuable. Since
these are precisely the activities that
have traditionally been biotech’s
strengths, the move to personalized
Beyond borders Global biotechnology report 2009
medicine should bring more bargaining
power to biotech companies, creating
opportunities for deals and business
models where biotech firms can make
the numbers work by capturing more of
the upside.
• Globalization. Last, but not least, is
globalization, another trend discussed
in some detail in last year’s Beyond
borders. Much of what we discussed
last year remains unchanged in the
current environment. 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. As overall
growth in emerging markets slows,
however, some Western companies
may start reconsidering the timing of
their strategies, which are based on
the assumption that rapidly growing
middle classes will give them access to
previously untapped markets. Beyond
these short-term impacts, however,
globalization promises to bring
sweeping changes to the drug industry,
with implications for the business
models of Western firms. As ex-US
and ex-European geographic rights
become more valuable, for instance, it
will become increasingly possible for
partners to divide up worldwide rights
in ways that provide value to each
participant. As companies in these
markets develop, they are partnering
with and acquiring assets from Western
companies — creating new sources of
capital and the potential for new ways
of collaborating that could become
increasingly significant with time.
More broadly, it is worth noting that
the biotech business model we have
discussed in this article is really the
Western biotech business model. In the
emerging biotechnology industries of
Asia, many of the factors that Western
companies have relied on — strong
university research, technology transfer
laws that support commercialization,
experienced venture capitalists — have
not been as readily available, and
companies have evolved different
models in response. As Western
companies look for alternatives in the
current climate, there may be Asian
examples to learn from.
The path ahead: beyond business
models as usual
Biotech’s existing business model has
never been under more strain, with
funding dramatically reduced and
considerable innovation at risk. The
question is whether the industry will find
new ways to reach a sustainable model. To
keep runners in the race (or attract entirely
new runners), companies will need ways to
improve returns on investment — through
better prices and valuations, quicker exits
or more efficient R&D. Alternatively, if they
can find ways to shorten the race itself, the
model could work with fewer runners.
Yes, this crisis is truly different. It’s
deep-rooted and systemic, and the
problems it has prompted are unlikely to
be mitigated any time soon. But times
of tremendous change — whether set off
by global recessions or meteors — can
reshape landscapes and create new
opportunities. There is good news in
that realization, because the sweeping
changes that are on the horizon — a wave
of high-quality generics, fundamental
healthcare reform, personalized
medicine and globalization — could
dramatically shift existing paradigms
and generate opportunities to build
sustainable business models.
For that to happen, biotech executives
will need to understand the potential
impact of these changes, prepare for
them, and wherever possible, help shape
them. The industry’s representatives will
need to be actively involved in the policy
debate on healthcare reform, to ensure
that the pay-for-performance metrics
developed align incentives with the needs
of innovation. And its scientists will need
to focus their R&D efforts to embrace
personalized medicine, since its adoption
offers some of the best hope for quicker
R&D and better returns on investment.
Necessity is the mother of all models,
and if history is any guide, today’s
tremendous challenges will unleash
tremendous creativity. So far, we’ve
seen that creativity applied in relatively
small ways to adjust partnering models
and navigate around immediate
roadblocks. As the industry’s creativity
is applied to the larger issue of
sustaining the entire relay race, and as
several paradigm-shifting trends unfold,
we could see the emergence of more
durable models that will carry biotech
through the next 30 years. The sooner
we can get there, the better.
17
John Martin, Ph.D.
Gilead Sciences, Inc.
Chairman and
Chief Executive Officer
The question of how we sustain growth in
our industry is, ultimately, one of how we
sustain innovation in treatment advances
and ensure greater patient access to
those advances. The global financial crisis
has had a direct and immediate impact on
the biotechnology industry, most visibly
in the consolidation and downsizing of
many organizations. Without continued
investment, we face the real danger
that an entire generation of biotech
companies will be cut down.
This danger is not unprecedented. We
have been threatened by economic, legal
and policy changes over the history of
the industry. At Gilead Sciences, we have
endured challenging times, and faced the
question of whether it made more sense
for us to be acquired rather than remain
independent. We persevered and went on
to become one of the industry’s largest
and most successful fully integrated
companies. Our experience may offer
insights for companies that are similarly
challenged today.
Risks
Risk is inherent in both the financial
and research components of our industry.
Bringing novel therapeutics to market
is a lengthy, difficult and expensive
endeavor, particularly compared to
product development in other industries.
Only a small percentage of compounds
in development ever make it to
commercialization.
With investors already facing significant
R&D risk from biotech investments,
anything that substantially worsens
the odds can lead to precipitous
declines in funding. In the early 1990s,
proposed healthcare reforms were
initially undertaken without sufficient
18
Survival of the focused
transparency for investors to understand
and evaluate risk, which dampened
investment. In the current crisis, the
perceived risk is mostly systemic rather
than sector-specific, and biotech is one
of many sectors that public investors
have abandoned.
Responses
At Gilead, we survived past
periods of uncertainty through a
concerted emphasis on what is most
important — developing innovative
drugs. To this day, our approach is to
apply critical decision-making to advance
only those compounds that we believe
have the potential to truly address
unmet medical needs. In an environment
in which regulators and payors are
demanding more, it is more important
than ever that we all have this focus.
Drugs that offer significant advances in
treating patients are the ones that will
gain market acceptance — and deliver
the returns that investors require.
We have always believed in being
deeply connected with the healthcare
ecosystem. Our conversations and
collaborations with governments,
companies, physicians and patients
help us understand the needs of the
communities we serve. Through these
conversations, we have, for instance,
developed access and care programs for
patients who cannot otherwise obtain
our medications in the developing
world and industrialized nations. But
being connected also gives a company
valuable feedback to make its operations
more effective, allowing it to adapt
clinical development programs, make
manufacturing processes leaner or
simplify the logistics of a patient
Beyond borders Global biotechnology report 2009
assistance program. For companies
and their investors, this means more
predictability, fewer surprises — and
less risk.
We also recognize that our research
efforts represent a small percentage
of the overall R&D landscape. Our
expertise, however, allows us to
evaluate and identify opportunities
outside our organization, and affords
us the credibility to be a valued partner
for other companies and academic
collaborators. In areas where we do not
have an inherent efficiency advantage
or strategic rationale for conducting
certain activities, we rely on the
experience and capacity of partners.
For example, we have outsourced much
of our manufacturing to partners with
substantial knowledge in this area.
Rewards
Tough times, as the adage goes, don’t
last. The question is what the industry
will look like after this crisis is over. Will
a new generation of fully integrated
companies emerge? I hope so. It won’t
be easy, and many firms will perish, but
I am confident that many will make it
through — and be the tougher for it.
In summary: focus on what matters.
Innovation matters, because that’s what
drives value in this industry. Collaboration
matters for efficiency and strategic
advantage. Connectivity matters, because
success depends on understanding the
needs of the communities we serve.
And that, in the final reckoning, is
the real reward — the opportunity to
make a difference in curing diseases
and helping patients. I can think of no
greater motivation.
James M.
Cornelius
Bristol-Myers Squibb
Chairman and
Chief Executive Officer
Innovation from a string of pearls
A raft of challenges
A string of pearls
Over the next few years, escalating
pressures will transform the
pharmaceutical industry as we know it.
The industry will face a host of patent
expirations on many of its most important
products, making innovation and R&D
productivity paramount. Meanwhile, access
to physicians is fleeting, and governments
and payors are bearing down on prices,
access and prescribing patterns.
To achieve these goals, we have
restructured in two significant ways.
First, we are divesting assets to focus
intently on innovative medicines. We
have moved away from our non-pharma
assets — selling our wound care and
imaging businesses, for instance,
and completing a partial IPO for our
nutritionals group.
These challenges are being compounded
by the global economic downturn,
which could reduce the uptake of novel
medicines as customers balance medical
care with other basic needs. For biotech
companies, access to capital has dried
up — with potentially dire consequences
for many innovators.
These measures have given us a
strong cash balance, allowing us to
pursue the second critical component
of our model: our “string of pearls,”
a series of interrelated acquisitions,
licensing agreements and partnerships
with biotech companies. We intend to
become the partner of choice for the
biotech industry.
In the face of these challenges, old business
models are unsustainable, and companies
must reinvent themselves — or fail. While
it is clear that new models are needed,
there is no consensus around what shape
those models should take. So, while all
pharma companies are responding, they
are taking somewhat different approaches
to the problem. Some are betting that
large-scale consolidation will provide a
path forward. Others have cast their lot
with diversification, turning to generics or
non-pharma products.
We don’t have a one-size-fits-all approach
to these alliances. Instead, we aim for
transaction structures that can generate
the greatest innovation and value.
In some cases, we may engage in a
licensing agreement for a single asset
or a particular group of compounds. In
other cases, as with our 2007 acquisition
of Adnexus, the value of the purchase
stems from the innovation we generate
by working closely together; as a result,
this subsidiary has flourished as part of
the Bristol-Myers Squibb family.
Bristol-Myers Squibb’s strategy — adopted
in late 2007 — is focused on combining
the best of biotech (intensity,
entrepreneurialism and agility) and
pharma (global reach, vast experience
and rich resources) with one central
goal: driving innovation. If we can
succeed at being truly innovative, we
will all benefit — biotech, pharma and
the patients we serve.
The partnerships we’ve formed have
been mutually beneficial, as they
allow for the cross-pollination of ideas
and culture. While our company’s
investments have helped nurture the
biotech industry, we’ve also been able
to borrow lessons about how to operate
leaner and more productively. By
following the example of the biotechs,
we have managed to spend less on
general and administrative expenses and
rely more on the intensity of a “can-do”
culture. We are well on track to realize
a total of US$2.5 billion in cost savings
and avoidance by 2012.
The path ahead
The drug industry faces sizeable
challenges, and there will be no quick
fixes. Pharma companies will not be able
to instantaneously replace the billions
of dollars of revenue they are slated to
lose over the next few years. For many
biotech firms, funding is challenging, and
investment is unlikely to return to historic
levels anytime soon.
But we believe it is possible — and
necessary — for biotech and pharma
companies to come together to ensure
that innovative medicines continue to get
to those who need them. To do so, we
will need to partner, to complement each
other’s strengths and weaknesses.
This is the path we are pursuing at
Bristol-Myers Squibb. We are already a
vastly changed company — financially
more competitive, culturally more
innovative and better structured for
delivering novel medicines for serious
disease. In making these changes,
we’ve also positioned ourselves as a
much more attractive business partner.
We are confident that this model will
promote a sustainable future of medical
innovation and scientific cooperation,
bringing meaningful hope to patients
and physicians fighting to prevail against
serious disease.
19
Venture capitalists speak out
The more things
change, the more
they stay the same?
We are in the midst of a global crisis that is buffeting industries from
airlines to wireless communications. But unlike most industries,
biotechnology is no stranger to financing droughts, and biotech companies
have become quite adept at surviving market slumps. This inevitably
raises a couple of interesting questions. Has the biotech industry been
here before, and will companies find creative ways to weather this difficult
environment as they have in the past? Or is this crisis truly different,
and what implications does that have for the industry? To address these
questions, we reached out to a number of seasoned venture capitalists
from across the US and Europe and asked for their insights.
Have we been here before?
“We have been here before. There have been many periods of
dramatic mismatch between capital supply and demand in
the history of the biotechnology industry. I am very confident
that these innovative, creative companies will once again
successfully adapt their business models to this challenging
environment. Over the last two decades, the biotech
industry has gained critical mass, and the demand for its
capabilities has never been greater — today, the industry is an
indispensable source of innovation for big pharma.“
— Rainer Strohmenger, Wellington Partners
“Biotech has gone through several bear markets before,
most notably following the burst of the tech bubble. What
is different this time is the underlying deep recession in the
world economy. However, compared with other industries,
biotech is faring quite well. Large- and medium-cap biotech
have been among the best-performing sectors during this
crisis. Fundamental drivers remain strong: patent expirations
in pharma necessitate an ongoing partnership with innovative
biotech companies. As a result, I expect biotech to be one of
the first sectors to attract new capital and recover.”
— Ansbert Gadicke, MPM Capital
“Biotech has been through many down cycles, and they are
always challenging times for entrepreneurship and venture
funding. But we also look at these times as an opportunity.
For portfolio companies, there is the opportunity to focus
and prioritize, return to capital efficiency, hire great talent
and differentiate themselves from their competitors. The
opportunity for VCs is to identify outstanding companies that
can prosper despite a difficult environment. Retrospectively,
we find that great companies and investments often emerge
from the toughest economic conditions.”
“Don’t panic, we’ve been here before! Yes, this is a global
recession of unprecedented magnitude, but biotech
funding has always been cyclical, and the industry has
always recovered. Today, the fundamentals remain strong.
Patients still endure huge unmet medical needs — out of
600 ‘classified’ diseases, only 20–25% have effective cures,
and millions of patients still suffer from diabetes, cancer
and heart disease. Pharma still faces a colossal patent cliff,
and biotech is crucial for filling the pipeline — biotech’s
productive R&D has produced thousands of products
currently in the clinic. So biotech-pharma deals, which
tripled between 1999 and 2009, will continue. Yes, biotech
has real challenges, led by financing risk. Hundreds of
firms face capital shortfalls at a time when it is very hard to
refinance. No doubt there will be failures. But there will also
be survivors and there will be winners. Times are different,
but some things never change.”
— Samuel Colella, Versant Ventures
“We have been here before. The biotechnology industry’s
core strength is translating novel science into breakthrough
products. Thoughtful people never forget what this requires:
hard work on the science, patience, collaborative teams,
lots of capital and cooperative partners. Sometimes these
elements combine to produce spectacular drugs and
diagnostics. Sometimes good efforts fail. And sometimes
external factors such as economic cycles, confusing
regulations and slow reimbursement frustrate us. Visit with
doctors, hospitals and patient groups to remind yourself why
this intensely creative industry is needed. Focus on novel
approaches serving unmet medical needs. True innovation will
still get funded and rewarded.”
— Brook Byers, Kleiner Perkins Caufield & Byers
— Amir Nashat, Polaris Venture Partners
20
Beyond borders Global biotechnology report 2009
Or is it different this time?
“This time it’s different because the public investors have been
burned too many times and pharma growth has ground to a
halt. We must now finance companies developing products
and technologies that look very different from the types of
things that have come before.”
— Douglas Fambrough, Oxford Bioscience Partners
“This time it’s different. The 2001–02 biotech bust was
contained and self-inflicted from our industry’s perspective,
but the current downturn is far-reaching and externally driven.
Last time, the promise of genomics engendered early-stage
companies with valuations that proved unsustainable when the
timelines to product launch became clear — but much of the
industry remained robust. This time, a persistent funding gap
will dramatically cull investors and companies. Biotechs with
novel products will flourish, even if they have to endure a down
round. But many lesser companies that might have survived
prior crises face a much harsher climate today, leading to
shotgun marriages and even insolvencies.”
— Bryan Roberts, Venrock
“We are living the tale of two cities. Biotech companies with
cash and exciting pipelines, versus those that lack either — or
both. Venture investors that closed their funds before the
downturn, versus those trying to raise funds now. Pharma
companies that have late-stage products to get them through
the patent cliff of 2012, and the ones that do not. And
products that offer true advances for patients, versus those
that are merely incremental. The contrast between haves and
have-nots has never been starker. Our industry will survive
and emerge stronger because smart people are working hard
to fill real unmet medical needs. But over the next few years,
its resilience will be tested as never before.”
“This time it’s different. The model of investing US$50 million
or more for proof-of-concept has grown too risky for most
investors. With unpredictable public markets, projects will
need to be financed longer — even to approval or market
launch — requiring much larger investments and/or greater
R&D efficiency. Breakthrough science and proven teams
can still produce strong returns, but frequent failures have
hurt overall VC returns. With further fund declines ahead,
the biotech VC industry will shrink. We will need new models
to boost success rates and returns on investment, but the
current crisis will still form the basis for new winners.”
— Andreas Wicki, HBM BioVentures
“Historically, few biotechs have gone under. This will change in
2009, amid a record downturn. High-quality companies — both
early- and late-stage — will still raise money, but will need to
rework business plans, seek capital efficiency and extend
runways. For the first time, many VCs are focusing on public
companies — and uncovering remarkable values. But while
much in today’s market is unprecedented, one truth endures:
the best investments are often made in difficult times.”
— David Leathers, Abingworth
“It’s always different in biotech because we have no stable
business model. The industry has become more responsive to
investors than big pharma buyers. As new money flows to the
largest funds, they can dictate valuations. This transfers value
from early to late investors. As a result, we have abandoned
early-stage investing when pharma is asking for innovation. If
politicians eliminate the problem of ‘excess’ capital, we might
see a ‘pharma-centric’ bioventure industry emerge to seek a
sustainable business model.”
— Standish Fleming, Forward Ventures
— Nicholas Galakatos, Clarus Ventures
21
Valuing innovation: new
approaches for new products
and changing expectations
The global financial crisis is straining
the budgets and spending priorities of
individuals, businesses and governments.
These days, many are being asked to
do more with less. Since long before
this crisis, however, healthcare systems
around the world have struggled to
meet patients’ expectations and seize
health-technology opportunities within
the constraints of available financial
resources. At the National Institute for
Health and Clinical Excellence (NICE)
in the United Kingdom, we have been
dealing with these issues since 1999,
and our methodologies have evolved to
address some of the challenges facing
evaluators of new health technologies.
Costs and benefits
The fundamental question is this: how
should a society allocate its healthcare
expenditures to best meet the needs of
patients? This is not very different from
the resource allocation decisions made
by other economic agents — households
choosing to save or spend, or companies
deploying capital across different
investments. One way to address the
problem, therefore, is to use the same
methodology implicit in those other
economic decisions — weighing relative
costs and benefits.
This is precisely what NICE does.
The agency uses an approach called
“cost-utility analysis” to compare the costs
and health benefits of new interventions
to those already provided by the UK’s
National Health Service (NHS). While this
may sound straightforward, in practice it
has been somewhat controversial. NICE
surveys show that while most NHS users
support the efficient and equitable use of
22
healthcare resources, they dislike the idea
that costs are taken into account when
deciding what treatments should be made
available. It’s a very human contradiction.
And as always, details matter, so the
specific approaches to measuring costs
and benefits generate controversy.
To quantify benefit, NICE considers the
impact of different treatments using a
common yardstick, the quality-adjusted
life year (QALY). The QALY measures
not just the length of life under an
intervention, but also the quality of
that life — whether patients are able
to undertake their usual activities,
for instance, or how much pain they
experience. On the cost side of the
ledger, NICE considers expenditures
incurred by the NHS and personal
social services (PSS) provided by
local governments. NICE appoints
independent advisory committees to
make decisions based not only on this
economic analysis, but also on clinical
effectiveness evidence, submissions
from stakeholders and testimony from
patient and clinical experts.
Because the NHS has a fixed budget,
any money spent on a new intervention
is not available for other things. To be
considered cost-effective, therefore,
a new intervention should provide at
least as much benefit (in QALY terms) as
other interventions that could have been
purchased using the same money.
Of course, we can’t measure the
cost-effectiveness of every alternative
intervention across all of the NHS,
so we have had to make assumptions
about cost-per-QALY thresholds at
which interventions may be deemed
cost-effective. We weren’t given a
Beyond borders Global biotechnology report 2009
Andrew Dillon
Sarah Garner, Ph.D.
NICE
NICE
Chief Executive
Associate Director for R&D
threshold by the UK’s Department of
Health, so we’ve had to work one out
for ourselves, based on what we believe
represents good value for money for the
NHS. To guide us in setting a threshold,
we took advice on the threshold which
had been used by NHS organizations
before NICE was established. Over time,
it became apparent that the advisory
committees generally approved at a
cost per QALY below around £30,000
(US$43,600) and were generally more
cautious in doing so above this figure.
This experience was subsequently
translated into a decision framework
which guides committees to routinely
approve treatments falling below
£20,000 (US$29,200) per QALY and
to normally approve those costing
between £20,000 and £30,000. Above
this level, committees would rarely
approve treatments, although they can
and do. Some argue that this range is
too high, displacing more cost-effective
interventions, and others argue it is
too low, preventing novel interventions
from being available. We are bringing
stakeholders together in 2009 to hear
arguments on both sides.
New approaches: measuring “benefit”
As discussed above, NICE considers
impacts within the healthcare
system — benefits for patients and
caregivers relative to costs incurred by
NHS and PSS. However, this approach
raises the possibility that we may miss
costs and benefits that ultimately
matter to patients by not taking a
wider economic perspective. If we
were to broaden our perspective — as
some have argued we should — by, for
example, taking account of the impact
on the economy of returning someone
to full employment, we would be using
resources allocated for health to pursue
nonhealthcare objectives.
Certainly there could be circumstances
where much of the cost (or cost saving)
is incurred outside the NHS and PSS, or
where the majority of the “benefit” is not
health-related. In a number of exceptional
circumstances, the Department of Health
has agreed that NICE can consider a
wider perspective for costs and benefits.
This has to be agreed at the start of the
appraisal since it will affect the results of
the economic analysis and may involve
making recommendations about resource
allocation beyond the health system.
The Department of Health is taking the
lead in researching and engaging with
stakeholders on this issue in 2009.
New approaches: pricing and access
The UK’s voluntary Pharmaceutical
Price Regulation Scheme (PPRS), which
modulates the pricing of pharmaceuticals
manufactured by participating companies,
including new biologics, has been revised
in 2009 with a broader agenda and two
new elements that better reflect value in
the price of drugs. The first new element,
flexible pricing, allows a company to
increase or decrease its original list price
when new evidence emerges concerning
the drug’s efficacy or risks, or a different
indication is developed. The second
element, patient access schemes, can
facilitate patient access for medicines
that were not initially found to be cost or
clinically effective by NICE.
Even before the revised PPRS was agreed,
patient access schemes have allowed
us to give patients access to new drugs,
sometimes by collaborating creatively with
drug companies. Velcade, for instance,
was approved for relapsed multiple
myeloma under an arrangement where
the company reimburses NHS for patients
who make a less-than-partial response
to treatment, based on a predetermined
measure. More recently, Sutent was
approved for advanced and/or metastatic
renal cancer; an arrangement where
the company pays for the first cycle of
treatment contributed to the agreement.
New approaches: life-extending
treatments
Shepherding new products through
regulatory approval is, of course, a long
and expensive process. In recent years,
new biologics have increasingly been
targeted at small subpopulations of
patients. These drugs sometimes come
with relatively high price tags. At these
prices, NICE’s current methodology
sometimes does not find the drugs
cost-effective compared to existing
interventions, even given the incremental
benefit they can offer.
This has, on occasion, spurred heated
debate, particularly when the drugs
in question are treatments that could
extend life for patients with terminal
diseases. How much are additional
months of life worth to patients and
their families compared to an equivalent
healthcare impact for people with other
conditions? How much more should the
healthcare system be willing to pay in
these circumstances? Some argue that
our existing analytical methods cannot
fully account for this value.
But we are working on new approaches.
In January 2009, NICE provided its
advisory committees with supplementary
methodological advice on the issue of
valuing extensions to life for terminal
patients. The advice applies in a defined
set of circumstances — while recognizing
exceptional situations, we also need to
maintain a consistent overall approach to
equitably allocating the fixed resources of
the NHS.
Valuing innovation
These are not easy issues. Our work
at NICE attempts to strike a balance
between the expectations of patients and
families, the need to provide commercial
incentives for healthcare investors and
innovators, and the ultimately finite
resources of the healthcare system.
With aging populations and increasingly
constrained budgets, these pressures are
only going to grow.
Our methods have sometimes generated
controversy. Perhaps that is to be
expected — after all, those methods do
require putting monetary values on health.
But one way or another, all health systems
make such choices — NICE’s methodologies
simply enable us to make them in a more
rigorous and explicit manner.
The challenge we are discussing here
can be summarized in two words: valuing
innovation. What approach should
be adopted by NICE to ensure that
innovation is properly taken into account
when establishing the value of new health
technologies? Should particular forms
of value be considered more important
than others? In 2009, we have asked
Professor Sir Ian Kennedy of University
College London to lead a study and chair
a series of workshops to discuss these
issues with industry representatives, the
NHS, patients and the general public. We
don’t claim to have all the answers, but
we’re certainly open to asking questions
and launching a dialog.
We would encourage others to do the
same. Our experiences at NICE may
provide lessons for policy-makers
in other countries as they seek new
solutions. Companies need to be
actively engaged as well. They can
approach NICE for scientific advice
about issues such as clinical-trial design
and selecting appropriate outcome
measures, and they should contribute
to their local comparative-effectiveness
policy debate. Balancing the needs of
patients, payors and innovators is not
easy. For the health of our industry and
the health of patients everywhere, we
will need healthy dialog.
23
Global year in review
Turbulent times
For the global biotechnology industry,
as for the rest of the world economy,
the biggest developments of 2008
were in the capital markets. The market
meltdown, born in increasing defaults
on US subprime mortgages, rapidly
spread beyond borders, sending stock
markets plummeting and fueling a credit
crisis. In the US, the aggregate market
capitalization of the biotech sector, which
rose 21% between 1 January and
15 August, fell sharply in the fourth
quarter, closing 2008 down slightly
relative to the beginning of the year.
The impact of the stock market crash
fell disproportionately on the industry’s
smallest firms, which saw their valuations
fall precipitously. A significant cohort of
firms was even trading at values below
the cash on their balance sheets, as wary
investors implicitly assigned negative
valuations to the intellectual property
and other assets of these firms. Similar
declines were seen in other major
markets during the year, as the industry’s
market capitalization fell by 35% in
Europe and by 61% in Canada.
by 46%, from US$30 billion in 2007 to
US$16 billion in 2008. Not surprisingly,
the most dramatic falloff was in funds
raised from public investors. The amount
of capital raised in IPOs fell by a dramatic
95%, from US$2.3 billion in 2007 to
US$116 million in 2008. The bulk of this
funding came from Europe, where three
companies went public and raised about
US$111 million. In the North American
market, IPOs all but disappeared. There
was just one listing in the US, for a
relatively meager US$6 million, and none
at all in Canada. Some Asian companies
did manage to go public in spite of the
market conditions, with three IPOs on
Japanese stock exchanges and two
listings by Chinese firms.
Financing
In recent years, follow-on and other
offerings have accounted for the majority
of the biotech industry’s financing. For
instance, these financings — which consist
primarily of follow-on equity transactions,
debt offerings and private investments in
public equity (PIPEs) — accounted for 68%
of the industry’s fundraising in 2007. In
2008, money raised from such financings
totaled US$9.9 billion — less than half the
US$20.3 billion raised in 2007.
The market turmoil led to significant
declines in funding in 2008. Overall,
capital raised by biotech companies fell
Venture capital held up relatively well
during the year, falling by only 19%. As a
result of the steeper decline in financing
for public companies, venture funding
accounted for 37% of total biotech
financing in 2008, up from 25% in 2007.
Venture financing remained relatively
strong in the US and Europe, but fell
more sharply in Canada, where there was
a 41% decrease.
Across the world, biotech companies
can expect a more challenging funding
environment in 2009. Investors in
publicly traded biotech companies,
which provided the majority of the
industry’s capital in recent years, are
unlikely to return in a big way. Many
of these investors have seen their
portfolios decline with the overall stock
market. The era of easy money and
high leverage has ended, and there is
simply less capital to go around, leaving
biotech companies with less funding
in the months ahead. And while VCs
have not abandoned the sector entirely,
they are being more selective in an
environment of challenging exits and
reduced valuations.
Financial performance
The revenues of the publicly traded global
biotechnology industry increased by 12%,
from US$80.3 billion in 2007 to US$89.7
billion in 2008. However, this growth was
unevenly distributed across regions.
The year in financing: US, Europe and Canada 2007 and 2008 (US$m)
Type
IPO
Follow-on and other offerings
Venture financing
Total
US
6
8,547
4,445
$12,998
2008
Europe
111
1,115
1,369
$2,595
Canada
0
271
207
$478
US
1,238
14,689
5,464
$21,391
2007
Europe
1,010
4,880
1,604
$7,494
Source: Ernst & Young, BioCentury, BioWorld, VentureSource and Windhover
Numbers may appear inconsistent because of rounding
Percentage changes for Europe and Canada based on conversion of currency to US dollars
24
Beyond borders Global biotechnology report 2009
Canada
5
703
352
$1,060
Percent change
US
Europe
Canada
-99.5%
-89%
-100%
-42%
-77%
-61%
-19%
-15%
-41%
-39%
-66%
-55%
In the US, top-line growth fell into
single-digit territory as the sector’s
revenues increased by only 8.4%.
However, US revenue was trimmed
by the acquisitions of several mature
biotechs. After adjusting for the impact
of three large deals — Millennium
Pharmaceuticals’ acquisition by Japan’s
Takeda Pharmaceuticals, ImClone Systems’
purchase by Eli Lilly, and the acquisition
of Applied Biosystems by Invitrogen
(since renamed Life Technologies) — the
sector’s revenues would have grown by
12.7% instead of 8.4%. Revenues were
also diminished by slower growth at the
industry’s largest revenue-generating
company — Amgen. While Amgen’s
revenues grew by a compound annual
growth rate of 27% between 2002 and
2006, they grew by only 1.6% in 2008,
largely as a result of regulatory and
reimbursement developments that hurt
sales of some of its products.
In Europe, the revenues of publicly
traded companies increased by 26%.
This growth rate was boosted by the
impact of fluctuations in the exchange
rate — when stated in euros, revenues
grew by 17%. The vast majority of this
increase is attributable to strong product
sales at a handful of mature European
biotechs, including Actelion, Elan, Eurofins
Scientific, Meda, Qiagen and Shire.
In Canada, revenues of publicly traded
biotech companies decreased 9%, from
US$2.2 billion in 2007 to US$2 billion in
2008, mainly due to the acquisitions of
four significant Canadian firms — Arius,
Aspreva, Axcan and Draxis — by foreign
companies. If 2007 revenues were
adjusted to exclude those four companies,
the industry’s revenues would have
increased by 26% instead of falling.
Global biotechnology at a glance in 2008 (US$m)
Public company data
Revenues
R&D expense
Net income (loss)
Number of employees
Number of companies
Public companies
Public and private companies
Global
US
Europe
Canada
AsiaPacific
89,648
31,745
(1,443)
200,760
66,127
25,270
417
128,200
16,515
5,171
(702)
49,060
2,041
703
(1,143)
7,970
4,965
601
(14)
15,530
776
4,717
371
1,754
178
1,836
72
358
155
769
Source: Ernst & Young
Numbers may appear inconsistent because of rounding
Employment totals are rounded to the nearest hundred in the US and to the nearest ten in other regions
In the Asia-Pacific region, revenues grew
by an impressive 25%, led by strong
growth in Australia, where the sector
benefited from strong sales of CSL’s
Gardasil. Indeed, in each region, a few
mature companies had a disproportionate
impact on top-line growth, highlighting
that biotech remains an industry of haves
and have-nots.
Sustained investments in R&D are
critical to the future success of biotech
companies, and it is encouraging that
global R&D expenditures grew by 18% in
2008 — outpacing growth on the top line.
While the growth in R&D differed across
regions, it grew by strong double-digit
rates everywhere except Canada, where
R&D expenditures were negatively
affected by the four large acquisitions
mentioned above.
There was some exciting news with regard
to one long-anticipated development: the
profitability of the US biotech industry.
As detailed in prior editions of Beyond
borders, the US publicly traded biotech
industry has never been profitable in
aggregate, because the profits of a
relatively small group of successful
companies have always been outweighed
by the losses of large numbers of smaller,
pre-revenue firms. For several years,
Ernst & Young has forecast that the US
publicly traded biotech industry would
reach aggregate profitability before the
end of the decade. The industry inched
closer to that benchmark in recent
years — including coming within a hair’s
breadth in 2007 — but never quite made
it. In 2008, the sector finally reached
aggregate profitability with aggregate
net income of US$0.4 billion. Alas, this
accomplishment will likely turn out to be
short-lived, given Roche’s acquisition of
Genentech in 2009.
Boosted by this positive development
in the US and by a strong showing in
Europe, where net loss declined by a
very significant US$1.5 billion, the global
industry’s bottom line improved by an
impressive 53%, from a net loss of about
US$3.1 billion in 2007 to a net loss of
US$1.4 billion in 2008. In the absence
of the Genentech acquisition, it was
quite conceivable that the net profit of
the US sector could have soon become
large enough to make the global industry
profitable in aggregate. With the loss of
25
Genentech, of course, it will be a lot longer
before the US or the global industry sees
aggregate profitability again.
The number of companies and number
of employees fell in 2008 — a sign of the
times and a harbinger of things to come
as the industry is poised for significant
consolidation in 2009.
Deals and creativity
Deal activity remained strong in 2008,
driven both by long-term trends such
as big pharma’s need to reinvent itself
because of looming patent expirations
and by the immediate challenges created
by the current funding environment.
26
M&A activity was robust in both the
US and Europe. The total value of M&A
transactions involving US biotechs was
more than US$28.5 billion — a record
high not counting megadeals in prior
years, such as the 2007 acquisition of
MedImmune by AstraZeneca. Though
absent any megadeals in 2008, the
US totals were boosted by three large
transactions valued at more than US$5
billion each: Millennium Pharmaceuticals’
acquisition by Takeda Pharmaceuticals,
ImClone Systems’ purchase by Eli
Lilly, and the acquisition of Applied
Biosystems by Invitrogen (since renamed
Life Technologies). In Europe, M&A
transactions totaled US$5.0 billion
(€3.4 billion).
Beyond borders Global biotechnology report 2009
Deal activity was also brisk on the
strategic-alliance front. The potential
value of strategic alliances involving US
biotech companies reached an all-time
high of almost US$30 billion, while the
potential value of alliances involving
European companies was US$13 billion
(€8.8 billion).
Reflecting the unprecedented challenges
facing large and small companies, there
were a number of creative deals in 2008.
Many of these transactions involved a small
group of biotech companies that are widely
regarded for their innovative platforms
and drugs. These companies were able to
structure deals that often included options
and allowed them to retain more upside.
Growth in global biotechnology, 2007-08 (US$m)
Public company data
Revenues
R&D expense
Net income (loss)
Number of employees
2008
2007
% change
89,648
31,745
(1,443)
200,760
80,344
26,881
(3,055)
201,690
12%
18%
-53%
-0.5%
776
4,717
815
4,799
-5%
-2%
Number of companies
Public companies
Public and private companies
Source: Ernst & Young
2008 financials largely represent data from 1 January 2008 through 31 December 2008
2007 financials largely represent data from 1 January 2007 through 31 December 2007
Numbers may appear inconsistent because of rounding
To help close the valuation gap between the
expectations of sellers and what the market
is willing to pay at a time of distressed
valuations, acquisitions with earn-outs
became a fairly regular feature even in
the purchases of public companies — an
unprecedented development.
Reflecting the considerable risks
that companies now face even after
launching products, due to increased
post-marketing safety surveillance and a
fast-changing pricing and reimbursement
environment, a number of strategic
alliances contained contingent payments
linked to commercial milestones rather
than R&D milestones.
The most watched biotech deal of the
year — the acquisition of Genentech by
Roche — led to extensive negotiations
but did not culminate in an agreement
until March 2009. Meanwhile, other big
pharmas undertook megamergers of
their own, including Pfizer’s acquisition
of Wyeth and the merger of Merck & Co.
with Schering-Plough. Biotech companies
will need to monitor these trends, since
the integration following such large
mergers can cause significant internal
distractions which impact the companies’
existing and potential partners.
Outlook
The global biotech industry turned in a
solid financial performance in 2008, and
the US sector’s attainment of aggregate
profitability is an encouraging, if largely
symbolic and fleeting, achievement.
Yet, financial growth was led by
strong product sales at a handful of
larger companies, underscoring that
biotech remains an industry of haves
and have-nots. In the current funding
environment, of course, the realities
facing those two sets of firms have
diverged, and many small-cap firms
will have a harder time raising capital,
particularly in the public markets.
Consolidation seems inevitable. For
biotechs looking to raise funds, the good
news is that deal activity remains strong.
But here, consolidation of a different
sort — among big pharma firms — has
made the outlook more complicated.
To survive and thrive in this market,
biotech firms will need to be vigilant,
remain focused and harness creativity.
27
A Darwinian moment?
The Americas perspective
Americas introduction
A Darwinian moment?
In September 2008, economic
conditions took a dramatic turn for
the worse. In three tumultuous weeks,
several leading financial institutions
either failed, were acquired or were
bailed out by the US government. Stock
markets nosedived in waves of dizzying
volatility. US regulators initiated a
series of unprecedented measures
to prop up ailing banks and boost a
flagging economy. As a credit crunch
quickly devolved into a deep global
recession, the world economy — which
had till then been limping along with
a low-grade fever — suddenly seemed
struck by a life-threatening infection.
Not surprisingly, the economic turmoil
has had a considerable impact on the US
biotech industry. The aggregate market
capitalization of the sector, which rose
21% between 1 January and 15 August,
fell sharply in the fourth quarter, closing
2008 down slightly relative to the
beginning of the year. While this showing
handily outperformed broad market
indices such as the Dow Jones Industrial
Average, the Nasdaq Composite and
the S&P 500, each of which fell 30% to
40% during 2008, the biotech sector’s
numbers were boosted considerably by
the strong performance of a handful
of large mature companies such as
Genentech, Amgen and Celgene.
The fortunes of smaller companies
were not quite as rosy, and the impact
of the crisis fell disproportionately
on the industry’s smallest firms. The
aggregate market value of mid-cap
biotech companies (defined as those with
market valuations between US$2 billion
and US$10 billion as of 1 January) fell
30% during 2008, while that of small-cap
firms (those with market caps between
US$200 million and US$2 billion) fell
30
In 2008, the biotech industry outperformed the market …
EY biotech industry
Nasdaq
Dow
S&P 500
+40%
+20%
0%
-20%
-40%
-60%
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Source: Ernst & Young, finance.yahoo.com
EY biotech industry represents the aggregate market cap of all US public biotech companies as defined by Ernst & Young
… but smaller companies fared considerably worse
Largest cos (market cap > US$10b)
Small cap (US$200m - 2b)
EY biotech industry
Mid cap (US$2b - 10b)
Micro cap (below US$200m)
+40%
+20%
0%
-20%
-40%
-60%
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Source: Ernst & Young, finance.yahoo.com
EY biotech industry represents the aggregate market cap of all US public biotech companies as defined by Ernst & Young
Beyond borders Global biotechnology report 2009
Jan
financing fell to levels not seen since
before 2003. The market for IPOs, which
had started to soften in the fourth quarter
of 2007, all but disappeared in 2008.
The year’s only IPO, by Florida-based
Bioheart, occurred in February and raised
under US$6 million, a small fraction of the
US$70 million the company had initially
hoped to raise, and less than the typical
proceeds of a seed round of venture
financing. The public markets were not
much more forthcoming for follow-on
offerings, debt and private investments
in public equity (PIPEs), all of which fell
sharply. The only segment that fared well
was venture capital, where — in spite of
a 19% decrease relative to 2007 — the
US industry achieved the second-highest
totals in history.
33%. For micro-cap companies (firms that
started the year with market valuations
below US$200 million), the decline was
an astonishing 52%. By 31 December,
about 85 biotech companies were trading
at values below the cash on their balance
sheets, as apprehensive investors implicitly
assigned negative valuations to the
intellectual property and other assets of
these firms. For these unfortunate firms,
the decline in market valuation over the
course of the year was a breathtaking 80%.
Financing
As one would expect, the challenging
capital markets environment has also
taken its toll on fundraising by the US
biotech sector, as the US industry’s
The pace of investments slowed
significantly late in the year as the
financial crisis deepened, and the bulk of
the year’s decline in financing occurred
in the fourth quarter. Capital raised by US
biotech companies had averaged US$3.9
billion per quarter during the first three
quarters, but fell to US$1.3 billion in the
fourth quarter. While follow-on offerings
had maintained a pace comparable to the
prior year during the first three quarters,
there were no financings in this category
in the last quarter. Combined with the
lack of IPOs, this means that public equity
markets have effectively been shut for
biotech companies. But even venture
capital — the one positive element in the
year’s financing data — fell notably in the
fourth quarter.
Ernst & Young survival index
US
2008
Number of Percent
companies
of total
More than 5 years of cash
76
3–5 years of cash
2–3 years of cash
1–2 years of cash
Canada
2008
2007
Number of Percent
Number of
Percent
companies
of total
companies
of total
2007
Number of Percent
companies
of total
20%
124
31%
14
19%
37
43%
18
5%
53
13%
3
4%
1
1%
41
11%
39
10%
0
0%
4
4%
74
20%
81
21%
14
19%
10
12%
Less than 1 year of cash
162
44%
98
25%
41
57%
32
39%
Total public companies
371
395
72
84
Source: Ernst & Young and company financial statement data
Numbers may appear inconsistent because of rounding
Quarterly breakdown of Americas biotechnology financings (US$m)
First quarter 2008
Second quarter 2008
Third quarter 2008
Fourth quarter 2008
Total
US
Canada
US
Canada
US
Canada
US
Canada
US
Canada
$6
(1)
$0
(0)
$0
(0)
$0
(0)
$0
(0)
$0
(0)
$0
(0)
$0
(0)
$6
(1)
$0
(0)
$606
(8)
$41
(3)
$278
(4)
$11
(2)
$831
(8)
$28
(3)
$0
(0)
$0
(0)
$1,715
(20)
$80
(8)
Venture
$1,202
(97)
$22
(8)
$1,192
(65)
$48
(5)
$1,177
(77)
$120
(6)
$875
(59)
$17
(6)
$4,445
(298)
$207
(25)
Other
$2,120
(41)
$3,934
$41
(12)
$104
$879
(48)
$2,348
$48
(15)
$107
$3,427
(43)
$5,435
$55
(10)
$203
$406
(36)
$1,281
$0
(12)
$64
$6,832
(168)
$12,998
$191
(49)
$478
(147)
(23)
(117)
(22)
(128)
(19)
(95)
(18)
(487)
(82)
IPO
Follow-on
Total
Source: Ernst & Young, BioCentury, BioWorld, Windhover and VentureSource
Figures in parentheses are number of financings. Numbers may appear inconsistent because of rounding.
31
Selected 2008 US biotechnology public company financial highlights by geographic area (US$m, percent change over 2007)
Region
San Francisco Bay Area
New England
San Diego
New Jersey
Mid-Atlantic
Southeast
New York State
Midwest
Pacific Northwest
Number
of public
companies
Market
capitalization
31.12.08
Revenue
R&D
Net income
(loss)
Cash and
equivalents
Total assets
73
149,371
23,605
6,574
2,790
9,162
38,740
-4%
0%
10%
73%
9%
21%
-2%
59
49,717
13,081
4,973
(49)
5,119
26,913
-8%
-24%
15%
3%
-92%
5%
-5%
40
17,450
3,972
1,721
(945)
2,235
15,565
-9%
-26%
24%
-13%
-21%
-19%
57%
28
31,952
3,962
1,637
(2,499)
1,702
8,971
-13%
7%
20%
42%
2705%
-13%
-5%
22
4,978
771
894
(614)
490
3,145
-4%
-33%
11%
5%
5%
-13%
-6%
23
1,867
234
258
(304)
406
940
5%
-30%
-9%
-63%
-46%
-22%
-22%
24
5,708
1,070
3,441
73
747
2,895
-14%
-53%
-30%
268%
-120%
-53%
-36%
11
598
16
113
(154)
135
212
0%
-54%
-61%
-17%
-23%
-45%
-46%
15
1,575
219
481
(635)
241
853
0%
-45%
41%
-19%
0%
-28%
-16%
18
65,021
15,513
3,544
3,413
2,299
38,557
17%
2%
-19%
30%
-31%
4%
1,071
434
310
(206)
346
880
Los Angeles/
Orange County
-5%
North Carolina
11
10%
-40%
-4%
11%
81%
-22%
-12%
Pennsylvania/
Delaware Valley
15
8,441
2,481
761
(88)
1,180
4,974
0%
-1%
10%
3%
-80%
-12%
-4%
Texas
10
1,281
138
174
(141)
182
504
-17%
-9%
-16%
-24%
-46%
75%
-20%
9
912
29
158
(242)
136
301
0%
-22%
-69%
18%
82%
-25%
-18%
2
3,375
436
159
16
277
776
Colorado
Utah
Other
Total
0%
52%
57%
16%
-152%
34%
26%
11
522
167
71
1
46
263
-15%
-89%
-59%
-49%
-102%
-25%
-12%
371
343,837
66,127
25,270
417
24,704
144,489
-6%
-7%
8%
20%
-431%
-5%
1%
Source: Ernst & Young and company financial statement data
Percent changes refer to change over December 2007
Numbers may appear inconsistent because of rounding
New England: Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, Vermont
Mid-Atlantic: Maryland, Virginia, District of Columbia
Southeast: Alabama, Arkansas, Florida, Georgia, Kentucky, Louisiana, Tennessee, South Carolina
Midwest: Illinois, Michigan, Ohio, Wisconsin
Pacific Northwest: Oregon, Washington
32
Beyond borders Global biotechnology report 2009
In the wake of a sharp economic
downturn and fewer exit options,
venture capitalists (VCs) have become
increasingly risk-averse and selective.
While the year’s overall venture funding
numbers look relatively strong, the
totals mask the deterioration in the
fourth quarter and the struggles of many
smaller companies trying to raise capital.
In addition, VCs themselves face the risk
that their limited partners, who have
often seen declines in their portfolios,
will not be able to honor funding
commitments. And VCs looking to raise
new funds will face a more challenging
environment, many likely finding they
cannot raise targeted amounts.
Meanwhile, investors in publicly traded
biotech companies, which provided the
bulk of the industry’s capital in recent
years, are unlikely to return in force any
time soon. The turmoil in the capital
markets has ended the era of easy money
and caused a massive deleveraging. There
is now simply less capital to go around,
leaving biotech companies with less
funding for the foreseeable future.
Deals
While rapid changes have radically altered
the environment for the biotech industry
in recent months, some long-term drivers
remain unchanged. In particular, the
pipeline challenges confronting big pharma
companies continue to become increasingly
urgent. Many firms face significant patent
expirations in the years ahead and do not
have enough in the pipeline to fill the gap.
Not surprisingly, big pharma companies
remained active buyers of biotech assets in
2008, helping drive deal totals for the year
to impressive heights.
The total value of M&A during the year
was more than US$28.5 billion — a record
high not counting the megadeals of prior
years, such as the 2007 acquisition of
Medimmune by AstraZeneca. In 2008,
although there were no megadeals,
there were three large transactions
valued at more than US$5 billion each:
Millennium Pharmaceuticals’ acquisition
by Japan’s Takeda Pharmaceuticals,
ImClone Systems’ purchase by Eli Lilly,
and the acquisition of Applied Biosystems
by Invitrogen (since renamed Life
Technologies). Big pharma’s interest in
successful mid-cap biotech companies
remains high, and we could well see more
such “mini-megadeals” in 2009.
While no megadeals were completed
during 2008, the back-and-forth
negotiations for the mother of all
megadeals kept the industry transfixed
for much of the year. Roche offered
in July to buy the minority stake in
Genentech that it did not already own,
and the two parties finally agreed
in March 2009 to a US$46.8 billion
purchase price, or US$95 per share.
Deal activity was every bit as heated for
strategic alliances, where the potential
value of alliances reached an all-time high
of almost US$30 billion. This was mostly
due to significant growth in the potential
value of biotech-biotech deals.
Financial performance
The US industry’s financial performance
in 2008 was a mixed bag. The revenues of
publicly traded US biotech companies grew
by 8.4% in 2008, down from the 11.3%
33
US biotechnology at a glance (US$b)
Financial
Product sales
Revenues
R&D expense
Net income (loss)
Industry
Market capitalization
Total financings
Number of IPOs
Number of companies
Number of employees
Public companies
2008
2007 % change
Industry total
2008
2007 % change
$54.1
66.1
25.3
0.4
$49.9
61.0
21.0
(0.1)
8.4%
8.4%
20.5%
-430.7%
$57.0
70.1
30.4
(3.7)
$52.7
64.9
26.1
(4.2)
8.0%
8.0%
16.8%
-11.2%
$343.8
8.6
1
371
128,200
$369.2
15.9
22
395
131,300
-6.9%
-46.3%
-95.5%
-6.1%
-2.4%
—
13.0
1
1,754
190,400
—
21.4
22
1,758
192,600
—
-39.2%
-95.5%
-0.2%
-1.1%
Source: Ernst & Young
Data were generally derived from year-end information (31 December). 2008 data are estimates based on January–September
quarterly filings and preliminary annual financial performance data for some companies. 2008 employee data are obtained from
10-Ks at time of publishing and include a combination of 2007 and 2008 employee data. The 2007 estimates have been revised for
compatibility with 2008 data. Numbers may appear inconsistent because of rounding.
growth seen in 2007 and significantly
below the industry’s historical compound
annual growth rate (CAGR) of about 15%.
As in previous years, the revenues of the
industry were diminished to some extent
by the acquisitions of a number of larger
successful biotechs by companies outside
the biotech industry. In particular, the
year’s three mini-megadeals had a palpable
impact on the industry’s top line. The
acquisitions of ImClone and Millennium by
big pharma buyers removed two firms that
together accounted for more than
US$1 billion in revenues.
The merger of Invitrogen and Applied
Biosystems also dampened the industry’s
total revenues in 2008, even though
neither company was acquired by a big
pharma firm. Instead, the merger resulted
in the formation of Life Technologies.
While we include the new company in our
biotech industry numbers, one result of
the accounting treatment of the merger
under US Generally Accepted Accounting
Principles (GAAP) is that for 2008, the
new company reported the full-year
revenues of Invitrogen and only those
revenues from Applied Biosystems that
were after the acquisition date. In its 2008
annual report, Life Technologies states (on
34
a pro-forma basis) that had the merger
occurred on 1 January 2007, the 2008
revenues of the combined entity would
have been about US$1.5 billion higher.
If these “lost” 2008 revenues are included
in the industry’s numbers, the top-line
growth rate would have been 12.7%
instead of 8.4% — roughly comparable to
the industry’s historic CAGR.
Revenues were also diminished by
slower growth at the industry’s largest
revenue-generating company — Amgen.
This is the second year of slowing
revenue growth at the Thousand Oaks,
California-based stalwart. Amgen’s
revenues grew by a CAGR of 27%
between 2002 and 2006, but growth
slowed to 3.5% in 2007 and declined
even further to 1.6% in 2008. For the
most part, this slower rate of growth
was driven by the negative impact
of regulatory and reimbursement
developments on sales of the company’s
erythropoiesis-stimulating agents (ESA)
products, including safety-related
revisions to product labels and the
loss of or significant restrictions
on reimbursement. (For additional
discussion, refer to the “US year in
review: products” article in Beyond
Beyond borders Global biotechnology report 2009
borders 2008.) As a result of these
challenges, the company implemented
a restructuring plan that included,
among other things, worldwide staff
reductions targeting 2,500 positions, a
rationalization of its worldwide network
of manufacturing facilities and the
divestiture of some less significant
marketed products.
The most anticipated financial-performance
news was somewhat anticlimactic. For
several years, Ernst & Young has been
forecasting that the US publicly traded
biotech industry would reach aggregate
profitability before the end of the decade.
In 2007, the industry came within a hair’s
breadth of reaching that milestone, and
in last year’s Beyond borders we were
fairly confident the industry would reach
aggregate profitability in 2008. Indeed,
the US biotech sector was profitable
in 2008 — with aggregate net income
of US$0.4 billion, a historic, if largely
symbolic, accomplishment.
It also turns out that the industry
was considerably closer to aggregate
profitability in 2007 than we had initially
estimated. Our estimate of the industry’s
net loss for that year included some
extrapolation of fourth quarter results
for companies that had not filed their
quarterly financial reports before our
publication was printed. In fact, the
industry’s 2007 net loss was US$0.1
billion instead of US$0.3 billion.
Biotech without DNA?
If aggregate profitability is a largely
symbolic accomplishment, it also
turned out to be, in hindsight, a
fleeting one. With the acquisition of
Genentech by Roche in 2009, it is
hard to see how the industry will be
profitable in aggregate any time soon.
The South San Francisco-based giant
had a net profit of US$3.4 billion
in 2008, and its departure leaves a
sizeable hole that other companies will
have to fill for the overall industry to
become profitable again.
Biotech without DNA?
Genentech has accounted for an increasingly large share of US industry revenues …
Revenues (US$b)
70
Biotech without DNA
Genentech
60
50
40
30
20
10
0
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Source: Ernst & Young and company financial statement data
… and the industry’s profitability will likely be very different after Genentech’s acquisition
Net income (US$b)
6
US biotech industry
Genentech
Biotech without DNA
4
2
0
-2
-4
-6
-8
-10
-12
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Source: Ernst & Young and company financial statement data
35
A Darwinian moment?
The landscape for US biotech will
continue to be challenging in 2009 and
2010. For many smaller companies,
raising capital has become quite difficult,
and the results are already appearing in
restructurings, layoffs, bankruptcies and
delistings. The number of restructuring
announcements by US publicly traded
biotechs, which had held steady at about
10 per quarter during the first nine
months of the year, jumped dramatically
to 35 in the fourth quarter of 2008 and
31 in the first quarter of 2009.
At the other end of the spectrum,
several mature, successful biotechs were
acquired by big pharma companies during
2008, and others will probably follow suit
in 2009. Consolidation seems inevitable.
The question is whether this will be a
destructive culling of companies or an
36
evolutionary process that leaves us with
a smaller, but stronger, biotech industry.
This question is posed repeatedly in
this year’s Beyond borders, not least in
the Global introduction article, where
we argue that the industry’s general
business model is becoming increasingly
unsustainable because of the sharp drop
in funding and corresponding reduction
in R&D and innovation. The implications
of that article — that companies will need
to understand, embrace and help shape
four key trends that promise to shift
existing paradigms and provide some of
the best hope for reaching a sustainable
business model — apply in spades to US
biotech firms.
The number of biotechs trading below cash ballooned …
90
80
Number of companies
70
60
50
40
30
20
10
0
31.3.
2007
30.6.
2007
30.9.
2007
31.12.
2007
31.3.
2008
30.6.
2008
30.9.
2008
15.10.
2008
31.10.
2008
15.11.
2008
30.11.
2008
15.12.
2008
31.12.
2008
Source: Ernst & Young and CapIQ
Number of companies trading below cash calculated based on the ratio of market capitalization on representative dates to the
sum of cash and equivalents and short-term investments on the same date or most recent date available
… as more and more companies restructure to survive
40
35
Number of restructuring announcements
Indeed, Genentech has had an enormous
impact on the biotech industry, and it
is hard to imagine what today’s biotech
sector would look like otherwise. We
referred to the Roche/Genentech deal
as the mother of megadeals — that’s so
in more ways than one, since Genentech
gave birth to the modern biotechnology
industry. It was the world’s first biotech
company — created in 1976 by the
legendary venture capitalist Robert
Swanson and the pioneering scientist
Herb Boyer. Over the years, Genentech
never lost its pioneering and innovative
spirit. The company was responsible
for a series of firsts. It was the first
to bring biologic products to market,
one of the first biotech companies to
go public (it has long owned the iconic
“DNA” ticker on the New York Stock
Exchange) and was one half of the most
successful partnership in the industry’s
history. Most of all, Genentech’s ability
to remain innovative even as it grew
into a mature organization, and its
remarkable success at developing
numerous successful products,
demonstrated what was possible to new
generations of start-ups.
30
25
20
15
10
5
0
Q1 2008
Q2 2008
Source: Ernst & Young, company press releases and Fierce Biotech
Beyond borders Global biotechnology report 2009
Q3 2008
Q4 2008
Q1 2009
A closer look
Compensation and benefits in turbulent times
Not too long ago, companies were waging a war for talent as they tried to attract
and retain the best employees with compelling compensation and benefit programs.
Today, the landscape is different, with many firms having to implement hiring freezes,
workforce reductions and cutbacks to compensation and benefits programs.
Companies, both public and private, rely on short- and long-term incentive plans
to link compensation with performance and delivery of shareholder value. But
with sudden and dramatic declines in economic circumstances, many are wrestling
with a very real dilemma: how do they appropriately reward and retain their best
performers while at the same time respecting that shareholders have not prospered
with their investment in the underlying stock? Some investors might argue that
if performance targets are not met, companies should not override previously
established pay-for-performance programs. On the other hand, companies face the
reality that proven performers are often courted by competitors even in downturns.
Addressing “underwater” stock options is often a challenge. There is
no one-size-fits-all approach, and companies need to consider several important
financial, regulatory and shareholder factors. Firms have used various approaches,
including exchanging existing underwater options with new options and/or
restricted stock; buying out underwater options with cash; doing nothing with
existing grants but making new option and/or restricted stock grants early;
and creating special one-time retention plans. Each approach has advantages,
disadvantages and unique considerations.
In the “Global introduction” article, we
mention that the process of evolution is
neither linear nor smooth. Often it has
been reshaped suddenly by cataclysmic
events such as meteor strikes or volcanic
eruptions. In 1980, scientists were given
the opportunity to witness first-hand
the impact of a (somewhat smaller)
cataclysmic event, the eruption of Mount
Saint Helens. The devastation — 230
square miles of charred wasteland — led
scientists to anticipate that it would take
many decades for the region’s ecosphere
to flourish again. But they were surprised
to find that the flora and fauna emerged
much sooner than expected.
Life, it turns out, is resilient. And if history
is any guide, so are the life sciences.
While modifying compensation strategies is a strategic business matter, companies
will need to assess cost effectiveness, taxes and financial efficiency; be sensitive to
investor issues; align with corporate and individual performance; and evaluate the
effectiveness of program structures in foreign jurisdictions. Meanwhile, monitoring
competitive pay practices with up-to-date data is challenging during times of
tremendous change.
While some firms are taking a wait-and-see approach on these issues, others
are moving ahead. Regardless of how the rest of 2009 plays out in the
executive-compensation arena, though, companies face a delicate balancing act
that requires thoughtful action.
It is also worth remembering that not
everyone shrinks in a downturn. Indeed,
recessions — and yes, even the Great
Depression — have often been periods of
tremendous innovation. For individuals
and companies willing and able to take
bold action, tough times can present
opportunities, including lower costs of
business inputs, undervalued assets
to acquire and cautious competitors.
Companies can also draw from an
expanded pool of available talent
(though competition for the best
performers remains high as it becomes
more complex in turbulent economic
times — see “A closer look” on this page
for more details). Even as the ranks of
investors and industry supporters shrink
as some decide they don’t have the
stomach for it, others will double down
and position themselves competitively
for the industry’s return. In the past,
acquisitions of biotech firms by big
pharma companies have often inspired
employees of acquired firms to form new
start-ups. The acquisition of Genentech
by Roche could lead to a groundswell of
new start-ups in the San Francisco Bay
Area as talented scientists and executives
decide to forge their own paths.
37
Jean-Jacques
Bienaimé
Jean-Paul
Clozel, M.D.
Colin
Goddard, Ph.D.
Louis
Lange, M.D., Ph.D.
BioMarin
Pharmaceutical Inc.
Actelion
Pharmaceuticals Ltd
OSI Pharmaceuticals
CV Therapeutics
CEO
CEO
CEO
CEO
CEO roundtable
Only the innovative survive:
perspectives from biotech’s next generation
While the global financial crisis has had a palpable impact on the biotech
industry, that impact has been far from uniform. In many ways, the
crisis has heightened the divisions between the industry’s haves and
have-nots — between organizations that have the resources and financial
strength to weather the crisis and those that are struggling to survive.
For the most part, identifying which companies fall into which camp is
fairly straightforward. As one might expect, there has been little fallout
for the top tier of global, mature large-cap biotech companies, while at
the other end of the spectrum, hundreds of emerging, privately held or
small-cap biotechs are having difficulty.
But what about the firms that lie between these two extremes? How is
the potential “next generation” of mature firms faring, and how do their
prospects affect the sustainability of the biotech industry?
We sat down with the CEOs of four mid-cap commercial-stage firms in
early 2009 to get their perspectives on the crisis and its implications.
The companies have similar profiles. Each of them is publicly traded
and has been public for about a decade. They have marketed products
and sustained revenues from product sales. While none of them has yet
reached the global scale of biotech industry leaders, they are all either
profitable or cash-flow-positive.
Interestingly, they also have some similar perspectives on the crisis.
They view this environment as having created more opportunities than
risks for their companies. They see an inevitable wave of consolidation
ahead and worry about the implications for funding, innovation and new
company formation. But at the end of the day, they believe fervently
that it is innovation that creates value in this industry. With that guiding
principle, they are optimistic about biotech’s long-term potential and the
ability of the industry at large — and their companies in particular — to
deliver meaningful value for investors, shareholders and patients.
38
Beyond borders Global biotechnology report 2009
Ernst & Young: What impact has the
current financial crisis had on your
company? How are you responding?
Bienaimé: We are in a very enviable
position. We raised close to US$560
million when the markets were
healthier, and we haven’t spent it. As
a result, we are cushioned from the
immediate impact of the financial crisis.
Of course, if the crisis deepens, our
revenues could be impacted, but we
have not seen much of that so far. We
have tried to conserve cash by staging
some of the R&D expenses and reducing
or delaying some of our projects. We
remain well positioned, and 2008 was
our first profitable year.
Clozel: Our revenue has also not been
hurt by the crisis. When you sell, as
we do, an effective drug for a severe,
life-threatening disease, product sales
remain strong regardless of market
conditions. We haven’t been completely
immune, of course — our share price
has not moved much, even though our
product sales grew by about 40–50%
over the last two years. How are we
responding? Well, so much of what
is happening in the markets is being
driven by factors beyond our control
that the best thing is simply to focus
on what we do best: work even harder
at finding new drugs. In this market,
it’s much more difficult to get debt
financing for acquisitions, so no one
should count on the fallback solution
of buying products and pipeline from
other companies. Now more than ever we have to make sure
that the breakthrough drugs we will need for our growth are
developed from within.
Lange: We have spent much of the last five years ending in
late 2008 monetizing a decade-long US$1 billion investment
in R&D that resulted in three product approvals and two
partnerships. As a result, we were able to initiate new revenue
streams and pay down much of our debt. Of course, we didn’t
know that the financial markets were going to crater, but
in hindsight our timing was good. We are going forward in
2009 with a healthy amount of cash on the balance sheet and
enough money to get to profitability if things go well. We were
preparing to become a profitable biotech company regardless
of the economic picture. That strategy now provides us with
many different choices that are reasonably independent of
having to raise equity dollars. I’m incredibly optimistic about
CV Therapeutics. We had three products approved last year,
we raised money, we have a robust pipeline and a strong
regulatory track record. We have very good relationships and
credibility with both the Food and Drug Administration and the
European Medicines Agency. We have a bright future with a
lot of value that is only going to increase. [Editor’s note: in the
months after this interview, CV Therapeutics was acquired by
Gilead Sciences for US$1.4 billion.]
Ernst & Young: Challenging economic times produce new
risks as well as new opportunities. On balance, which is
greater for your company at the current time — emerging
opportunities or new risks? What specific challenges or
opportunities are you seeing?
Goddard: There’s much more opportunity than threat for
a company like ours, which is anchored around a solid and
growing product, because it allows us to look for strategically
enriching platform technologies or pipeline assets. We need
to do this in a thoughtful manner. First, we need to remember
that just because something is on sale doesn’t mean that it’s a
good buy.
Second, companies at our stage of evolution face more earnings
scrutiny, which implies that we need to appropriately balance
financial performance against reinvestment. While we’re all trying
to create value, there’s an inevitable dichotomy between the focus
of some shorter-term investors and the generally longer-term
view of companies. Investors have a job to do which can lead to a
shorter-term focus. But to create sustainable shareholder value,
we need to balance short-term financial performance against
the longer-term need to reinvest. One way to do this could be
through creative and thoughtful transactions that have less
income-statement impact. Over time, of course, with sustained
top-line growth comes credibility and more latitude from investors
to reinvest. We’re on that journey, but it does impact how we
respond to the opportunities in front of us today.
Those are the opportunities. In terms of risk, one of our
frustrations is around the volatility in interest rates and
currency exchange, since a significant proportion of our
revenues are earned outside the US. We are considering
hedging strategies, but the volatility is there at a level that is
quite unusual. It’s something for us to think about in terms of
managing the business as a whole.
Bienaimé: Interest rates have impacted us as well. Interest
rates have fallen with the onset of this recession, lowering the
interest income on our fairly sizeable cash balances and creating
more risk on this front. The most significant risk, though, is the
potential pressure on reimbursements. This hasn’t materialized
yet, but, if economic conditions around the world deteriorate,
I’m sure there will be some pushback from payors.
In terms of opportunities, as already mentioned, there are
several smaller biotech companies that have no revenues and
no cash. We are getting an increasing number of calls about
companies that are desperate, some of which have decent
assets but no ability to fund further development. That creates
buying opportunities for us.
Bigger companies may be less willing to buy some of these
struggling companies. Well, we’re not big pharma. We
are willing to take some risks with which they may be
39
uncomfortable. Regardless of what they might say, I suspect
that big pharma is still uncomfortable with expensive biologics.
They worry about the impact to their public image from
products with price tags exceeding US$75,000 or US$100,000.
“Bigger companies may be less willing to buy some
of these struggling companies. Well, we’re not big
pharma. We are willing to take some risks with
which they may be uncomfortable. Regardless of
what they might say, I suspect that big pharma is
still uncomfortable with expensive biologics.”
Clozel: The global financial crisis creates two significant
challenges. The first is the impact on drug pricing and the
potential for downward pressure on prices. The second
challenge is the lack of credit, which could impinge on our ability
to make an external expansion. Though we have over CHF1
billion (US$0.9 billion) in cash and short-term deposits, we will
need to deploy those funds carefully.
Ernst & Young: The conventional wisdom is that health-related
industries such as biotech are fairly recession-proof — people
fall sick and need healthcare regardless of the business cycle.
Is that principle still true?
Benaimé: It’s still true, but with a caveat. Biotech remains
somewhat independent from economic cycles because the
valuations of specific companies are dependent upon product
development cycles more than economic cycles. I don’t think
that’s going to change. However, if the recession continues to
deepen for several years, we will inevitably see some impact on
reimbursement and pricing.
Clozel: In many ways, biotech remains one of the better-positioned
industries in this crisis. That doesn’t guarantee that we will
remain completely immune to its effects over time, but it
does mean that we will need to deliver even better drugs.
Governments will come under tremendous fiscal pressure as
budget deficits balloon and unemployment soars. So only the
I also think the crisis creates some big opportunities. Many
companies that are strapped for capital are having to resort to
layoffs and turning to licensing deals, which increases the number
of experienced specialists and attractive products available to us.
We are looking to grow our organization, and I intend to hire an
additional 300–500 people globally over the next 12–18 months.
So this is a great opportunity for us.
Lange: We seized an opportunity when the credit markets froze.
Many of the hedge funds holding our convertible debt were in a
liquidity crisis, so we repurchased some of our debt at extremely
favorable terms. We are now well positioned to go out and fill our
pipeline. Many biotechs are unable to raise money today, and their
assets are selling at deep discounts. With cash in hand, we have
been looking for commercial products and development-stage
candidates, and we see tremendous value out there. We can bring
a lot to any program through our proven track record of executing
and securing regulatory approval.
40
Beyond borders Global biotechnology report 2009
When the
drought is over,
will we seed
real replacement
companies?
“In recent years ... VCs have changed their funding
approach — they have placed many more bets, yet
we have fewer real companies being built in terms
of platforms, technologies and pipelines. What they
are funding, instead, are often no more than project
teams disguised as companies.”
best drugs are going to be reimbursed — not the “me-too”
products. Whether it’s automobile companies or biotech firms,
innovation is the answer.
Ernst & Young: How do you see the current downturn? Is it
similar to crises past, or is this truly different from previous
funding droughts? What are the implications for the future
of biotechnology?
Clozel: The last crisis, at the end of the genomics bubble, was really
different. Then, the crunch was in one sector which had been hyped
and then came crashing back to reality. Now, it’s a global crisis,
which makes it a much more profound and worrisome condition.
Lange: I do think it’s different. The worst period that I can
remember before this was the nuclear blizzard from the
proposed US healthcare reform in 1993 and 1994, when it was
very difficult to raise money. We were fortunate then as well. We
raised money just before that and got through it fine. This time,
it’s much worse because of the overall asset deflation across
all asset classes. There’s no credit around. I think the venture
community is seeing forced withdrawals, forced liquidations, and
pension funds and endowments that are unable to honor their
commitments, so their funds are evaporating. Having cash is
critical to surviving for the next year or two.
There are too many biotech companies, and the days of funding
2,000 biotech companies are numbered. This asset deflation
crisis will drive large numbers of sales and bankruptcies, and
venture funding to start new companies in classic biotech is
going to be extremely limited. There likely are opportunities in
services, diagnostics, electronics, personalized medicine and
very late-stage, highly novel therapeutics. But the era of the
classic biotech company is over.
Goddard: This crisis is fundamentally different from others that
we have seen. In my view, the model that has been the engine
of company formation in this industry has completely broken
down. Access to capital has become very difficult, and lots
of biotech companies — in the absence of available financing
choices — are looking at their options for being acquired by
pharma or mid-cap or large-cap biotech companies.
The question is how we will replenish the sector after these
acquisitions. When the drought is over, will we seed real
replacement companies? In recent years, in response to the
pressures they have faced, VCs have changed their funding
approach — they have placed many more bets, yet we have fewer
real companies being built in terms of platforms, technologies
and pipelines. What they are funding, instead, are often no more
than project teams disguised as companies. The investment is
around a specific product with the goal of finding a buyer at a
certain stage of development, typically clinical proof of concept.
That’s a very different model from what we’ve had historically.
As the current situation is sorted out through acquisitions by
pharma and mergers of public companies, I worry that we may
not build the true replacement companies that have always been
there in the past. I fear the entire company formation model has
broken down and we’re going to see a different industry emerge
over the next three to five years.
Benaimé: Yes, there is something truly different about this
crisis. This one is going to be much longer in duration and I think
valuations will be reset at new levels for quite a while. For a long
time, we’ve anticipated consolidation and it never happened.
Well, I think we are finally going to see significant consolidation
in the industry over the next eighteen months to two years.
There were too many companies founded on very narrow
technology or a single product, and I don’t think that model is
going to be very viable anymore.
Ernst & Young: Will this consolidation be a positive or
negative development? Will the winnowing of firms produce
more sustainable, robust companies, or will it prune
innovative technologies and products that might otherwise
have come to market?
Clozel: Like most things, it’s a bit of both. There will be some
Darwinian selection, which may not be entirely bad, because
natural selection implies that the fittest will survive. Many of
“There will be some Darwinian selection, which
may not be entirely bad, because natural selection
implies that the fittest will survive ... money is going
to be more concentrated in better companies, which
could be a good thing ... The real danger is that we
may fail to fund the ideas that appear completely
crazy — and therefore high-risk — to us today, but
which may prove to be real breakthroughs over time.
We can’t let all the funding go to low-risk R&D.”
41
“The FIPCO model is largely over ... I think the
industry is going to return to models that involve a
more efficient use of capital, early de-risking and
smart exits.”
these companies were never really sustainable anyway. As
a result, money is going to be more concentrated in better
companies, which could be a good thing.
But we also risk curbing potentially breakthrough research.
A decade from now, when companies that might have been
formed today would have delivered new products, we could feel
the impact of today’s crisis. If you are a young scientist with a
major discovery who wants to start a company, you are probably
going to have a hard time raising funds in today’s market. That’s
very unfortunate, and quite worrying.
The real danger is that we may fail to fund the ideas that appear
completely crazy — and therefore high-risk — to us today, but
which may prove to be real breakthroughs over time. We can’t
let all the funding go to low-risk R&D, because more than
ever, we need groundbreaking studies. We need fundamental
research. We need breakthrough technologies.
Lange: I think investors will become more selective, but the
problem is that it’s very difficult to pick winners and losers.
Few could have predicted back in 1980 that a start-up named
Applied Molecular Genetics would go on to become today’s
Amgen. So if we become more picky, we might fail to create
some good companies.
Bienaimé: It’s inevitable that we will see significant consolidation.
With regulatory, reporting and accounting requirements, the
fixed costs of being a public company are high. I look at some
valuations — there are companies with market caps of US$5
million or US$6 million — where the officers’ compensation is
more than the market cap. How long can that last?
The consolidation will be driven more by biotechs merging to
survive rather than by pharma acquisitions. There are not many
biotech companies that can create noticeable value for big
pharma. What does buying a company with even US$400 million
in revenues do for Pfizer? Nothing. It would barely impact their
top line.
So we will see some companies go under, but most of them will
probably just morph into something else. I hope most of the
good assets will not be lost, but rather still be financed somehow
within a smaller number of structures. While this will be painful
for some, it’s going to produce a more sustainable business model
with more robust companies and a better allocation of resources.
42
Goddard: Cycles of consolidation and regeneration are quite
normal and healthy in most industries, and we have always had
some of that in biotech. What’s worrying is the depth and scale
of this consolidation cycle. You have to ask whether we will be
able to build enterprises for the creation of long-term value in the
future. There are certainly brilliant private and public long-term
investors out there, but most investors are working in a different
time frame nowadays. Today, companies have less flexibility
to adopt longer-term strategies for building multibillion dollar
enterprises. As a result, their approaches are inevitably skewed
more toward near-term M&A. That’s not to say that an early
M&A exit — at Phase II, for example — can’t be a way to realize
shareholder value. Of course it can. But we need an environment
where companies can also build longer-term strategic value so
that being acquired is a major success rather than a defensive
outcome and a suboptimal, near-term exit.
Ernst & Young: What do these trends imply for the next
round of companies? Will new generations of companies go
the distance and become fully integrated pharmaceutical
companies (FIPCOs)? If not, would that have implications for
the sustainability of the industry?
Lange: The FIPCO model is largely over. When we went public
in 1996, nobody thought a FIPCO was possible; most of the
models then were partnerships going through Phase II. I think the
industry is going to return to models that involve a more efficient
use of capital, early de-risking and smart exits.
CV Therapeutics was founded in 1992, and I think we faced
market conditions that were very different from what today’s
emerging companies are likely to encounter. Investors will not be
as patient as they were with the companies founded in the early to
mid-1990s. And I don’t think the bull market for small-cap growth
as in the late 1990s and early 2000s is going to return any time
soon. Over time, we raised about US$2 billion. The good news
is that we could. The bad news is, as we started buying back our
convertible debt, it turned out we needed US$1.95 billion of it!
So, we might see FIPCOs created through spin-outs from large
companies, where the new company already has revenue or is in
very late-stage clinical development. But if someone is looking
“There are fantastic opportunities for innovator
companies like ours to go the distance if they
manage well, make brutally disciplined choices on
where they spend R&D funds, and ensure that they
are differentiated and innovative.”
Beyond borders Global biotechnology report 2009
“I can’t imagine why it would make sense for us
to be acquired at this time. We’re in a position of
strength ... We can remain independent even if there
is no financing opportunity for the next few years. In
addition, I can’t think of any other company — biotech
or big pharma — that would manage our assets better
than we do.”
to build an R&D-based product company in biotech from scratch,
that is going to be extremely difficult.
Bienaimé: Biotech has been a tough environment for many years,
and it’s not going to get any easier. There are so many hurdles.
Still, I think it remains possible for companies to become FIPCOs,
and I think the industry will defy the odds. It’s good news that big
pharmas cannot buy the top fifteen biotech companies because
once they go below the top ten, those companies don’t have a
major impact on their operations. They are going to have to let
some of those second-tier companies mature.
Goddard: There are fantastic opportunities for innovator
companies like ours to go the distance if they manage well, make
brutally disciplined choices on where they spend R&D funds,
and ensure that they are differentiated and innovative. You
can still make the journey with your first product if you can get
revenues to sustain you till you are financially viable — through
royalty financing, for instance. But at the end of the day, the
question is whether the right exit for shareholders and for the
industry at large is being acquired or becoming a premium-valued
independent — the next Genentech or Gilead — in five years. The
job is still about building real strategic value so that everybody
wins. So, while M&A is always a viable option for value creation,
I hope cooler heads will prevail in this crisis and we won’t engage
exclusively in a level of pessimism that leads to widespread,
premature transactions.
Ernst & Young: How do you see the relative merits of
remaining independent versus being acquired for your
company?
Goddard: Planning to sell your company is not a strategy.
Regardless of whether you believe the company can become
a successful FIPCO or whether you believe it shouldn’t remain
independent in the long term, there is only one strategy to follow:
manage the organization well and create long-term value. If you
do that, you will command an appropriate strategic premium in an
acquisition, or you will become a Gilead or a Genentech, and you
will create value for shareholders either way. It’s as simple as that.
Bienaimé: I can’t imagine why it would make sense for us to
be acquired at this time. We’re in a position of strength. In
2008, we became profitable for the first time. We have nearly
US$560 million in cash, a growing pipeline and double-digit
revenue growth. We can remain independent even if there is no
financing opportunity for the next few years.
In addition, I can’t think of any other company — biotech or
big pharma — that would manage our assets better than we
do. We’ve been very successful at commercializing Naglazyme
ourselves around the world. We went from investigational new
drug to approval for three products in three years, which is
very, very fast. If we were out of cash and had no revenue,
that would be a different situation, but that’s not where we
are. And with valuations depressed right now because of
market conditions, being acquired wouldn’t make any sense
for our shareholders.
Clozel: Big pharma is certainly looking to acquire companies,
and is even making hostile bids in many cases. But the
record clearly shows that size is not the answer. These big
companies did scores of mergers in the past, and those
mergers did not create value for their shareholders. They are
now pursuing short-term financial gains — cutting costs and
boosting margins. But the long-term solution is only through
innovation. Acquisitions don’t create innovation. They may
allow you to extract more profits from the results of prior
innovation, but they don’t create new innovation.
If we were to be acquired by a large pharma, we would
get integrated into the larger organization and essentially
disappear. That kills the smaller company’s innovative spirit,
and essentially destroys the thing pharma was hoping to buy.
To remain innovative, biotech companies should instead grow
organically, by discovering and developing new drugs.
Ernst & Young: What advice would you give small-cap
biotech companies in the current environment?
Lange: The world has changed before our eyes, so discard your
previous assumptions and old ways of doing business. This is
probably not a short-lived market decline, so you need to think
“The world has changed before our eyes, so discard
your previous assumptions ... The assumption that
you will achieve a significant jump in valuation with
a positive Phase II study just isn’t true. If you are a
company in Phase I or Phase II, focus on just how
long the road ahead still is.”
43
of innovative ways to raise money and keep going. Adapt your
spend rate, your focus and your business model to survive.
The assumption that you will achieve a significant jump in
valuation with a positive Phase II study just isn’t true. If you are
a company in Phase I or Phase II, focus on just how long the
road ahead still is. We got our first Phase III result in 1999 — a
decade ago. And here’s the rub: the bulk of the money we had to
raise and spend came after that Phase III success.
Bienaimé: Conserve cash. If you have less than six to nine
months of cash on hand, try to merge with someone else as
soon as possible. Encourage your boards to be realistic about
valuations. As time goes by, this is likely to only get worse,
but some boards are being unrealistic about valuations and
waiting too long to enter a strategic transaction. Overall, I
still believe in the long-term value of biotech. The biotech
revolution is still in its infancy.
Clozel: Biotech is difficult and complicated, and there are many
disappointments along the way, but don’t get discouraged. Instead,
immerse yourself in your work. You won’t create value for your
company by going to investor meetings. You won’t discover drugs
by selling yourself to the financial world. The best way to create
value is by working hard in your company labs. This crisis will pass.
And when the good times return, the results of your work will be
even more valuable, because it’s going to be more rare.
“You won’t create value for your company by going
to investor meetings. You won’t discover drugs
by selling yourself to the financial world. The best
way to create value is by working hard in your
company labs.”
Goddard: Both as an individual and as a company, we’ve
had some high highs and some low lows. At times, I’ve been
viewed as something of a hero, and in others, I’ve been seen as
anything but. So I can tell you that the journey is a hard one,
made more difficult in this environment. Be thick-skinned, bring
honest objectivity, and apply disciplined, bold management
to your business. It may have been difficult, but I would do
it again in a heartbeat. Where else do you get the chance to
really pursue a passion and have this sort of impact? I went into
biotech because I wanted to study cancer and have the fun and
challenge of participating in building a great business, and I’ve
had the opportunity to do all that and more. The tragedy — for
budding entrepreneurs, emerging companies and society at
large — will be if those opportunities to build great, innovative
companies are diminished for the long term by the current crisis
and its widespread ramifications.
Will new generations
of companies go the distance?
44
Beyond borders Global biotechnology report 2009
The Darwinian challenge:
why evolution is vital for
building biotech
In biology and business, in natural
selection and economic Darwinism, it is
the fittest that survive. So companies,
like species, need to evolve by
monitoring and adapting to changes
in their environment. Not surprisingly,
each of the successful and sustainable
businesses with which I have been
associated evolved over time. General
Electric expanded from lighting and
appliances into financial services,
Bain & Company changed from an
information technology firm to a global
strategy consultancy, and Genetics
Institute morphed from an agricultural
to a health-focused biotech. Experience
has shown that building a successful
business is more about adapting to
changes than about picking the right
strategy, technology or products from
the outset. You don’t always have to be
right, but you need to be nimble.
Unfortunately, applying these principles
to biotechnology is problematic. Since
developing drugs is slow, expensive and
risky, financial and strategic investors
often invest based on what is needed to
achieve specific product-development
milestones. This can put extraordinary
pressure on companies to stay the course
and pursue original milestones regardless
of whether the data continue to support
them. Furthermore, as additional
capital is needed, the lag between when
investments are made and when value
is recognized makes further equity
financings too dilutive.
Rifle shots and multiple partners
To reduce dilution, some companies
extend their initial capital by keeping
themselves on a very short leash,
focusing limited resources on
pursuing single-product opportunities.
Adelene Q. Perkins
Infinity Pharmaceuticals, Inc.
They attempt to determine quickly
whether a product works, using a
highly focused — and hence less
expensive — approach, and don’t spend
money on infrastructure or pipeline
building. If the product succeeds,
attractive M&A exits are available; if it
fails, investors’ losses are limited and
balanced by other portfolio investments.
But this “rifle shot” approach has its
drawbacks. The industry has a full
graveyard of single-product companies,
and this approach does not build
sustainable enterprises that can attract
and develop talented employees.
In search of better alternatives,
companies outlicense their technologies
and products. Biotechs typically delay
partnering their assets for as long as
possible, hoping that their values will
increase over time. Companies search for
the highest bidder for each subsequent
program and end up with multiple
partners. This reduces risk by ensuring
that funding is not dependent on a single
collaborator and diminishes the potential
effect of the souring of any individual
relationship. And having multiple partners
increases the possibility of buyers
competing in an acquisition — helping to
bid up premiums.
An obvious problem with multiple
partners, however, is that each
collaborator cares only about the
fate of its inlicensed product and not
about other products in the pipeline
or the fate of the entire organization.
Consequently, this prevents companies
from seamlessly reallocating investment
dollars across products in response
to new information. Yet the ability to
change course and evolve — and maybe
even stumble a few times — is vital for
success in this industry.
President
Witness the most successful biotechnology
company of our era. In 1990, Genentech
was a human-growth-hormone company
with enough capital from its initial deal with
Roche to conduct a large trial for tissue
plasminogen activator. By 1995, after
several clinical setbacks, Genentech was
forced to renegotiate the Roche deal on
terms that brought in no immediate money
while giving away significant ex-US product
rights. But critics of that restructured
deal failed to recognize its one saving
feature: a stock put, at an attractive price,
that prevented a stock-price free fall if
Roche decided to let its call option expire.
Genentech got the one thing it needed: the
ability to evolve. Over the next few years,
the company adapted its way through a
number of additional setbacks, and by the
turn of the century, a star had been born.
Of course, the ability to evolve does
not guarantee success. There are
many examples of companies that
never delivered even after being given
numerous opportunities by increasingly
weary investors. This simply highlights
that success still requires good science,
good decisions and an element of luck.
But good decisions can only come from
decisions that one has the ability to
make. All too often, companies end up
in the untenable position of having no
choice but to bet everything on products
that no longer merit the bet. The
company may want to change course,
but their funding structures preclude
evolutionary possibilities.
Successful marriages
To build sustainable companies, we
need a sustainable source of funding
that allows for evolution. Since having
multiple, competing partners creates an
obstacle to portfolio reprioritization and
45
evolution, we must find ways to make
partner concentration a strength rather
than a liability.
As with any marriage, this should start
with finding the right partner — someone
with whom strategic interests are aligned
and with whom you are willing to align
your future. The structure must recognize
the challenges that can test even the
best of relationships and include ways to
preserve what is special to each partner
while capitalizing on what the parties can
contribute. The best structures embrace
three key elements: dependence,
interdependence and independence.
Relationships must be carefully defined to
optimize what is done together and what
is done independently — balancing speed
and flexibility with access to capital
and infrastructure.
Infinity Pharmaceuticals’ recent
partnership with Purdue Pharma and
Mundipharma (associated companies)
provides an example of how these
dimensions can contribute to a
mutually transformative relationship.
This partnership replicates several
characteristics of the relationship
between Genentech and Roche, which is
credited with driving the companies to the
number one oncology positions in the US
and non-US markets, respectively — not a
bad role model!
• Dependence: At the core of Infinity’s
recent partnership is a shared vision: the
global development and commercialization
of a rich pipeline of oncology products.
It is a vision better achieved together
and to which each partner makes unique
contributions. Infinity brings novel product
candidates, discovery and development
teams and the investigator relationships
needed for global product development.
Mundipharma brings a commercial
presence in oncology outside the US and
a commitment to building the business,
but no discovery or US development
capability in oncology. Finally, Purdue/
Mundipharma brings capital for global
product development.
• Interdependence: It is essential that
the parties contribute to and benefit from
each other’s success. With responsibility
for global development, Infinity is
motivated to seek Mundipharma’s
insights on global commercialization
dynamics. This is reinforced by a
financial incentive, as Infinity receives
significant double-digit royalties on
sales from successful Mundipharma
commercialization outside the US.
Mundipharma also has a financial
interest in Infinity’s success, through
royalty payments from Infinity’s US
sales and a meaningful equity ownership
in Infinity.
• Independence: It was essential to both
parties that Infinity retain independent
decision-making during development — the
right to reallocate resources across product
candidates in response to changing data.
Yes, the right to evolve! Interestingly,
Infinity’s independence was facilitated by
the parties’ interdependence — the bulk
of Infinity’s pipeline was included in the
partnership, thereby removing potential
conflicts of interest with respect to product
prioritization. And maintaining Infinity’s
independence allows the company to
retain its small-company culture and
incentive structures — attributes that are
critical for attracting and retaining the
best employees.
Conclusion
Building a successful biotechnology
company is hard. Financing strategies
that require you to get it right the
first time also require that you be very
lucky. To the contrary, structures that
allow companies to evolve over time
empower them to better manage the
risks inherent in drug discovery and
development. At the end of the day,
of course, this improves the odds for
successfully developing medicines
that make a meaningful difference in
patients’ lives.
46
Beyond borders Global biotechnology report 2009
Peter Wirth
Connecting the dots:
the impact of the global financial
crisis on biotechnology
Genzyme Corporation
The global financial crisis has
fundamentally altered the market
landscape for biotechnology companies.
The headline-making events of recent
months — many in seemingly far-flung
sectors of the economy — connect in
often unexpected ways, with profound
implications for the biotech industry.
Market conditions for biotech companies
are now far from normal, and a return
to anything resembling normalcy will be
neither quick nor easy.
This is now a buyer’s market. While venture
capitalists (VCs) have not abandoned
biotech, many face their own capital
constraints and all see acquisition as the
most likely exit. In a remarkable sign of the
times, VCs have been more proactive in
approaching big pharma and big biotech
firms to ask them which assets they might
want to buy and tailoring their funding
and development plans accordingly. We
are also seeing more deals with earn-outs
(even with public companies!) and option
deals with prenegotiated prices but no firm
commitment to buy.
Connecting the dots
A major reason for the severe impact of
the financial crisis lies in how the dots are
connected. The crisis started, of course,
in the US mortgage markets — a segment
that, on the surface, would seem to be
far removed from biotechnology. But
the collapse of the mortgage market
also damaged many large investment
banks, which held significant numbers
of mortgage-backed securities. Those
banks were, in turn, prime brokers to
hedge funds, and hedge funds were a
primary source of capital for the public
biotech industry.
In the wake of the mortgage crisis, the
prime brokers stopped lending to the
hedge funds, so the hedge funds stopped
buying biotech companies and instead
began liquidating their positions. All of a
sudden, more than half the money going
into biotech simply disappeared, and it isn’t
likely to return any time soon. This isn’t
another down cycle of investor sentiment
that the industry can wait out. Investors
aren’t disenchanted with biotech; instead,
they have a fundamentally diminished
capacity to invest.
Fewer options
This chain reaction has slashed public
funding for biotech companies, and there
are few remaining good options. Deals with
pharma companies are unlikely to play a
major role in filling biotech’s funding gap,
for a couple of reasons.
First, big pharma is distracted. Pharma’s
patent cliff boosted deal activity with
biotechs in recent years, and it’s true
that big pharma still desperately needs
products. But in the near term, these firms
are more likely to focus on realigning cost
structures for the rapidly approaching
future when most of their products will
compete with lower-margin generics. It isn’t
easy for a large company to make radical
changes from within, because of cultural
inertia and other barriers. But a company
may be able to overcome those barriers
by merging with another large firm and
“buying margin” — the merger boosts the
top line while also providing an opportunity
to slash redundant costs. Consequently,
many are predicting increased merger
activity between large pharma companies.
For biotech, this means there will be fewer
remaining buyers, and those buyers will be
distracted by internal challenges.
Second, the presence of undervalued
biotech companies is unlikely to spur a
wave of acquisitions. At Genzyme, for
instance, we have a well-defined list of
opportunities in which we are interested.
But the list is pretty short, and things that
weren’t interesting to us before are unlikely
to become more interesting just because
they are cheaper. So while competition
for the most desirable companies remains
healthy, and they will command strong
premiums relative to their current public
valuations, others will need to become
more pragmatic.
Executive Vice President
Legal and Corporate
Development
New models
These are worrisome trends. We need
innovation. But drug development
is expensive, and without adequate
funding, much of that innovation may
be threatened.
In this environment, we will need new
business and financial models. Companies
must consider capital-sparing business
models — partnering assets, for instance,
that they would otherwise have developed
independently. Approaches to deal-making
will have to become more creative as
well. In a buyer’s market, deal structures
are likely to offer large companies more
risk mitigation, e.g., alliances rather than
acquisitions or acquisitions with earn-outs.
But buyers should also be mindful of
smaller firms’ capital constraints and
structure deals to protect their partners’
viability. For their own self-interest, as well
as for the sake of sustaining innovation,
large companies may want to value the
most promising assets more realistically
than the public markets currently do, and
structure deals that provide capital to
advance assets while sharing rewards with
original innovators.
47
US financing
Collateral damage
and outright collapses increasingly
common, it was clear that the financing
environment for biotechnology
companies had become part of the
extensive “collateral damage.”
From windows to housing collapses
Through much of the history of the
biotechnology industry, companies and
analysts have relied on the time-tested
metaphor of biotech financing “windows”
that open and shut. The image refers, of
course, to the sector’s boom-and-bust
cycles of investment, driven mostly by
vacillating investor sentiment toward
biotech stocks — excitement one year
about scientific promise followed by a
precipitous retreat a few years later when
the timelines to commercializing that
promise become clear.
As the system started to deleverage,
uncertainty around when equity markets
would touch bottom and where new
capital would come from drove buyers
to the sidelines and pummeled the
market capitalizations of many biotech
companies. Firms without sufficient
capital to fund operations until the
next value-creating milestone were hit
particularly hard as investors put financing
risk on par with development risk. With
so many companies trading at historic
lows — and some even facing the prospect
of being delisted — there was no interest in
new issuances of biotech stocks and only
limited interest in funding existing public
companies. Venture capital, while down
from the record levels of 2007, remained
relatively strong. However, venture
investors modified their strategies in light
of bargains in the public markets and the
need to reserve more funding to sustain
existing portfolio companies.
In last year’s Beyond borders, we noted
that the current crisis, which had started
to manifest itself in 2007, was something
entirely new — not the closing of another
window so much as the collapse of the
house around the window. The house
metaphor, it turns out, is appropriate
in more ways than one, since the crisis
originated in the US housing market.
Thanks to the way the cards are arrayed
in the global financial system — through
complex derivatives and intertwined
financial institutions — mortgage troubles
reverberated throughout the global
economy. As 2008 progressed, a credit
crisis devolved into the deepest global
recession in decades. By year’s end,
with corporate restructurings, bailouts
The total amount raised by the US biotech
industry fell 39% in 2008 to US$13
billion — the lowest total since 2002. A
significant portion of the fundraising in
2007 and 2008 came from a few very
large debt offerings by industry leaders
such as Amgen and Biogen Idec. If these
huge transactions are removed from the
totals of both years, the year-on-year
decline is 25% instead of 39%.
Venture capital hangs in
Private funding was a relative bright spot
in 2008, with the US industry raising
approximately US$4.4 billion from
venture investors. While this was a 19%
decrease relative to 2007, the 2007 total
had itself been an all-time record that
outdistanced any prior year by a gaping
US$2 billion margin. The amount raised
in 2008 represented the second-best
year on record — comfortably ahead of
the US$3.2 billion average for 2003–06,
and particularly heartening given the
overall financial-market turmoil. This is
not to suggest that venture capitalists
(VCs) are immune to broader economic
trends. Indeed, the pace of investments
slowed significantly late in the year as
the financial crisis deepened, from an
average of US$1.2 billion in the first
three quarters to US$875 million in the
fourth quarter.
This decrease can be attributed partially
to caution, as VCs assessed the need
to reserve additional funds for existing
US yearly biotechnology financings (US$m)
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
6
1,238
944
626
1,618
448
456
208
4,997
685
260
Follow-ons
1,715
2,494
5,114
3,952
2,846
2,825
838
1,695
14,964
3,680
500
Other
6,832
12,195
10,953
6,788
8,964
8,306
5,242
3,635
9,987
2,969
787
Venture
4,445
5,464
3,302
3,328
3,551
2,826
2,164
2,392
2,773
1,435
1,219
$12,998
$21,391
$20,313
$14,694
$16,979
$14,405
$8,699
$7,930
$32,722
$8,769
$2,766
IPOs
Total
Source: Ernst & Young, BioCentury, BioWorld and VentureSource. Numbers may appear inconsistent because of rounding.
48
Beyond borders Global biotechnology report 2009
portfolio companies in the expectation
that these firms will need to be nurtured
longer. In addition, VCs face the risk that
limited partners, themselves damaged by
declines across their portfolios, will not
be able to honor funding commitments.
While this phenomenon has not yet
manifested itself in any meaningful way,
it could become visible as firms seek to
raise new funds. Many analysts expect
a culling of the ranks of venture funds
as well as a decrease in average fund
sizes. Established players with strong
track records will face less pressure, and
several such firms were able to close new
funds raised during the market turmoil,
including Clarus Ventures (which raised
US$660 million in February 2008),
Versant Ventures (US$500 million in
July 2008) and Aisling Capital (US$650
million in January 2009).
US IPOs essentially dried up in 2008 ...
IPOs (US$m)
700
600
500
400
300
200
100
0
Q1 2007
Q2 2007
Q3 2007
Q4 2007
Q1 2008
Q2 2008
Q3 2008
Q4 2008
Q2 2008
Q3 2008
Q4 2008
Q2 2008
Q3 2008
Q4 2008
Source: Ernst & Young, BioCentury, BioWorld and VentureSource
… and follow-on offerings disappeared in the fourth quarter ...
Follow-on (US$b)
1.6
Venture capitalists are inherently
optimistic (see “The more things change,
the more they remain the same?” in
the Global section for ample evidence
of this inclination) and hold faith in
the industry’s resilience, creativity and
ability to commercialize breakthrough
technologies. Most VCs are operating
under the premise that the economy,
financial markets and hence the biotech
industry will ultimately return to
“normal.” Since their new investments
today require a three- to five-year
gestation period, they are counting on
recovery in that time frame. Meanwhile,
the reality that the public markets will
not be a viable exit option for some
time will require new approaches to
managing existing portfolio companies.
This includes strategies such as
reducing burn rates by focusing on
fewer R&D candidates, aggressively
seeking partners to share funding and
development risk, and agreeing to tie up
with an acquirer earlier.
As acquisitions become the most viable
exit, building a company to “fit” the
strategic needs of a larger entity — much
the way the medical-device industry has
functioned for many years — may become
more common. A willingness to share the
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0
Q1 2007
Q2 2007
Q3 2007
Q4 2007
Q1 2008
Source: Ernst & Young, BioCentury, BioWorld and VentureSource
… but venture capital has not declined dramatically
Venture capital (US$b)
2.5
2.0
1.5
1.0
0.5
0
Q1 2007
Q2 2007
Q3 2007
Q4 2007
Q1 2008
Source: Ernst & Young, BioCentury, BioWorld and VentureSource
49
risk and the upside rewards of development,
for example by agreeing up front to be
acquired at a defined price following the
achievement of a specified milestone or
agreeing to a greater percentage of merger
consideration in the form of downstream
milestones, can be a creative way to help
establish a path to liquidity. An instance of
this is the agreement between Cephalon and
Ception, which includes up-front payments
for Ception plus an arrangement whereby
Cephalon has the option to acquire Ception
following results of a Phase IIb/III trial.
In 2008, there were 15 venture rounds of
US$50 million or more, led by the sizeable
US$103 million raised by San Francisco Bay
Area-based OncoMed Pharmaceuticals in
several tranches which brought the total
raised or committed in the series to US$169
million. OncoMed will use the proceeds,
along with the funds raised in a significant
2007 collaboration with GlaxoSmithKline,
to further its research of cancer stem
cells. Another Bay Area company, Pacific
Biosciences, completed a US$100 million
venture round as it continues developing
its next-generation sequencing technology.
EKR Therapeutics, a New Jersey-based
specialty pharma, completed an unusual
transaction which included US$50 million in
equity and US$95 million in senior debt, the
proceeds of which were in part used to buy
two products from PDL BioPharma.
As the year progressed, more and more
companies, including many with advanced
pipelines, were trading well below their IPO
prices and sometimes even below the cash
on their balance sheets. For venture-capital
funds with charters that permit investments
in public companies, this presented a new
buying opportunity. Many began looking for
undervalued assets, and a new acronym,
VIPE (venture investment in a public entity)
was duly added to the alphabet soup of
investment terminology. However, VIPEs
are unlikely to provide new capital for
many micro-cap companies, since VCs will
look beyond valuations to strategic fit.
They are most likely to focus on specific
opportunities where their expertise can add
value or where assets can be repurposed or
positioned for high return.
Capital raised by leading US regions, 2008
4.5
4.0
San Diego
3.5
Total capital raised (US$b)
New England
3.0
2.5
San Francisco Bay Area
2.0
1.5
Pacific NW
1.0
New York State
Pennsylvania/Delaware Valley
0.5
Mid-Atlantic
New Jersey
0
0
200
400
600
800
1,000
1,200
1,400
Venture capital raised (US$m)
Source: Ernst & Young, BioCentury and VentureSource
Size of bubbles shows number of financings per region
50
Beyond borders Global biotechnology report 2009
Yes, we have no IPOs
There was only one biotech IPO in 2008:
the February offering by Florida-based
BioHeart. However, by industry standards,
this minor transaction — with gross
proceeds of less than US$6 million and net
proceeds of less than US$2 million — barely
moved the needle. It did little to sustain
the firm in any meaningful way, either, and
by year-end, BioHeart was warning that it
was unable to meet debt obligations due to
a lack of financial resources.
The US industry’s last institutional-sized
IPO occurred in November 2007. As we go
to press, the sector will have endured over
five quarters without such an offering,
which exceeds the post-genomics-bubble
drought and is likely to surpass the
six-quarter lull of the mid-1980s. Unlike
the closed windows of the past, which
were biotech-specific, the current lack of
IPO activity has spanned all industries.
According to VentureSource, only seven
venture-backed IPOs closed in all of 2008,
and only one of those occurred after the
first quarter. The industry is building a
significant backlog of new issues, and
when IPOs do return, they are likely to do
so with a bang rather than a whimper.
Until then, private companies will have
to find other paths to the public markets.
In 2008, several firms sought mergers
with public “fallen angels.” Both parties
benefit from these transactions — the
public company typically has cash and
a viable stock-market listing but lacks
ongoing technology value, while the
private company usually has a pipeline
and management team but needs to
access public markets for additional
fundraising flexibility. The private-company
shareholders typically end up with a
significant majority of the merged entity,
and thus these transactions are called
reverse public offerings, or RPOs. In a sign
of the times, any public company willing to
enter an RPO in 2008 attracted a long list
of suitors. Several of these transactions
closed during the year, including the
mergers of AVANT Immunotherapeutics
with Celldex Therapeutics, and Point
Therapeutics with Dara BioSciences. RPOs
do not always please the public company’s
existing investors, and this was apparent
in the proposed merger of NitroMed and
Archemix. Deerfield Funds, a significant
NitroMed shareholder, not only refused to
approve the deal, but also countered with
a higher bid and ultimately prevailed in
taking the company private in early 2009.
Other financing
While the IPO market was closed,
financing was still available to existing
public companies, especially in the first
half of the year. Leading the charge was
Vertex Pharmaceuticals, which raised
US$338 million in two equity offerings
(including one for US$220 million in the
midst of the September market meltdown)
and a further US$287 million in a
convertible-debt transaction. Combined
with US$160 million raised through a
royalty financing arrangement, Vertex
filled its coffers for its anticipated final
run to the approval of Telaprevir, now in
Phase III trials for the treatment of HCV.
Investors clearly favored companies with
commercialized products or near-term
clinical milestones. Illumina followed its
2007 US$400 million convertible-debt
offering with a follow-on equity offering
of US$353 million, the largest of 2008.
Other companies completing follow-on
offerings of greater than US$100 million
included Rigel Pharmaceuticals, Accorda
Therapeutics, Incyte and Seattle Genomics.
Private investments in public entities
(PIPEs) and registered direct offerings
remained popular because of their speed
and lower transaction costs. The largest
PIPE transaction of the year was the
US$100 million raised by Middlebrook
Pharmaceuticals to support a new product
launch. However, investors, who had been
expecting the company to be bought, did
not cheer the deal and instead sent the
stock down more than 50%.
At a time when most companies’
valuations have seen steep declines,
it is challenging for investors to raise
additional capital in ways that do not
overly dilute the stakes of existing
shareholders. Short of a strategic alliance
or asset sale, most chief financial officers
must place the continued viability of
the company and the interests of all
stakeholders (including patients and
employees) ahead of current investors’
wish to avoid dilution. A little-used
approach that companies may wish to
consider is a “rights offering.” These
transactions, which allow all current
stockholders to invest and maintain their
proportionate shares, take longer and
incur more costs than typical privately
arranged sales. However, they allow the
company to raise capital without diluting
the shares of loyal stockholders.
Debt dollars
In spite of the credit squeeze, some
companies did raise convertible debt,
although the total amount raised
decreased from US$700 million in the
first quarter to under US$100 million in
the fourth quarter. In addition to Vertex,
OSI Pharmaceuticals raised US$175
million and Theravance US$173 million
in first-quarter transactions. It remains
to be seen whether a convertible-debt
market will return to biotech as the
broader market recovers. As noted in
the Global introduction article, there
are impediments to this which may
squeeze current issuers with debt that
is significantly under water as the debt
maturity date approaches.
Not all debt transactions were of the
convertible variety. The biggest debt deals
of the year went to mature companies.
In February, Biogen Idec raised US$1
billion to refinance existing debt, and in
September, Life Technologies (formerly
Invitrogen) secured US$2.65 billion
of new debt to fund its acquisition of
Applied BioSystems. Exelixis availed itself
of a US$150 million line of credit from
Deerfield Management that can be drawn
down in US$15 million increments at
the company’s option, subject to various
conditions, through the end of 2009. In
exchange for making this facility available,
Deerfield will collect fees and warrants up
through the 2013 maturity of the facility.
In a similar deal with a twist, Deerfield
made available a US$100 million facility
to Seattle-based ZymoGenetics. The
twist is that each US$25 million tranche
drawn will be secured by a two percent
royalty on the net sales of RECOTHROM,
ZymoGenetics’ recombinant thrombin
product, which was approved in 2008.
Increased selectivity: venture investors
gravitated toward later rounds in Q4 2008
Later stage
Second round
First round
Seed round
100%
80%
60%
40%
20%
0%
Q1 2008
Q2 2008
Q3 2008
Q4 2008
Source: Ernst & Young and VentureSource
Beyond dilution
In addition to the royalty deals noted
above, CV Therapeutics and Indevus
Pharmaceuticals also both completed
royalty financing transactions, which
netted proceeds of over US$100 million
each. Our report last year described the
project financing structure employed by
Symphony Capital as another potential
source of nondilutive (or at least less
dilutive) capital. Symphony continues to
entertain opportunities but closed only one
new investment in 2008, with OXiGENE.
Geographic distribution
While total capital raised was down in
most regions, the leading clusters of
Northern and Southern California and
New England once again dominated
the regional comparisons. San Diego
51
A closer look
Outlook
State capital: incentive programs
On the surface, the current funding
situation looks comparable to prior down
cycles with respect to the number of
distressed companies. For example, in our
1994 annual report, we noted that 58%
of the public companies had less than two
years of cash on their balance sheets.
What is different in this crisis, however,
is the absence of buyers. In prior down
markets, companies could always find
another group of potential investors. These
investors may have exacted more than
the proverbial pound of flesh (industry
veterans might remember “death spiral”
preferred-stock offerings with conversion
ratios that changed as a company’s stock
price decreased), but at least the additional
capital injections allowed companies to
survive. As a result, very few companies
ceased operations or filed for bankruptcy.
Today, with massive deleveraging across the
financial markets, such buyers are scarce.
By the end of 2009, there will be fewer
public companies as firms turn to mergers
and acquisitions or simply cease operations,
while the pipeline of new IPO companies will
remain backed up. Companies will still be
able to raise funds in 2009, but investors
will be more selective, leading to a wider
gap between haves and have-nots. We
expect venture-capital investment to remain
strong, although probably at lower levels
than in 2008.
At a time when many biotech companies are struggling to raise capital for their
operational needs, firms are becoming creative and looking beyond traditional
sources of funding. In this challenging climate, government incentives can provide
welcome injections of cash or relief through tax savings or subsidies. And while
many state and local governments are under heightened budgetary pressure in this
downturn, attracting and retaining biotech companies remains a priority for economic
development agencies.
Incentives are often keyed to specific metrics such as workforce expansions, new
capital investments, R&D spending and/or employee training. As such, companies
should explore their incentives options any time they make significant investments
or undertake business expansions. While incentives are not likely to be the sole
driver of a capital investment decision, they should be evaluated when choosing the
location and scope of new investments. In reviewing potential incentives, companies
should consider the monetary benefit that each program can provide, the impact of
an incentives application process on the overall project timeline and the compliance
requirements of each program. This analysis should be done throughout the site
selection and investment process.
Not all incentive programs may be relevant. For instance, while many jurisdictions
offer income tax-based credits, these are not very valuable for biotech companies that
are not currently in an income tax position. Other incentives, such as direct financing,
cash grants, or abatements for property, sales or use tax may provide greater
immediate value.
Like all money, these funds come with some strings attached. Most incentives
programs require formal agreements between governments and the companies
receiving funding. These agreements list the specific levels of job creation, capital
investment and/or job training that a company commits to make in exchange for
a specified incentives package. If a company fails to meet its commitments, many
jurisdictions reserve the ability to retract or “claw back” the incentives.
vaulted to the top position in terms
of total financing because of the Life
Technologies debt issuance, but still
trails the other two regions in number
of financing rounds and venture-capital
investment. New England edged out
Northern California in total dollars
raised, as a result of the Biogen Idec debt
refinancing, while the latter region had a
slight lead in venture-capital investment.
The remaining regions continue to be
very close in terms of total dollars raised.
Casting a wider net
In the current market, companies are
increasingly looking at nontraditional
sources of capital. These include disease
52
foundations, which typically target
conditions that have smaller patient
populations in order to increase the
otherwise low commercial incentive for
R&D. Some firms are examining whether
they might qualify for foundation
money by applying an existing platform
to a different therapeutic area or
reprioritizing items in development.
Others are looking at government
grants or incentive programs to
understand eligibility requirements and
examine how their existing platforms
and projects could be made eligible. (For
more information, see “A closer look” on
this page.)
Beyond borders Global biotechnology report 2009
But while market fundamentals may have
changed in 2008, certain fundamental
truths have not. To access capital,
companies will need solid product stories
and a single-minded focus on clinical
success. Biotech funding, which became
collateral damage in the mayhem of global
financial markets, will fully recover only
when those broader markets recuperate
and rebuild investor confidence. By all
accounts, that will take many quarters
rather than mere months. But, while a
number of companies will likely perish, the
biotech industry as a whole will survive to
see the return of better funding days.
US deals
Buying biotech, being biotech
The good news is that the primary
buyers in this market, big pharmaceutical
companies, continue to need products
and technologies to supplement their own
internal pipelines and are all aggressively
reaching out to biotech companies and
their investors. The question is, who has
the bargaining power at the deal table? In
early 2008, power appeared to be moving
toward biotech companies, but by the
end of the year, the pendulum had swung
rapidly in the other direction as biotech
companies’ fundraising options dwindled.
Still, as many of the guest authors in
this report suggest, bargaining power
will ultimately be deal- and time-specific.
Companies with sought-after assets will
continue to command multiple bidders
and high prices, while those with products
that address smaller markets or have
significant development risk will be at the
mercy of the market.
While the number of strategic alliance
transactions involving US biotechnology
companies in 2008 remained fairly
consistent with prior years, the potential
value of strategic alliances increased to
a record level of almost US$30 billion.
This was driven mostly by an increase
in the potential value of biotech-biotech
deals, which increased more than 50% to
US$9.7 billion. Of course, it is unlikely
that all of this cash will actually exchange
hands, since these “biobucks” totals
implicitly assume that all milestones
will be achieved. The disclosed up-front
payments in these transactions, in the
form of license payments and equity
investments, totaled US$3.7 billion,
providing an important source of capital
for current operations.
On the M&A front, 2008 was another
strong year for the US biotech industry.
There were 53 transactions involving US
biotech companies, with a total value of
more than US$28.5 billion. This aggregate
value is a record for any single year, if one
excludes megadeals in prior years — such
as the 2007 acquisition of MedImmune by
AstraZeneca — which can skew deal totals.
While there was no single megadeal in
2008 (defined as an acquisition valued at
more than US$10 billion), the year’s totals
were instead heavily influenced by three
large transactions valued at more than
US$5 billion each: Takeda Pharmaceuticals’
acquisition of Millennium Pharmaceuticals,
Eli Lilly’s acquisition of ImClone Systems
and the acquisition of Applied Biosystems
by Invitrogen (since renamed Life
Technologies). This is both familiar and
unprecedented. We have seen very high
M&A totals in the absence of a megadeal
The potential value of strategic alliances set a new record
Pharma-biotech
Biotech-biotech
35
30
Potential value (US$b)
One constant in the world of biotechnology
is that drug development is costly and
lengthy, requiring companies to raise large
amounts of capital. Firms have traditionally
raised funds from some combination of
financial buyers — such as equity or debt
investors — or strategic buyers in the form
of other corporate entities looking to
access technology and products. In 2008,
the wholesale retreat of the public equity
market and convertible-debt market has
limited the menu of choices for many
biotech companies. For the most part, what
is left for those needing capital to sustain
operations is to tie up with a larger and
better-capitalized entity, either through
a strategic alliance or an acquisition. In
ordinary times, many companies might
have chosen to go it alone longer, hoping
to hit that next value inflection point in
the development cycle. In the current
environment, dwindling cash balances and
reticent financial investors are increasing
companies’ urgency to complete strategic
transactions. For most assets, with the
exception of a few truly innovative platform
technologies, buyers would prefer an
alliance over an acquisition simply to
mitigate risk. However, shrinking equity
valuations may make acquisitions the only
reasonable alternative in some cases.
25
20
15
10
5
0
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Source: Ernst & Young, Windhover, MedTRACK and company press releases
Chart shows potential value, including up-front and milestone payments, for alliances where deal terms are publicly disclosed
53
companies are attracting the eyes of larger
buyers, the arrival of the mini-mega may be
a harbinger of things to come.
Adjusted for megadeals, M&As reached new highs in 2008
Pharma-biotech
Pharma-biotech megadeals
Biotech-biotech
Biotech-biotech megadeals
35
M&A: megas and mini-megas
30
Value (US$b)
25
20
15
10
5
0
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Source: Ernst & Young, Windhover, MedTRACK and company press releases
before, in 2006, when we observed that
“the large totals were driven by several
big deals — a measure of the heightened
interest across a broad spectrum of buyers
for valuable biotech assets.” But while
the 2008 totals were driven by three
“mini-megadeals” valued at more than
US$5 billion each, there were no deals
of this magnitude in 2006 — indeed,
the largest deal that year was Abbott’s
acquisition of KOS for US$3.7 billion.
At a time when several mid-cap biotech
Selected 2008 US biotech M&As
Value
(US$m)
Company
Location
Acquired company Location
Takeda
Japan
Millennium
Life Technologies
San Diego
Applied Biosystems SF Bay Area
6,700
Eli Lilly
Other (Indiana)
ImClone
New York State
6,500
Kinetic Concepts
Texas
LifeCell
New Jersey
1,700
GlaxoSmithKline
UK
Sirtris
New England
720
ViroPharma
PA/Delaware Valley Lev
Hologic
New England
Johnson & Johnson New Jersey
New England
8,800
New York State
618
Third Wave
Technologies
Midwest
580
Omrix
New York State
438
Galderma Pharma
Switzerland
CollaGenex
PA/Delaware Valley
420
Ipsen
France
Tercica
SF Bay Area
404
Novartis
Switzerland
Protez
PA/Delaware Valley
400
Teva
Israel
CoGenesys
Mid-Atlantic
400
LA/Orange County
Dow
Pharmaceutical
Sciences
Valeant
SF Bay Area
277
Source: Ernst & Young, Windhover, MedTRACK and company press releases
54
Beyond borders Global biotechnology report 2009
Big pharma’s interest in mature biotech
enterprises resulted in more than minimega activity in 2008. Indeed, it gave
us what is probably the year’s mostwatched transaction and is certainly
the mother of all megadeals: Roche’s
acquisition of Genentech. In July,
Roche offered to buy out the minority
shareholders of Genentech for US$43.7
billion. Over the next few months,
the deal kept everyone guessing as
negotiations dragged on and even
turned hostile before the two parties
agreed in March 2009 to a deal priced
at US$46.8 billion, or US$95 per share.
Interestingly, the biggest challenge
for Roche will not be financing the
transaction in the midst of a global
credit crisis but rather retaining the
talent and culture that has made
Genentech an R&D and financial
juggernaut over the years. As we
argued in last year’s Beyond borders,
structures and incentives drive conduct
and performance. And while many
companies are trying not to upset the
cultures at their acquired children
(examples include AstraZeneca/
MedImmune, GSK/Sirtris and Takeda/
Millennium), stock options and other
equity incentives give independent
biotechs a powerful tool tying
performance to financial reward. The
Roche-Genentech structure — termed
“the 60% solution” in the 1990s — was
the industry’s longest-standing example
of this arrangement. Other similar
transactions, including Wyeth/Genetics
Institute, Novartis/Chiron and Sandoz/
Systemix ultimately succumbed to the
allure of “valuing synergies more highly
than culture.”
Roche has promised that Genentech
will continue to operate autonomously,
but if history is any guide, the takeout
of Genentech could well lead to a
groundswell of new start-ups in the
San Francisco Bay Area as talented
scientists and executives decide to forge
their own paths.
Another pioneering big biotech, Biogen
Idec, flirted with selling itself after
public statements by shareholder Carl
Icahn suggested that a sale was the best
way to maximize shareholder value.
Seeking to avoid a drawn-out process
that would impact employee productivity
and retention, Biogen structured a
formal auction process with a defined
deadline. In the end, the complexities of
Biogen’s relationships with Genentech
(for Rituxan) and with Ireland’s Elan (for
Tysabri) resulted in no offers from big
pharma. While Mr. Icahn criticized the
process because potential suitors were
not permitted to talk to Biogen’s partners
before making an offer, shareholders
supported management and the board’s
approach by refusing to elect a slate
of Icahn-nominated directors at a
subsequent annual meeting.
Mr. Icahn was also involved in one of the
year’s most prominent deals: Eli Lilly’s
acquisition of ImClone Systems, where
Icahn had been a significant shareholder
for many years and had chaired the board
Big pharma was not only interested
in large deals; with falling valuations
and limited financing options came a
number of acquisitions between existing
alliance partners, including Eli Lilly’s
acquisition of SGX for US$64 million
(a premium of 122%), GSK’s takeout of
Genelabs for US$57 million (a premium
of 465%) and Roche’s acquisition of
Memory Pharmaceuticals for US$50
million (a premium of 319%). While
the valuations in these acquisitions
(and many of the year’s other sizeable
transactions) reflected strong premiums
relative to the day before the deal was
announced, the share prices of many
acquired companies had plummeted in
the weeks and months preceding these
deals as markets spiraled downward.
When compared to the high price
for the 52 weeks preceding the deal
announcement, the purchase price in
each of these acquisitions was not a
healthy premium, but a discount.
of directors. Icahn realized a sizeable
return on his investment after a very public
process in which Bristol-Myers Squibb,
ImClone’s partner for the blockbuster drug
Erbitux and the most likely suitor, had its
offer rebuffed as too low. Lilly emerged
as an unexpected white knight, ultimately
agreeing to pay US$70 per share — 13%
higher than BMS’ last offer. Lilly and
BMS will now co-promote Eribitux, while
a potential dispute over whether BMS
also has rights to a “next generation”
compound through its original agreement
with ImClone remains unsettled.
Another notable acquisition was
GlaxoSmithKline’s US$720 million takeout
of Sirtris Pharmaceuticals, less than a year
after Sirtris went public in an offering that
raised US$69 million. The valuation no
doubt pleased investors, especially since
Sirtris had only one clinical-stage program
at the time of the transaction. GSK was
clearly more interested in the potential
of sirtuins to be a new drug-development
platform than in any single drug candidate.
As noted above, GSK has chosen to let
Sirtris continue to pursue its research
autonomously in the hope of preserving
the entrepreneurial culture and focus of
the company.
Milestones and stepping stones
Indeed, with the capital markets taking a
toll on many small-cap company valuations,
negotiating an M&A price that reflects
“fair value” has become particularly
Lowered expectations? 2008 US public company acquisition premiums
52–week premium
One–day premium
500%
Deal size: US$50-200 million
Deal size: over US$400 million
400%
300%
200%
100%
0%
lly
/I
m
L
Cl
A ife
on
pp
T
e
lie ec
d hn
Bi o
os lo
ys gie
te s/
Ta
m
ke
s
da
/M
ill
en
ni
um
fe
Ce
ll
Li
ris
rt
/S
i
GS
K
ne
tic
/L
i
Ki
Vi
ro
Ph
ar
rd
m
a/
Le
v
W
av
e
rix
m
ic
/T
hi
og
rm
ha
/P
J&
J/
O
ol
H
ei
a
St
ie
fe
l/
Ba
rr
ie
r
BM
S/
Ko
sa
n
Pf
iz
er
/E
nc
ys
iv
e
Ip
se
n/
Te
Ga
rc
ld
ic
er
a
m
a/
Co
lla
Ge
ne
x
ac
op
lly
/S
GX
Li
nd
Li
ga
Ro
c
he
/M
em
or
Tr
y
ip
os
/P
ha
rs
ig
ht
GS
K/
Ge
ne
la
bs
-100%
Source: Ernst & Young
55
challenging. On the sell side, management
teams typically start from the premise that
current equity markets do not reflect the
true value of their companies, especially
if clinical-development milestones are
eventually achieved. One way to bridge this
gap is to settle on an up-front price and
then provide for additional consideration if
certain performance targets are reached.
Such “earn-outs” have been common in
acquisitions of private companies, but in
the current environment they are often
occurring even in acquisitions of publicly
traded companies. Public investors’
increased willingness to forgo a clean exit
in exchange for the chance to capture
more upside later is an indicator of the
tough environment for deal negotiations.
In this environment, some compensation
now is better than suffering dilution
with no guarantee of an exit at a higher
valuation later.
One prominent example in 2008
was ViroPharma’s acquisition of Lev
Pharmaceuticals. While the up-front
exchange was US$443 million in cash and
stock, Lev’s shareholders can receive up
to an additional US$175 million if certain
regulatory and commercial milestones
are achieved. Investors are willing to
be patient — one of the commercial
milestones is for Cinryze, Lev’s product
for the treatment of hereditary
angioedema, to achieve cumulative sales
greater than US$600 million over the
next 10 years.
Two option-based acquisitions of private
companies were variants of this structure.
Actimis Pharmaceuticals agreed to
a “step” acquisition by Boehringer
Ingelheim valued at up to US$515 million.
Under the deal terms, Boehringer will
acquire additional shares of Actimis if
milestones related to the company’s lead
asthma product candidate are achieved.
In early 2009, Cephalon announced a
similar deal in which it will pay US$100
million for the option to acquire Ception
Therapeutics for an additional US$250
million (exercisable at any time up to 15
days after Ception receives results from
a Phase III clinical trial). US$50 million of
56
A closer look
New rules for the M&A road
Mergers and acquisitions are a constant in the biotech industry, and challenging
funding environments tend to spur creative deal structures.
In an environment of rapidly decreasing valuations, negotiations often turn on the
ability to bridge a valuation gap between the parties. Earn-out payments or other
contingent considerations have been commonly used in this regard, especially when
the target was closely held. Several recent transactions involving publicly traded
companies have also embraced contingent payments as a mechanism to get deals
done rapidly. We expect this trend to continue as long as companies have limited
capital alternatives. Typically, contingent payments are tied to future milestone
events such as clinical advancement or revenue. Another recent phenomenon is for
private and public companies to enter into staged buyouts that include an up-front
payment, usually to fund clinical trials and product development, in exchange for an
option to buy the entire company upon product approval or achievement of some
other milestone.
While companies negotiating a deal may be most focused on strategic and valuation
issues, creative transaction structures with contingent payments such as earn-outs
can carry significant accounting consequences. These implications should be fully
explored before signing a deal, particularly in light of the 2009 adoption of US
Financial Accounting Standards Board Statement No. 141(R), Business Combinations,
which is substantially consistent with International Accounting Standard 3(R). Under
these rules, acquirers need to consider the fair value of contingent payments and
record these amounts as liabilities at the date of the acquisition. An acquirer will
also need to be comprehensive in identifying contingent payments — for example the
target’s contractual obligations to collaborators (which may or may not relate to the
same product or technologies). The ultimate amount paid could differ significantly
from the amounts recorded at the acquisition date, with any differences generally
recognized in earnings.
Statement 141(R) and the comparable international standard also require that the
fair value of purchased in-process research and development (IPR&D) be recorded
as an asset on the date of the acquisition and then evaluated for impairment over
time. If a product is ultimately commercialized, the asset would be amortized to
expense over the expected life of the product. Judgments around impairment
will be inherently subjective and will typically require consultation with valuation
specialists. Further, under US standards, transactions where a company provides
an up-front payment with an option to purchase the entire company at a later date
for a predetermined price may require the acquirer to consolidate the operations of
the target. Interestingly, under Statement 141(R), if the target is consolidated and
subsequently the milestone is achieved, the contingent consideration paid is recorded
in stockholders’ equity and does not require the revaluation of any assets of the
target — including IPR&D.
These new rules, while complicated and at times subjective, will not overshadow
the business rationale for transactions. Management teams will be charged with
explaining in a clear and transparent manner the applicable accounting treatment,
and financial statement users, including analysts, will need to adapt to a new world
in which significant adjustments to purchased assets and liabilities in subsequent
periods will be increasingly common.
Beyond borders Global biotechnology report 2009
the initial payment was made to Ception
investors, giving them a partial return on
their investment.
While US biotech companies have a long
history of deal creativity in response to
challenging funding climates, one element
that is different in the current environment
is changes in the accounting treatment
of such structures. For instance, the
adoption of new accounting rules governing
business combinations in 2009 could
affect the way acquisitions with earn-outs
and option-to-purchase transactions are
reflected on financial statements. Companies
should consider the implications of these
changes when negotiating deals. (See “A
closer look” on the previous page for details.)
Strategic alliances
For the US biotech industry, 2008 was
another strong year on the strategic
alliance front. The two largest transactions
were biotech-biotech deals — Genzyme’s
alliance with ISIS (which also included the
largest total up-front payment of the year,
US$325 million, for a technology license
and equity), and Celgene’s transaction with
privately held Acceleron Pharmaceuticals,
which was more weighted toward future
milestones. Genzyme remained an active
acquirer of technologies during the year,
forming alliances with Osiris Therapeutics
for ex-US rights to two late-stage stem-cell
therapies and with PTC Therapeutics for
ex-North American rights to a drug being
tested for the treatment of Duchenne
muscular dystrophy. Both deals included
impressive up-front payments of US$100
million or more. Up-front payments of this
magnitude are in part a recognition of
the need to provide some sustainability to
the biotech partner and insulate it from
having to return to the capital markets
in the near term. Indeed, Peter Wirth,
Genzyme’s Executive Vice President
of Legal and Corporate Development,
observes in his article in this issue of
Beyond borders that deal structures that
give smaller companies sufficient capital
to advance their pipelines can help protect
their viability in the current climate. (See
“Connecting the dots” for more details.)
Selected 2008 US biotech alliances
Up-front license
payments
(US$m)
Potential value
(US$m)
175
1,900
Company
Location
Partner
Location
Genzyme
New England
ISIS
San Diego
Celgene
New Jersey
Acceleron
New England
45
1,871
GlaxoSmithKline
UK
Archemix
New England
21
1,428
Genzyme
New England
Osiris
Mid-Atlantic
130
1,380
Takeda
Japan
Amgen
LA/Orange County
300
1,177
Roche
Switzerland
Synta
New England
16
1,025
Bristol-Myers Squibb
New York State
Exelixis
SF Bay Area
195
1,000
Takeda
Japan
Alnylam
New England
100
1,000
AstraZeneca
UK
MAP Pharmaceuticals
SF Bay Area
40
900
GlaxoSmithKline
UK
Valeant
LA/Orange County
125
820
GlaxoSmithKline
UK
Dynavax
SF Bay Area
10
810
GlaxoSmithKline
UK
Mpex
San Diego
9
765
Astellas
Japan
CoMentis
SF Bay Area
80
760
Pfizer
New York State
Medivation
SF Bay Area
225
725
Bristol-Myers Squibb
New York State
PDL
SF Bay Area
30
710
Nycomed
Denmark
Immunomedics
New Jersey
40
620
GlaxoSmithKline
UK
Regulus
San Diego
20
598
Onyx
SF Bay Area
S*Bio
Singapore
25
550
Amgen
LA/Orange County
Kyowa Hakko Kogyo
Japan
100
520
Cephalon
PA/Delaware Valley
ImmuPharma
UK
15
515
Sanofi-Aventis
France
DYAX
New England
—
500
Source: Ernst & Young, Windhover, MedTRACK and company press releases
57
Two other Massachusetts-based
companies pursued different approaches
to achieve the goal of insulation from the
capital markets. In a deal that echoed its
2007 transaction with Roche, Alnylam
Pharmaceuticals provided nonexclusive
access to its intellectual-property
platform to Takeda Pharmaceuticals of
Japan while retaining independence to
pursue its own R&D. Takeda paid US$100
million up front in a deal that could be
worth up to US$1 billion to Alnylam. In
addition, Alnylam will have the rights
to co-promote in the United States any
drugs developed by Takeda based on
its RNAi technology. The deal allows
Alnylam, which will not perform research
services for its partner, to leverage its
technology platform, and increases
its opportunity to realize a return
(either through an internal program
or the success of a partner). With
US$430 million of cash and short-term
investments on its balance sheet at the
end of 2008, Alnylam has independence
from the capital markets and a war chest
to expand its own programs.
While not possessing the same kind
of technology platform, Infinity
Pharmaceuticals completed one of
the most innovative alliances in recent
memory with its transaction with Purdue
Pharmaceuticals. Purdue, a privately
held company, was looking to create or
access an R&D capability for innovative
drugs in areas it had not previously
pursued, such as oncology. Infinity, like
most companies its size, needed to raise
capital, but wanted to retain significant
commercial rights to its programs. The
result is a structure similar to the hallmark
Roche-Genentech transaction, with Purdue
taking a significant, but not controlling,
equity stake and agreeing to offset a
substantial part of Infinity’s R&D expenses
in the coming years. In exchange, Purdue
gets ex-US commercialization rights to
all previously unpartnered oncology
products developed by Infinity during
the collaboration. Importantly, Infinity
controls all R&D decisions and retains the
58
US rights to all products — which, as the
Genentech example has proven, can be
a very lucrative franchise. (For more on
this transaction, refer to “The Darwinian
challenge” by Adelene Perkins, Infinity’s
President, in this issue of Beyond borders.)
new challenges and sources of risks
for partners. While due diligence in
alliances may have previously focused
on technology, intellectual property and
potential market size, buyers must now
also consider their partners’ financial
viability and ongoing fundraising ability.
Big spenders
The other big driver of deals, of course,
is big pharma’s continuing drive to
replenish its pipeline and reinvent
its approach to R&D. Pharmaceutical
companies are responding in two ways.
In recent years, we saw firms move to
transactions that attempt to preserve
the innovative cultures, structures and
incentives of biotech firms — a “being
biotech” philosophy that is embodied
in acquire-and-preserve-independence
deals such as Takeda/Millennium, GSK/
Sirtris, Pfizer/Rinat and a host of others.
In 2008 and 2009, Roche, the company
that was long synonymous with this
philosophy, moved instead to “buy
biotech” by acquiring the remaining
stake in Genentech. While some big
pharmas have come out against
megamergers as drains on focus and
productivity, others are moving ahead
with even bigger transactions — for
example, Pfizer’s acquisition of Wyeth
and the merger of Merck & Co. with
Schering-Plough, with speculation of
more to follow. Post-merger integration
necessarily brings distractions which
impact both existing and potential
partners, as jobs, reporting structures
and even therapeutic areas of focus
change. Biotech companies, which are
particularly sensitive to the pace of
development, would be wise to consider
what else may be on the radar of the
partners before entering a transaction.
One company made a big impression
in the US in 2008 — Japan’s Takeda
Pharmaceuticals. Takeda opened its wallet
for a diverse set of deals, two of which are
mentioned above. The takeout of Millennium
(now referred to as “The Takeda Oncology
Company”) brought the Japanese pharma
the blockbuster Velcade (marketed jointly
with partner Johnson & Johnson) and a
strong R&D capability in oncology. The
nonexclusive license with Alnylam has the
potential to make Takeda a leading player in
the emerging RNAi space, especially in Asia.
In addition, Takeda paid Amgen US$300
million up front and could pay US$700
million or more in development support and
potential milestones to Amgen for Japanese
rights to 13 compounds in development.
This deal gives Takeda an expanded
pipeline in the home market — the world’s
second-largest. These three transactions
were indicative of a broader trend toward
oncology products adopted by many big
pharmas. As Avastin, Erbitux, Velcade
and others have demonstrated, biotech
oncology products that address important
medical needs have been less susceptible to
price pressures and to generic competition
(at least so far) and can be marketed with
a more modest commercial infrastructure
than treatments for chronic illnesses. (For
more discussion of these deals, see the
Japan year in review article in this issue of
Beyond borders.)
Outlook: buying biotech, being biotech
What lies ahead? A daunting fundraising
environment will continue to spur
deal activity, and we expect to see
considerable consolidation among
small-cap biotechs that are struggling to
survive. These trends are also producing
Beyond borders Global biotechnology report 2009
US public policy
Will biotech get the change it needs?
For the drug development industry,
these are times of tremendous
change. Many private and small-cap
biotechnology companies, hit hard by
tumbling stock markets and reticent
investors, are fighting for survival. Large
pharmaceutical companies, meanwhile,
are gearing up for the huge changes that
will be unleashed by a wave of sizeable
patent expirations.
While many firms may understandably
be focused on responding to these
sweeping market changes, there are also
tremendous changes afoot in Washington,
DC, where a new administration with a
mandate for change could potentially
alter the course of public policy and
regulation on a host of healthcare-related
issues — with significant implications for
the biotech industry.
Reforming healthcare: fulfilling a
campaign promise
As a presidential candidate, Barack Obama
made healthcare reform a key part of his
campaign platform. He pledged to reduce
the number of uninsured Americans,
improve the quality of care, save the typical
family US$2,500 a year in medical-related
costs — and bring much-needed efficiency
to a health system that costs US$2.3
trillion a year. Yet given the nation’s
economic woes, soaring federal deficit and
delays in confirming a new Secretary of
Health and Human Services, many have
questioned whether healthcare reform is a
feasible goal for the near-term horizon.
Healthcare reform remains a high priority,
as the president has maintained that
solving the nation’s healthcare crisis is
inextricably linked to creating a strong
economy for the future. In its budget
blueprint for 2010, the administration
proposed to begin a vast expansion of
the government’s involvement in the
healthcare system by creating a US$634
billion reserve fund over the next decade,
launching an overhaul that many experts
project will ultimately cost at least US$1
trillion. Called a “down payment on
healthcare reform,” the reserve fund
would be financed in part by squeezing
US$316 billion in efficiencies out of the
current healthcare system by aligning
incentives toward quality and promoting
accountability and shared responsibility.
Among other changes, subsidies paid to
insurers that sell Medicare managed-care
plans would be eliminated, and Medicare
Advantage plans would be subject to
a competitive bidding process. The
reserve fund would be financed also
by trimming tax breaks for the nation’s
wealthiest individuals.
The last time the US considered
fundamental healthcare reform — in
the early years of the first Clinton
administration — the proposal bitterly
divided the various stakeholders in the
healthcare economy and ultimately
suffered a decisive defeat. Biotech
companies and their investors were
concerned about the prospect of price
controls under universal care, and this
triggered a wholesale retreat in the public
markets. This time, things are different
in that present dialog does not mandate
a single-payer government-run system.
There is also much broader consensus on
the need for reform, with many industry
participants lending their support to the
administration’s efforts. Still, the reform
debate is expected to be contentious.
Critics argue that, given the money spent
on the stimulus and bailout, the nation
can’t afford health-system overhaul.
The president seeks to build consensus
before Congress tackles the issue, by
creating a bipartisan reform study group
of key stakeholders.
For the drug industry, a population with
more access to healthcare could mute the
potential effect of lower prices. However,
it is critical for the future viability of the
biotech industry that market incentives
remain to reward the innovation of
companies pursuing therapies that
address unmet medical needs and small
patient populations.
Drug prices: raising the heat
In the quest for lower healthcare costs,
the political and public pressure to
reduce drug prices continues. The
president’s healthcare plan challenges
drug prices on three main fronts,
proposing to 1) increase the use
of cheaper generic drugs, 2) allow
drugs approved by the Food and Drug
Administration (FDA) to be imported
from other countries, and 3) authorize
Medicare to negotiate with drug makers
for lower US prices.
The US$3.5 trillion budget proposal for
fiscal year 2010 released in April calls
for a regulatory pathway for companies
to bring to market generic versions of
biotechnology drugs — known as follow-on
biologics, or FOBs (sometimes also
referred to as biosimilars, biogenerics
or bioequivalents). The goal is to keep
a tighter rein on drug costs by creating
greater competition in the biotech market.
According to budget documents, FOBs
could save taxpayers an estimated
US$9.2 billion over 10 years and help
pay for improved care and expanded
insurance coverage. Drug companies
would be prevented from blocking
generic drugs with anticompetitive
agreements to keep FOBs off the market.
The budget proposal also aims to prohibit
makers of brand-name biotech medicines
from “evergreening,” or extending the
59
patent-protected life of current products
by changing them slightly.
The president’s plan for biosimilars
has received mixed reactions from
the biotech industry. Winning a
legal pathway for FOBs could open
a significant new market for generic
and pharmaceutical companies that
choose to play in this space. While the
biotech industry is supportive of FOBs in
principle, companies want any legislation
to provide an adequate period of market
exclusivity for original products, to
ensure a reasonable time to earn a
return on investment before others can
copy their discoveries.
In March 2009, a bipartisan group of
Congressional representatives (led by
California Rep. Henry Waxman) introduced
biosimilar legislation consistent with
the language of the president’s budget
A closer look
The FDA: transforming an agency in crisis
With nearly 11,000 employees and an annual budget of more
than US$2 billion, the FDA is charged with the critical mission
of promoting and protecting public health. It oversees products
that account for one-fourth of every consumer dollar spent in
the US, from foods to cosmetics, therapies to medical products.
A recent wave of scandals, ranging from contaminated blood
thinner from China to tainted peanuts from Georgia, has
tarnished the FDA’s gold-standard image, undermining public
trust and intensifying pressures for an agency overhaul.
Observers agree that transforming the FDA starts with a
new commissioner. The Obama administration has tapped
Margaret A. Hamburg, a physician and former New York City
health commissioner, for the top post. Joshua Sharfstein,
commissioner of the Baltimore City Health Department and
also a physician, has been named to serve as Hamburg’s
chief deputy.
The next commissioner faces a daunting array of challenges,
including:
• Improving the safety and effectiveness of drugs, biologics
and medical devices. A report from the Government
Accountability Office (GAO), the investigative arm of
Congress, charges that the FDA is putting the public at
risk of bad drugs and unsafe products. Safety concerns
extend also to the FDA’s capacity for inspecting foreign
drug plants. Although 80% of active drug ingredients are
produced abroad, just 7% of the plants exporting to the US
are inspected by the FDA, the GAO says. Recently, the FDA
Globalization Act of 2009 was introduced in the House of
Representatives, designed to improve the FDA’s inspection
process for drug-manufacturing facilities. Opponents of the
bill argue that it would likely increase producer costs and
patient prices.
• Speeding up the drug approval process. Although more
than 600 biologics are under development, fewer than 10
are approved by the FDA each year. With a renewed focus
on product safety, approval of new drugs and therapies
could face even further delays. Critics question whether
the FDA is doing its part to make sure new therapies can
reach the patients who need them. Advocates look to the
60
new commissioner to advance the agency’s Critical Path
Initiative, a national effort to modernize the scientific
process through which FDA-regulated products are
developed, evaluated and manufactured.
• Giving equal weight to the food-safety and drug-safety
functions. Some lawmakers have argued that the FDA
is too busy evaluating drugs and medical devices to
adequately regulate food. Rep. Rosa DeLauro, for
example, has proposed merging most government
responsibilities for food safety under a new Food Safety
Administration, which would do the jobs that the FDA and
US Department of Agriculture now perform separately.
The possibility of separating food from drug has been
debated for more than two decades and may be revisited
in the Obama administration.
• Ramping up for global threats. Along with ensuring the
safety of foreign imports, the new FDA must protect
Americans from bioterrorism, cross-border disease
transmission and the threat of intentional contamination of
the nation’s food supply.
• Attracting a new workforce. Much of the FDA’s staff were
hired in the boom of the 1970s and are ready to retire.
The agency’s well-publicized problems, coupled with lower
salaries than the private sector, have it made it difficult
to replenish staff. In addition, the rapid pace of innovation
requires the agency to attract professionals who are
current in their knowledge and have expertise across a
broad array of cutting-edge technologies.
• Updating technology. Reviews by the GAO and others have
found the agency, working with outdated computers, lacks
the information-technology capabilities to analyze data,
assess risks and share intelligence.
Many in Congress agree that it is no longer a question of
whether or not the FDA will be reformed, but rather how and
when. Strong leadership is paramount. Yet to keep American
consumers safe and life-saving therapies in ready supply,
the FDA will also need expanded authority to make sound
regulatory decisions — and increased resources to keep pace
with rapidly evolving biomedical innovations.
Beyond borders Global biotechnology report 2009
proposal. Dubbed the “Promoting
Innovation and Access to Life-Saving
Medicine Act,” the bill gives the FDA
authority to approve copies of biotech
drugs and take steps to ensure they are
safe and effective. The legislation would:
• Allow the FDA to approve FOBs through
an abbreviated application process
• Require FOB makers to 1) demonstrate
there are no clinically meaningfully
differences between the biosimilar
and branded product and 2) show
the two products are highly similar in
molecular structure and share the same
mechanism of action, if known
• Allow an FOB maker to show the FDA
that a product is a biogeneric and is
interchangeable with the original product
The key issue of debate is length of
exclusivity. The new bill limits market
exclusivity for innovator products to
5.5 years. Industry advocates argue
that biotech companies should be
entitled to at least 14 years of data
exclusivity to recover their investments
in drug discovery. As in the prior
Congress, multiple legislative proposals
are expected as a starting point for
negotiations. In fact, in March 2009,
Rep. Anna Eshoo, who represents
biotech-heavy Silicon Valley, filed
a competing proposal that had 43
cosigners. The Eshoo proposal provides
for 14.5 years of data exclusivity.
The second part of the president’s plan
to reduce drug prices — reimporting
prescription drugs from outside the US — is
also a point of contention. Drug makers
argue that reimportation can erode
intellectual property rights and increase
safety risks, put de facto constraints on
the returns that sustain investment in
innovation, and endanger patients with
substandard products.
The industry is also concerned about
the president’s proposed change to
the Medicare Part D prescription drug
program, which funds drug coverage
for some 44 million elderly Americans.
Under the current system, the
Funding for scientific research in the stimulus package
US$21 billion for science and research spending, including:
• US$10 billion for the National Institutes of Health, including US$8.5 billion for
research grants (US$2 billion for biomedical research) and US$1.5 billion to
renovate university research facilities
• US$3 billion for the National Science Foundation
• US$4.5 billion for renewable energy research, including bioethanol and other
biotech solutions
• US$1.1 billion for grants for disease prevention
• US$1.1 billion for comparative effectiveness research
Source: Ernst & Young and www.HHS.gov
government is prohibited from engaging
in Medicare drug pricing negotiations
with pharmaceutical manufacturers.
Negotiations are handled strictly by
private-sector managed care and
pharmacy benefit management plans. The
president and Congressional Democrats
advocate changing the program to
enable, or even require, the government
to negotiate with drug manufacturers,
leading to savings estimates of US$10
billion to US$30 billion. Private payers
often take cues from government
reimbursement policies, and drug
companies are worried that this change
could open a back door to price controls
as private insurers might follow suit in
renegotiating prices.
While drug costs account for only a small
share of US healthcare expenditures,
because of the industry’s historically high
margins, drug companies have frequently
been a convenient scapegoat in media
coverage and policy debate about the
cost of healthcare. It is encouraging that
the administration’s proposals take a
holistic view, emphasizing, among other
things, the use of electronic medical
records and structuring incentives to
improve outcomes. And importantly,
not only drugs’ costs but also their
financial benefits — such as reductions in
hospitalization or other care — are part of
the debate.
One way to apply this philosophy to drug
pricing and reimbursement is through
the use of comparative effectiveness
research. In the United Kingdom, the
National Institute for Healthcare and
Clinical Excellence (NICE) uses cost-utility
analysis to make coverage decisions
based on cost relative to benefit. The
Obama administration’s stimulus bill
provides US$1.1 billion for comparative
effectiveness research. But it is important
that any measures implemented are
constructed in ways that encourage and
reward innovation and are not just a cover
for simply cutting costs. These concerns
were reflected in the legislative debate,
when the biotech and pharmaceutical
industries expressed a preference for
using the term “comparative clinical
effectiveness” rather than “comparative
effectiveness,” which many read to mean
“cost effectiveness,” in the bill’s language.
While the emphasis on reducing costs
is important at a time of mushrooming
budget deficits, as mentioned above,
for the US to retain leadership in
biotechnology, it is also critical that
prices provide a commercial incentive for
innovative R&D.
Stem cell research: lifting the ban
In an important symbolic victory for the
biotech industry, President Obama issued
an executive order in March 2009 lifting
61
the restrictions imposed by President
Bush on federal funding for research on
human embryonic stem cells.
The reversal was expected, as the
president — long a proponent of stem cell
research and regenerative medicine — had
pledged a policy shift on the campaign
trail. Advocates have stressed, however,
that the change is more a symbolic move
for industry than a true financial driver.
Federal research grants, distributed
almost exclusively to government
agencies and academic research centers,
will not generally end up in biotechnology
companies. Thus companies pursuing
embryonic stem cell research will still
need to raise funding from investors,
which has become more challenging in
the wake of the economic crisis.
failed to provide an adequate safety
warning even though the product’s
label had been approved by the FDA.
The decision, which was issued in
March 2009, upheld a state supreme
court decision that concluded FDA
approval does not preempt the right of
a plaintiff to claim damages in a state
court. The decision was in contrast to
a recent decision by the court in Riegel
v. Medtronic which upheld preemption.
A key difference in the Medtronic
case was that the federal law granting
the FDA its authority to approve and
regulate medical devices states that
federal requirements preempt state
requirements, while no such statement
exists for pharmaceuticals. The Court
rejected Wyeth’s argument that a drug
maker could face an FDA enforcement
action for strengthening a safety warning.
States’ rights
In the most watched judicial case of
the year, the US Supreme Court heard
arguments in late 2008 in the case of
Wyeth v. Levine, which dealt with a
plaintiff’s right to pursue a claim. The
plaintiff in the case alleged that Wyeth
Patent reform: returning to the
battleground
Patent reform is making its way through
Congress once again with the introduction
of the Patent Reform Act of 2009. The
legislation mirrors much of the proposed
legislation from 2008 that died on the
Senate floor. (See Beyond borders 2008
for more details.) In the last Congress, the
debate pitted the legitimate needs of drug
companies against those of technology
companies. Their different needs result
from the very different nature of intellectual
property and length of innovation cycle
in the two industries. While technology
product cycles are rapid and many
innovations are incremental improvements
on existing technologies, drugs often take
more than a decade to develop at a cost of
at least several hundred million dollars. With
both sides remaining actively involved in
the debate, the new measure could result in
a similar stalemate.
The change we need?
President Obama ran his presidential race
on the slogan, “the change we need.”
While the legislative debate on the issues
listed above is just getting started, the
changes being considered are nothing if
not ambitious. While biotech companies
may understandably be preoccupied with
thorny operational challenges related to
raising funds and running lean, the issues
being debated in Washington, DC, could
potentially have huge implications for the
future of the entire industry.
For lawmakers, the challenge will be to
not just change policies, but modify them
in ways that sustain the industry and its
tremendous innovation and economic
engine. From the measurement of
outcomes to the protection of intellectual
property and the pricing of innovative
and life-saving drugs, legislators should
consider the incentives created by their
policy initiatives. With the right measures
that produce the right incentives for the
right behaviors, the biotech industry — and
the healthcare economy at large — could
indeed get the change it needs.
62
Beyond borders Global biotechnology report 2009
US products and technologies
Monitoring progress
Progress: increased approvals
The US Food and Drug Administration
(FDA) approved 27 new molecular
entities (NMEs) and biologic license
applications (BLAs) in 2008 — a marked
improvement over 2007, when product
approvals at the agency fell to 18, the
lowest level since 1983. This represents
a return to the levels seen in 2005 and
2006, when 20 and 22 products were
approved, but a far cry from 2004, when
36 NMEs were approved.
According to “The Pink Sheet” less than
half of the year’s approvals were for
breakthrough technologies or products
addressing unmet medical needs.
The majority of products receiving
approval were more than just “me-too”
technologies, even though they were
in treatment classes that already had
several existing approved options. To
the extent that there were innovative
products in the class of 2008, they
often stemmed from biotech companies.
Regeneron’s Arcalyst was approved
for Cryopyrin-Associated Periodic
Syndromes or CAPS, a group of rare,
inherited, auto-inflammatory conditions.
Two products were approved for
Idiopathic Thrombocytopenic Purpura
(ITP), a blood clotting disease: Amgen’s
Nplate and Ligand/GSK’s Promacta.
Genzyme received approval for Mozobil,
an injectable drug that provides
enhanced mobilization of stem cells for
autologous transplantation in patients
with non-Hodgkin’s lymphoma and
multiple myeloma.
Overall, additional approvals in 2008
were widely dispersed throughout
multiple product types, including those
for epilepsy, pain management and
contrasting/imaging agents. Unlike the
last few years, the leading innovative
technologies in 2008 were neither
anti-infectives nor oncology products.
The most prominent grouping was the
area of imaging and contrast agents
where four new products were approved.
These included two biotech-developed
products, CV Therapeutics/Astellas’
Lexiscan and Epix Pharmaceuticals’
first drug, Vasovist. Both of these
products target cardiovascular scanning
procedures. Lexiscan is a stress test
agent that increases arterial blood flow
in the arteries for patients unable to
undergo adequate exercise-induced
stress, while Vasovist is the first contrast
agent approved to support the relatively
new procedure of magnetic resonance
angiography (MRA).
REMS: monitoring safety
With the signing of the Food and Drug
Administration Amendments Act
(FDAAA) in September 2007, sweeping
changes were made in the FDA. The Act’s
greatest impact on future drug approvals
could be through its mechanism for
post-marketing safety surveillance, the
risk evaluation and mitigation strategy
(REMS). Of course, post-approval studies
are not new, but as of 2008, these are
no longer voluntary post-marketing
commitments, but rather, enforceable
studies with predetermined time frames
and outcome targets. The FDA can now
require drug companies to develop and
propose a REMS (which can include a
medication guide, patient package insert
or a communication plan) to ensure
that the benefits of a drug outweigh the
risks. As of December 2008, the FDA
had approved 21 REMS from companies
submitting new drug applications
(NDAs). The majority of these REMS
have required the submission of a
medication guide to address drug- and
drug class-specific issues and provide
further information to help patients avoid
serious adverse events. In a few cases,
the FDA also required that the programs
include steps to assure safe use, such
as the certification of prescribers and
pharmacies and enrollment of patients in
special programs to ensure that they fully
understand the associated risks.
REMS programs are not restricted to
new drugs seeking approval; the FDA can
also require them for existing, approved
products. The FDA posted its first list of
previously approved products requiring
REMS in March 2008, which included
products such as Biogen Idec and Elan’s
multiple sclerosis drug, Tysabri, and
Celgene’s multiple myeloma and MDS
therapy, Revlimid. Remarkably, the
agency even included Exubera, which
Pfizer had already pulled from the
market in 2007.
Both of the drugs approved in 2008 for
ITP, Amgen’s Nplate and Ligand/GSK’s
Promacta, required sponsors to develop
a REMS to meet approval requirements.
Nplate’s REMS included a medication
guide for patients and required that
all prescribers and patients enroll in a
special program to track the long-term
safety of Nplate therapy.
The introduction of the REMS
framework may provide greater
comfort to regulators in approving
novel therapies for serious conditions
that also have identified risks, and
may also help in boosting patient and
practitioner acceptance and usage of
these drugs. For example, the REMS
for Tysabri may have allowed the
product to remain on the market and
be seen as an acceptable alternative
by patients and doctors. The product,
which had initially been pulled from the
market in 2005 after three patients
developed progressive multifocal
63
leukoencephalopathy (PML), was
subsequently re-approved by the FDA.
Even though cases of PML have been
reported since the reintroduction of
Tysabri, the FDA has not pulled the
drug from the market this time around.
The existence of a REMS has given the
Agency greater confidence that they
can understand and monitor the degree
of risk presented to patients, while
letting doctors know how to carefully
monitor for the occurrence of PML in
their patients.
PDUFA dates: monitoring timelines
Another significant issue in 2008
was the FDA’s inability to meet its
target dates for acting on new drug
applications. While the FDA had set
non-binding timelines for review
and action on new medicines under
the Prescription Drug User Fee Act
(PDUFA) — targeting action within
10 months of submission for 90% of
standard NDAs and within 6 months of
submission for priority applications — the
agency failed to meet PDUFA dates for
at least 15 drugs. The FDA stated that
the delay in approvals was the result
of inadequate staff, particularly since
it needed to implement the safety
legislation approved by Congress in
2007. These missed target deadlines
denied patients access to potential
treatments and increased uncertainty
for companies and investors. In several
cases, the missed dates were not
accompanied with clear reasons from
the FDA, leaving investors to wonder
whether the delays were because of the
FDA’s lack of resources or because of
problems with the application itself.
Selected US product approvals, 2008
Brand
name
Entereg
Generic name
alvimopan
Type
New molecular
entity
Indication
Regain GI function
after bowel resection
Los Angeles/
Orange County
Nplate
romiplostim
Biologics license
application
Immune
thrombocytopenic
purpura (ITP)
Cephalon
Pennsylvania/
Delaware Valley
Treanda
bendamustine
hydrochloride
New molecular
entity
Non-Hodgkins
lymphoma
CV Therapeutics/
Astellas
San Francisco Bay Lexiscan
Area
regadenoson
New molecular
entity
Cardiac imaging
agent
Epix
New England
Vasovist
gadofosveset
trisodium
New molecular
entity
Contrast agent
December
Genzyme
(acquired from
Anormed)
New England
Mozobil
plerixafor
New molecular
entity
Bone marrow
transplants in nonHodgkins lymphoma
and multiple
myelomas
December
Lev
Pharmaceuticals
New York State
Cinryze
C1 inhibitor
Biologics license
application
CI hibitor HAE
October
Ligand
Pharmaceuticals/
GSK
San Diego
Promacta
eltrombopag
olamine
New molecular
entity
Chronic ITP
Progenics/Wyeth
New York State
Relistor
methylnaltrexone
bromide
New molecular
entity
Opiod-induced
constipation
April
Regeneron
New York State
Arcalyst
rilonacept
Biologics license
application
Cryopyrin-associated
periodic syndromes
February
The Medicines
Company
New Jersey
Cleviprex
clevidipine
New molecular
entity
Hypertension
August
Zymogenetics
Pacific NW
Recothrom
thrombin, topical
(recombinant)
Biologics license
application
Stopping blood loss in
surgery
January
Company
Adolor/GSK
Location
Pennsylvania/
Delaware Valley
Amgen
Source: Ernst & Young, US Food and Drug Administration
64
Beyond borders Global biotechnology report 2009
REMS
required
Yes
Yes
Month
May
August
March
Yes
Yes
April
November
Complete response letters:
monitoring applications
In 2008, the FDA switched from issuing
“approvable” and “not approvable”
letters in response to NDAs to issuing
complete response letters (CRLs) — which
had previously only been used for BLAs.
Under the approvable/not approvable
system, the release of a letter gave the
sponsor, investors and the public an
instant understanding of the application’s
status. The new nomenclature is more
ambiguous, making it somewhat harder
to monitor the status of applications.
While the term “complete response letter”
might suggest the end of a process, it
often indicates the opposite — signaling
that an application is incomplete, and
initiating a new round of action.
The biotechnology industry and
biologics products were well
represented in the applications that
received a CRL in 2008. In nearly all
of these cases, the letters required
sponsors to continue working on
their product applications, and some
of the products were approved in
early 2009. These include products
for which additional trials were not
required, such as Roche’s Actemra
and AMAG’s Feraheme (both of
which were challenged to produce
additional documentation concerning
manufacturing and final labeling),
MedImmune’s motavizumab (in which
the FDA asked for supplementary
documentation), and Centocor’s
ustekinumab (which requested the
sponsor to submit a REMS). However,
in Targanta’s CRL for ortavancin,
a gram-positive anti-infective for
hospital-based patients, the FDA found
that the data was not sufficient and
required new clinical trials. The CRL
resulted in Targanta’s sale to The
Medicines Company. (For details, see
the US deals article.) The Medicines
Company believes ortavancin will add to
their strategic plan of becoming a global
leader in critical care medicine.
Looking ahead: monitoring progress
As of early 2009, more than 125 new
drug applications (NDAs) and biologics
license applications (BLAs) are on file
with the FDA with decisions scheduled
during the year. Approximately one
third of these products were developed
either entirely by or in partnership with
biotechnology companies. Many of
them are novel therapeutics, such as
Amgen’s denosumab for postmenopausal
osteoporosis, Novo Nordisk’s liraglutide
for type 2 diabetes and Theravance’s
telavancin for the treatment of
complicated skin and skin-structure
infections. Other submissions seek to
expand successful marketed products
into treating new indications, including
applications to use Genzyme’s Clolar
as a first-line therapy for acute myeloid
leukemia and Merck/CSL’s Gardasil
human papillomavirus vaccine not just
for women (for whom it is currently
approved) but for men as well. Also filed
with responses expected shortly are the
CRL follow-ups for AMAG’s Feraheme and
MedImmune’s motavizumab.
After a dismal 2007, there was definite
progress on the products front in
2008, but that progress will need to be
monitored to make sure it is sustained.
The FDA, which has struggled in recent
years with political pressures and
resource constraints, is undergoing
considerable reform (see the US public
policy article for details), and companies
will need to stay abreast of developments
at the agency to understand the
changing regulatory climate. One area
where things have already changed,
of course, is in the area of monitoring
safety. For companies seeking product
approvals in 2009, some of the biggest
challenges may lie in developing REMS
and responding to the anticipated slate of
CRLs — challenges that will likely require
additional investments in the final phases
of bringing products to market.
2008 was a year of considerable
procedural change and reasonable
progress in product approvals. An
atmosphere of change at the FDA
will most likely continue to cloud the
predictability of outcomes. But the
pace of overall applications continues
to be strong and much of this pipeline
is in truly innovative technologies with
products that target oncology, orphan
diseases, autoimmune disorders and
other underserved disease segments. We
all have much at stake in ensuring that
these applications are processed promptly
and innovative new products are brought
to market. For a drug industry facing a
significant patent expiration cliff, 2009
applications pending at the FDA — which
Cowen and Company estimates could
generate revenues of as much as US$60
billion by 2013 — could contribute to a
recovery in the sector. And of course,
for patients everywhere, these products
could provide the ultimate benefit — by
improving and saving lives.
65
Canada year in review
A time of reckoning
The global financial crisis, which is
straining the Canadian economy, has
taken a major toll on the biotech sector.
Public markets have been firmly closed
since mid-2007, while follow-on offerings
fell to the lowest level in more than
a decade. Venture capital, which had
rebounded in 2007, fell substantially
in 2008, especially for new start-ups
and early-stage corporations. This
funding crisis is straining companies and
their business strategies, leading to a
significant decline in the number of firms.
More than half of the remaining public
companies now have less than a year’s
worth of cash. For the Canadian industry,
this is now a time of reckoning. Without
new approaches and solutions, the next
few years could cripple the sector.
industry needs sustained R&D investments
to attract investors and grow sustainably.
loss no longer a good indicator of the
health of the sector.
The funding crisis has driven
reductions in R&D programs and
related expenditures and has
produced substantial intangible asset
impairments. Net loss increased from
US$759 million to US$1.1 billion as a
result of write-offs of intangible assets
and goodwill. Angiotech wrote off
US$650 million of goodwill in 2008,
representing more than the entire
increase in losses in the industry. In
the absence of this write-down and
the acquisitions of the four companies
mentioned above, the industry’s net
loss would have decreased by 57%. The
extent of noncash charges makes net
The market capitalization of the
Canadian industry declined 61%, from
US$10.8 billion in 2007 to US$4.2
billion in 2008. While this is at least
partially driven by the four significant
public-company acquisitions, the 72
public companies in existence at the
end of 2008 saw their total market
value shrink by a very significant 47%.
This decline was driven by a number
of companies that have announced the
need to “pursue strategic alternatives”
and by companies that experienced
clinical-trial setbacks in addition to
the general market decline. However,
the fact that the Canadian industry
Financial performance
Canadian biotechnology at a glance 2008 (US$m)
The financial results of the Canadian
biotech industry reflect the challenging
realities of the current economic crisis.
To a large extent, the numbers have
also been dampened by the acquisition
in 2008 of four significant public
companies — Arius, Aspreva, Axcan and
Draxis — by foreign firms.
The revenues of the publicly traded
biotech industry decreased 9%, from
US$2.2 billion in 2007 to US$2 billion in
2008, mainly due to the large acquisitions
mentioned above. If 2007 revenues
were adjusted to exclude those four
companies, the industry’s revenues would
have increased by 26% instead of falling.
This strong growth is indicative of new
product approvals and solid revenue
growth of existing products. This can also
be seen in the 9% increase in the number
of employees. However, R&D expenses
decreased from US$743 million to
US$703 million — a source of concern and
a direct result of the lack of funding. The
66
2008
2007
% change
2,041
2,237
-9%
703
743
-5%
(1,143)
(759)
51%
Market capitalization
4,217
10,844
-61%
Number of employees
7,972
7,326
9%
271
707
-62%
0
1
-100%
207
352
-41%
Public companies
72
84
-14%
Private companies
286
322
-11%
Public and private companies
358
404
-11%
Public company data
Revenues
R&D expense
Net income (loss)
Financings
Public company financings
Number of IPOs
Private company financings
Number of companies
Source: Ernst & Young
Financial data for 2008 were converted to US$ using an exchange rate of 1.07 (Canadian per US$), except market capitalization,
which was converted using an exchange rate of 1.22. Data for 2007 were converted to US$ using an exchange rate of 1.07,
except market capitalization, which was converted using an exchange rate of 0.99. Data for 2007 have been restated to reflect
full-year results, since estimates in Beyond borders 2008 included some estimation of fourth-quarter results. Numbers may appear
inconsistent because of rounding.
Beyond borders Global biotechnology report 2009
is no longer followed by a significant
number of analysts and many of the
larger investment banks no longer
have a separate life sciences industry
group also contributed to the decline.
In 2004, there were 18 full-time
analysts covering the life sciences
industry in Canada; at the end of 2008,
there were only 3. Further, few mutual
funds require a certain percentage
of their investments to be in life
sciences companies, and most stock
market indices contain only one or two
Canadian biotech companies.
The number of Canadian public companies
decreased by 12%, from 84 in 2007 to
72 in 2008. This was driven in part by
the acquisition of successful companies.
Most of the decline in company count,
however, was due to clinical-trial failures,
companies transforming themselves into
service or resource companies, or firms
being wound up or becoming insolvent.
For many years, Canada was second
only to the US in the number of biotech
companies it had, but it now ranks third,
well behind Germany.
In 2008, the Canadian biotech industry underperformed the market ...
EY Canadian biotech industry
S&P/TSE Composite Index (Canada)
S&P 500 (US)
+20%
0%
-20%
-40%
-60%
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Source: Ernst & Young, finance.yahoo.com
EY Canadian biotech industry represents the aggregate market cap of all Canadian public biotech companies as defined by Ernst & Young.
... while Biovail did better than the rest of the industry
Biovail
Medium cap (250m–1b)
Small cap (100m–250m)
EY Canadian biotech industry
Micro cap (under 100m)
+20%
0%
Financing
In 2008, the industry collectively raised
a little more than US$475 million, the
lowest total since 1995. Not surprisingly,
the decline accelerated in the fourth
quarter, when the industry raised
less than US$64 million, the smallest
quarterly amount in the years that
Ernst & Young has been tracking the
Canadian sector.
The public markets have essentially been
closed to Canadian biotechs since
mid-2007. The complete lack of IPOs
during the year was coupled with a striking
decline in follow-on public offerings of
common shares or units, from US$398
million in 2007 to US$80 million in 2008.
The largest follow-on offerings were by
Theratechnologies for approximately C$30
million and by Akela Pharma for a little
more than US$10 million.
-20%
-40%
-60%
-80%
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Source: Ernst & Young, finance.yahoo.com
EY Canadian biotech industry represents the aggregate market cap of all Canadian public biotech companies as defined by Ernst & Young.
Funds raised in the “other” offerings
category decreased to US$191 million
from US$305 million in 2007. Of this
total, private placements of equity
securities represented only US$103
million, while private placements of debt
(mostly convertible debt) amounted to
US$87 million. The shift from equity
securities to debt instruments — which
accounted for 31% of total public
financings in 2008, up from 17% a year
earlier — indicates the level of investor
uncertainty. Convertible debt allows
investors to participate in any equity
upside while also giving them collateral
from the corporation’s assets, often
67
its intellectual property (IP). If the
corporation is unable to raise additional
financing and is forced into restructuring
or a liquidation, these investors would
have rights to some of the IP and would
come before equity holders in recovering
at least some of their investment.
Canadian yearly biotechnology financings (US$m)
Another concern is the size of the
individual offerings. The average private
placement of equity amounted to slightly
more than US$4 million, while the average
private placement of convertible debt
amounted to US$3.8 million. Many of
these financings were provided by existing
investors to maintain minimum operations
and were not sufficient for expanding
operations or acquiring or developing new
technologies. Similarly, follow-on offerings
had an average size of only US$10 million,
which is significantly smaller than most
venture rounds in the US.
Total
Although not included in our financing
data, Quebec-based Æterna Zentaris
raised US$52.5 million in a royalty
financing deal with Cowen Healthcare
Royalty Partnership. While the sale of
future royalty streams is an excellent
method of raising capital in the current
financial crisis — and is increasingly used
in the US — it has limited applicability
68
2007
2006
2005
2004
2003
2002
2001
2000
0
5
9
160
85
0
10
42
103
80
580
925
295
296
723
186
621
364
Other
191
122
664
242
139
416
132
155
258
Venture
207
353
205
313
271
206
199
388
546
Follow-ons
$478 $1,060 $1,803 $1,010
$791 $1,345
$527 $1,206 $1,271
Source: Ernst & Young, Canadian Biotech News and company websites
Numbers may appear inconsistent because of rounding
in Canada, where only a small number
of companies have products that are
marketed or close to approval.
Provincial distributions
As in prior years, Quebec-based companies
attracted more total investment than any
other province, with US$199 million raised,
followed by Ontario (US$138 million) and
British Columbia (US$90 million). Quebec’s
lead was facilitated by the province’s US$58
million in follow-on public financings,
compared with US$20 million in British
Columbia and none in Ontario.
QLT redeemed US$172.5 million of
convertible senior notes for cash in
September. Since the publicly traded
industry raised only US$271 million in
aggregate during the year, this implies
that net funding for the sector was
less than US$100 million. Further, in
December, QLT proceeded with a modified
Dutch auction tender to purchase US$50
million of common shares. This process
expired on January with the company
repurchasing 20 million common shares.
The aggregate amount returned to
shareholders in these two transactions
represents half of the new funds raised by
the entire Canadian industry in 2008.
On the venture-capital front, Ontario
attracted close to US$109 million,
primarily related to a US$45 million
investment in Cytochroma. Following
Ontario were Quebec (US$51 million
raised) and British Columbia (US$40
million). These three provinces accounted
for 97% of total venture funding.
Capital raised by Canadian province, 2008
Private companies
Public companies
250
200
51
150
US$m
Venture funding fell from US$353
million to US$207 million. This is roughly
comparable to the annual totals during
most of the last seven years (except 2007
and 2005, when more than US$300
million was raised.) Interestingly, the
average venture round was about US$8
million, significantly higher than the
average size of private placements in
public companies. This was driven by a
few large rounds raised by later-stage
companies that would normally have gone
public in earlier years. These included
Cytochroma (US$45 million), Gemin X
(US$38 million), Inimex Pharmaceuticals
(US$22 million) and Klarogen
Biotherapies (US$17 million). Without
these rounds, which represented almost
60% of the venture financing in 2008, the
average round would have been about
US$4 million.
2008
IPOs
100
41
109
148
50
78
3
3
30
0
Quebec
Ontario
British Columbia
Source: Ernst & Young, Canadian Biotech News and company websites
Beyond borders Global biotechnology report 2009
8
7
Alberta
Other
The number of Canadian companies
declined significantly in 2008. The number
of private firms decreased from 98 to 84 in
Ontario, from 87 to 78 in Quebec and from
57 to 55 in British Columbia. Meanwhile,
public companies decreased from 24 to 20
in Ontario and from 25 to 21 in Quebec.
Since 2004, all provinces except British
Columbia have experienced significant
declines in the number of companies,
including drops of 44 companies each in
Quebec and Ontario.
Deals
As mentioned above, several successful
Canadian biotechs were acquired in
2008. The two largest deals — Aspreva’s
acquisition for US$0.9 billion by Galenica
Group and Axcan’s purchase by TPG
Capital for US$1.3 billion — were among
the largest deals ever seen in the
Canadian biotech industry. Both
transactions were announced in 2007
and completed in early 2008. In
addition to these two takeovers, Draxis
Health was acquired by India’s Jubilant
Organosys for US$226 million, and
Arius Research was acquired by Roche
for US$190 million. Atrium Innovations
sold its active-ingredients and specialtychemical divisions for US$166 million in
cash. Atrium will now become a health
and nutrition pure-play corporation.
On the private-company side, Oryx
Pharmaceuticals was acquired by
Sepracor for US$50 million. Shareholders
could receive an additional US$20
million upon accomplishment of various
regulatory milestones.
The year saw several notable strategic
alliances as well. In January 2008,
BioMS Medical completed a previously
announced licensing and development
agreement with Eli Lilly. BioMS received
an up-front cash payment of US$87
million and could receive additional
development and sales milestones up
to US$410 million as well as escalating
royalties on commercial sales. Aegera
Therapeutics outlicensed its oncology
drug AEG40826 to Human Genome
Sciences in exchange for US$20 million
in up-front payments including US$5
million in equity. Aegera could also
receive up to US$295 million in future
development and commercial milestone
payments and double-digit royalties.
Theratechnologies signed a collaboration
and licensing agreement with EMD Serono
(a subsidiary of Merck-Serono) for the
exclusive commercialization rights to
Tesamorelin in the US. Theratechnologies,
Capital raised by leading Canadian biotech clusters, 2008
$250
Total capital raised (US$m)
$200
Montreal
$150
Toronto
Vancouver
$100
which retained ex-US rights, received
US$30 million up front (including an
US$8 million equity investment and a
license fee of US$22 million) and could
receive up to an additional US$285
million in development, regulatory
and sales milestones plus royalties. In
addition, there were at least seven other
pharma-biotech strategic alliances and in
excess of 35 biotech-biotech agreements,
mostly with small deal values.
In the current environment, a number
of small deals were structured to
generate near-term cash for struggling
companies or to cut costs by offloading
ancillary products or sharing services
with other corporations. These included
Cipher Pharmaceuticals’ development,
distribution and supply agreement
with Ranbaxy Pharmaceuticals and
MethylGene’s agreement with Otsuka
Pharmaceutical to develop small-molecule
kinase inhibitors for ocular diseases. Both
agreements provided up-front payments
of less than US$2 million but could be
worth anywhere from US$20 to US$50
million, depending on milestones.
Product approvals
In a year when the US Food and Drug
Administration (FDA) approved relatively
few new molecular entities (see the US
products and technologies article for
details), Canadian firms had limited success
bringing new therapeutic products to
market. In December, Labopharm received
FDA approval of Ryzolt, a once-daily,
extended-release formulation of tramadol.
In addition, DiagnoCure received US CLIA
certification to launch Previstage, its new
colorectal cancer-staging test. Bioniche
Life Sciences also received licensing
approval by the Canadian Food Inspection
Agency for Econiche, a cattle vaccine to
reduce E. coli 0157 shedding.
$50
Quebec
Halifax
$0
0
20
40
60
Venture capital raised (US$m)
Source: Ernst & Young, Canadian Biotech News and company websites
Size of bubbles shows number of financings per region
80
100
120
Canada has 22 public companies as
well as some private firms with drugs
in Phase III trials. In recent years,
approvals at the FDA have slowed, but
the Obama administration is looking at
overhauling the agency in part to speed
69
approvals. (For more details, refer to
the US public policy article.) Companies
looking to get new products approved
and concerned about survival will need
to monitor these changes.
Canadian biotech industry indicators, 2000-08
Revenue
The funding crisis is threatening
companies’ survival. Fifty-seven percent of
companies had less than a year’s worth of
cash as of 31 December 2008, while 76%
had less than two years’ worth. Reflecting
this reality, 43 of the 72 public companies
had full going-concern disclosures in their
2008 financial statements, indicating that
management believes they have less than
a year’s worth of cash. In the past, most
companies in this situation were able to
raise funds to continue, but now this is
more difficult since the industry has an
unprecedented number of companies with
little cash, very low market values and a
lack of new buyers.
Only 45 of the 72 public companies have
noninterest revenue, much of which is
generated from research collaborations
and other precommercial activities; and
only 24 of these firms have approved
products. For the two-thirds of public
biotech companies that do not yet have
approved products, access to funding
will be critical. In 2008, Canadian public
companies raised only US$271 million in
aggregate, which is significantly below the
industry’s burn rate and represents about
one-third its R&D expenditures. Without
renewed funding, significant consolidation
will be the most likely outcome.
Not surprisingly, six public companies
essentially closed operations in 2008,
and 20 of the 72 remaining companies
have announced that they are actively
pursuing strategic alternatives such as
reorganization or sales. If these trends
continue, the Canadian biotech industry
could emerge from the financial crisis
much smaller and essentially restricted
to the three major clusters in Montreal,
Toronto and Vancouver.
70
US$b
Consolidation and survival
Market capitalization
Number of companies
20
500
18
450
16
400
14
350
12
300
10
250
8
200
6
150
4
100
2
50
0
0
2000
2001
2002
2003
2004
2005
2006
2007
2008
Source: Ernst & Young
For Canadian biotech companies,
investors and policy-makers, this is now
a time of reckoning. If the industry is to
survive in any meaningful, sustainable
way, it will need new approaches to
address the substantial gaps and
challenges ahead.
The government could play a constructive
role by helping to align incentives and
fill funding and other gaps. Data from
Statistics Canada show that, while the
federal government spent US$920
million on biotechnology scientific
activities in the year ending 31 March
2008, only US$15 million of that total
is related to business enterprises. And
while this investment is probably at least
matched by provincial contributions,
the vast majority of those funds are
for pure research. These expenditures
may advance science and contribute to
many new and innovative biotechnology
products, but without robust funding
and a strong domestic industry, these
inventions will be commercialized by
foreign companies with little economic
benefit to the Canadian economy.
Beyond borders Global biotechnology report 2009
One mechanism the government uses
to boost biotech is the scientific and
experimental development tax credits
(SR&ED) program, which returns cash
to private companies based on R&D
spending, and is augmented by similar
programs in many provinces. While
these programs greatly benefit private
firms, they may be less useful to many
companies in the current environment.
As venture-capital firms cut back on
early-stage financing, many companies
lack the funds to invest in R&D and
avail themselves of the credits. Further,
these credits are of little value to public
companies since they can only be offset
against taxable income, which few public
Canadian biotechnology companies have.
For public companies, making a portion of
the SR&ED tax credits and unused SR&ED
expenditures refundable would provide
immediate relief.
Other programs to spur investor interest
within the sector could include:
“flow-through shares” for public companies,
which would permit shareholders to deduct
a proportionate share of R&D expenditures;
Canadian biotech companies by province, 2008
Private companies
Public companies
Number of companies
90
80
70
60
50
40
30
20
10
0
Ontario
Quebec
British
Columbia
Alberta
Saskatchewan Nova Scotia
Manitoba
Prince Edward
Island
New
Brunswick
Newfoundland
Source: Ernst & Young
deductions from income for capital
losses incurred from direct investments
in new shares of public companies; and
methodologies to permit investors to deduct
direct investments into public companies
against income, using a stock savings or
similar mechanism.
Programs to reduce the perceived risk
associated with start-up investments
could also help attract investors. These
could include matching government
funds for start-ups and grants based on
employment creation in start-ups.
A number of companies have Phase
III products that require at least two
or three years of additional funding.
A loan program to assist such firms
with commercialization would be
beneficial at a time when the lack
of funding could cripple promising
projects or push them abroad. While
Canada’s Innovation & Technology
Office provides funding to a number of
industries, such as aerospace, it has
not provided these funds to biotech for
many years.
These measures could help the industry
survive the drought. Longer term,
however, it will need to become more
self-sustaining and not rely on government
incentives. Canadian companies will need
to behave more like American firms,
which focus on the commercial potential
of products and less on pure research
and very early-stage products. Such a
commercial focus with significant attention
and resources committed to moving
products with good commercial potential
toward approval as soon as possible should
reduce risks and attract investors.
While the Canadian biotech industry will
experience significant financial challenges
in the near term, about one-third of public
companies with approved products are
generating revenue, and their revenue
growth has been substantial in recent years.
These companies will provide a basis for
the industry’s continuance into the future.
But companies that do not have approved
products need a chance to start generating
revenue, and unless the industry funds
new start-ups, Canada will become a small
player in the global industry.
71
Staying afloat?
The European perspective
European introduction
Staying afloat?
For the European biotech industry, the
last few years have seen sustained growth
across several fronts — much-needed
progress after a prolonged period
during which the sector struggled with a
challenging financing environment and
anemic growth. In 2008, the industry’s
success streak may have been brought
to an abrupt halt by the global financial
crisis. While Europe’s leading mature firms
continue to post strong financial results,
the environment facing many smaller
companies is much more challenging.
Financial performance
Revenues of publicly traded European
biotechnology companies increased 17%,
from €9.6 billion in 2007 to €11.2 billion
in 2008. This compares favorably to
the 6% decline in revenues the industry
experienced in 2007. However, as
noted in last year’s Beyond borders, the
2007 numbers had been skewed by the
acquisition of Serono by Merck KGaA,
which had removed one of Europe’s largest
biotech companies from the industry.
Adjusted for the Serono acquisition, the
2007 growth rate was 20% — roughly on
par with the 2008 growth rate.
Not surprisingly, the vast majority of this
increase in revenues came from a handful
of mature European biotechs. In particular,
the industry’s performance was boosted
by top-line growth in excess of 20% at
Elan (based in Ireland), Eurofins Scientific
(France), Meda (Sweden) and Qiagen (the
Netherlands), while Switzerland-based
Actelion and British specialty pharma Shire
grew by 16% each. For the most part, these
impressive increases are attributable to
strong product sales at these firms.
The bottom line of publicly traded
companies also improved significantly,
from a net loss of €1.6 billion in 2007
74
to €478 million in 2008 — a 70% decline
in net loss and a historic low of less
than 4% of revenues. Over 40% of
this improvement came from just two
companies — Shire and Actelion. Actelion’s
2007 bottom line had been impacted
by a significant in-process research and
development charge.
Financing
As in most markets, the global financial
crisis hindered biotechnology companies’
access to capital, and this was clearly
visible in the European industry’s financing
totals. 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
€5.4 billion (US$7.4 billion) in 2007 to less
than €2 billion (US$2.9 billion) in 2008.
The bulk of this reduction was in funding
for public companies, which shrank from
more than €4 billion (US$5.5 billion) in
2007 to only €833 million (US$1.2 billion)
in 2008.
This is not surprising, given that the
global turmoil in stock markets saw public
company financing for biotechnology
plummet in most major markets. The
European industry was subject to the
same trends — the industry’s market
capitalization fell 34% as investors
slashed a substantial €20 billion from the
valuations of Europe’s biotech firms. The
market for IPOs, which had trickled along
in the first half of the year — producing only
three IPOs that generated a relatively small
€75 million (US$111 million) — evaporated
entirely as the financial crisis set in.
But while the global financial crisis has
certainly made matters worse, Europe’s
financing challenges pre-date the worst of
the crisis. Indeed, the public markets have
been cool to biotech investments since the
second half of 2007, when what was then
called the credit crunch prompted investors
to abandon stocks with greater perceived
risk. In the first two quarters of 2007,
biotech companies raised €600 million
(US$822 million) through IPOs and more
than €3.1 billion (US$4.2 billion) through
follow-on and other public offerings. In the
European biotechnology at a glance (€m)
Public companies
2008
2007 % change
2008
Industry total
2007
% change
Financial
Revenues
11,228
9,591
17%
15,348
13,553
13%
R&D expense
3,516
3,409
3%
6,812
6,571
4%
Net income (loss)
(478)
(1,588)
-70%
(1,994)
(3,077)
-35%
38,487
58,727
-34%
—
—
—
Total financings
833
4,269
-80%
1,764
5,438
-68%
Number of IPOs
3
21
-86%
3
21
-86%
Industry
Market capitalization
Number of companies
178
185
-4%
1,836
1,869
-2%
Number of employees
49,062
47,775
3%
85,612
83,330
3%
Source: Ernst & Young and company financial data
For methodology, refer to table on page 34
Beyond borders Global biotechnology report 2009
six quarters since, the cumulative amount
raised has been less than 40% of the total
raised during the first six months of 2007.
Deals
Deals are a perennial presence in the
biotech industry, and the volume and
potential value of transactions conducted
by European biotech companies remained
fairly strong in 2008, despite the financial
crisis. In fact, the challenging times may
have spurred deal activity in some cases, as
distressed circumstances drove firms to find
solutions through partnerships while private
investors sought exits through acquisitions.
A large part of this decline is in follow-on
and other financings, which withered from
€3.5 billion (US$4.8 billion) in 2007 to
less than €800 million (US$1.2 billion) in
2008. In contrast with 2007, when there
were eight transactions above the €100
million mark, there was only one such
financing in 2008.
Venture financing held up better than the
public markets in 2008. But even here,
the amount raised was 20% lower than
in 2007. Venture funding fell from €1.2
billion (US$1.6 billion) in 2007 to €932
million (US$1.4 billion) in 2008 — one of
only two years since 2000 in which the
amount of venture capital raised by the
European industry has dipped below €1
billion (US$1.5 billion). Venture investors
have been demonstrating a lower appetite
for risk, preferring companies with more
advanced pipelines that offer relatively
low-risk, short-term return horizons.
Reflecting this trend, the year’s three
largest first-round financings were
completed by companies with programs in
clinical development and with their origins
in established pharmaceutical companies.
During the year, European biotechs
announced M&A transactions worth a
total of €3.4 billion (US$5.0 billion), split
somewhat evenly between biotech-biotech
and pharma-biotech transactions. While
this total is far lower than the €14.3 billion
(US$19.6 billion) of M&A transactions in
2007, the 2007 totals had been skewed
by three deals (Merck KGaA/Serono,
Qiagen/Digene and Shire/New River). After
adjusting for these large deals, the 2008
numbers represent an 81% increase relative
to 2007.
On the strategic alliance front, the total
value of transactions decreased by twelve
percent in 2008, to €8.8 billion (US$13.1
billion). While novel clinical-stage product
candidates continued to command
impressive premiums in alliances, there
was also strong deal-making activity
around preclinical assets. Indeed, 11 of
the 15 largest European deals in 2008
involved discovery programs or assets in
preclinical development.
Some deal trends were driven by larger
challenges facing the industry. For instance,
as big pharma companies attempt to
reinvent themselves (see the “Reinvention
and reinnovation” article in Beyond borders
2008 for details), several of these firms are
seeking to rationalize operations and divest
themselves of noncore assets — leading to
a number of transactions in which smaller
European firms inlicensed commercialized
products from large companies. And
as companies face increased risks even
after product launch — from greater
post-marketing safety surveillance and
a changing pricing and reimbursement
environment — this reality drove a number
of deal structures in which contingent
payments are linked to commercial
milestones such as sales performance
rather than R&D milestones.
Products and pipeline
The industry had a mixed performance with
regard to product approvals and pipeline
development. Building on the success of
Ernst & Young survival index: Europe
2008
Number of Percent
companies
of total
2007
Number of Percent
companies
of total
2006
Number of Percent
companies
of total
2005
Number of
Percent
companies
of total
More than 5 years of cash
50
28%
68
37%
61
38%
51
39%
3–5 years of cash
13
7%
26
14%
18
11%
20
15%
2–3 years of cash
24
14%
18
10%
17
11%
15
11%
1–2 years of cash
25
14%
40
22%
35
22%
25
19%
66
37%
33
18%
30
19%
21
16%
Less than 1 year of cash
Total public companies
178
185
161
132
Source: Ernst & Young and company financial data
Numbers may appear inconsistent because of rounding
75
previous years, the pipelines of European
companies grew across all phases of
clinical development during 2008. The
number of candidates in the aggregate
pipeline of the industry increased by more
than 10% relative to 2007, bringing the
total number of candidates in clinical
development to more than 1,000.
The news was not as strong on the products
front. Only one new molecular entity
received US Food and Drug Administration
approval, while two received approval
from the European Medicines Agency for
marketing throughout the European Union.
In addition, product-approval success was
dominated by specialty pharmaceutical
companies, while approvals secured
by “core” biotechnology companies
were mainly new formulations of
already-approved and marketed products.
Staying afloat?
For many privately held and small-cap
European biotechnology firms, access to
capital has become very difficult in the
aftermath of the global financial crisis.
With the waters from the market meltdown
rising all around them, many are having to
take urgent measures simply to stay afloat.
Without funding options, many of those that
are currently treading water will not be able
to do so indefinitely, and 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.
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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.
Beyond the sink-or-swim moment
confronting many European biotechs,
however, is the larger question of the
sustainability of the industry itself. Late in
2008, fearing the long-term damage that
might be caused by a prolonged funding
drought, particularly to small, early-stage
companies, national industry associations
and other biotech interest groups began to
encourage European governments to act.
In December, 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 with half
coming from public funds and half from
private investors. The proposals envisage
the creation of two funds — one to fund
mergers and acquisitions between
smaller biotechs, drive consolidation and
generate critical mass, and the other
to provide capital for “high-potential”
candidates. As this publication goes
to press, the UK Government has
announced the introduction of a £750
million Strategic Investment Fund
for emerging technologies, including
biotech, and is launching a review to
consider whether and in what form
further intervention is required.
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/
Beyond borders Global biotechnology report 2009
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.
In January 2009, one European country
did take positive action: the Norwegian
government included a €318 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.
Looking ahead
The European industry’s financial results
showed sustained growth in 2008, but
as always much of this success came
from a few mature companies. While
these leading firms will remain largely
unaffected by the crisis, the reality facing
many smaller European companies is
vastly different. 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.
While government interventions such
as those enacted by Norway could help
struggling biotech companies, it is not
clear that other national governments are
ready to follow suit — after providing capital
to shore up the banking sector, European
leaders are being scrutinized by taxpayers,
who generally do not favor “bailouts.” If
governments do act, however, they should
not just provide lifelines for companies in
danger of going under, but rather look for
measures that will promote the long-term
viability of the industry.
Roundtable on deals
New deal
structures for
challenging times
Naseem Amin, M.D.
Jeffrey Elton, Ph.D.
John Goddard
Mervyn Turner, Ph.D.
Biogen Idec
Novartis Institutes for
BioMedical Research
AstraZeneca PLC
Merck & Co., Inc.
Senior Vice President,
Strategic Planning and
Business Development
Senior Vice President,
Worldwide Licensing and
External Research and Chief
Strategy Officer
Senior Vice President,
Business Development
Formerly Senior Vice
President of Strategy and
Global Chief Operating Officer
Exceptional times spur exceptional creativity. While that maxim has
largely held true for the life sciences industry, it is also true that the
challenges companies face today are truly unprecedented. More than
ever before, companies need to strike a fine balance between pressures
and objectives that are often diametrically opposed. Big pharma
companies need to enhance their R&D productivity while simultaneously
lowering costs and protecting earnings. The financial crisis is driving
many smaller companies to aggressively seek alliances to sustain
operations — but depressed valuations make it harder for them to
negotiate terms that will let them retain sufficient financial upside.
While strategic alliances have been an integral part of the biotech
business model throughout the industry’s history, the basic elements
of biotech deals have not changed much during this period. Today, with
biotech and pharma companies confronting such thorny challenges, are
we likely to see increased creativity in structuring deals?
To get some perspective from the executives most likely to be
at the forefront of deal creativity, we caught up with seasoned
business-development leaders from four large biotechnology and
pharmaceutical companies.
Ernst & Young: The life sciences industry faces unprecedented challenges — from
big pharma’s need to reinvent its business model/R&D approach, to the funding
challenges of emerging companies. What challenges or bottlenecks are you currently
facing that could be addressed through strategic alliances?
Goddard: The most significant challenge is the one that big pharma is collectively
struggling with — how do we continue to grow revenues at historical rates when we
have a headwind of patent expiries of some of our most successful drugs? This means
we need ways to boost R&D productivity and bring enough innovative new drugs to
market to replenish and grow the top line. So deal-making becomes one way to fill the
revenue gap. It’s by no means guaranteed to be successful, but it’s one way to go.
Turner: Our biggest challenge as an industry is increasing the productivity of R&D.
Look at where our billion-dollar drugs have come from and you’ll see that this
industry survives on two or three new mechanisms a year. But we are not very
good at identifying early the ones
that are likely to succeed. While the
number of candidates in Phase I and
Phase II clinical trials has increased
steadily in recent years, there hasn’t
been any corresponding increase in
the number of molecules in Phase III.
We need, therefore, to get better at
early identification of the two or three
successful mechanisms that are going
to emerge each year, and at effectively
separating the winners from the losers.
What does this imply for deals? Our real
challenge is to work with partners to triage
more opportunities, more rapidly and at a
lower cost using smart clinical-development
strategies. One approach, of course, is
using biomarker-based strategies, which
give us greater certainty — positive or
negative — earlier in development, so
we can manage the portfolio risk
more effectively.
Elton: The pipeline challenges facing the
industry are well known, of course, but the
current environment is creating risks. Key
among these is the financial strength of
biotechnology companies, our prospective
partners. Access to capital is much more
constrained than it has been historically.
Ideally, we would like to see companies
reach some form of proof of concept on
their platform, technology or therapeutic
before we partner with them. But given
the current economic climate and the
venture community’s desire to fund
mid- to later-stage opportunities, many
firms may not be able to fund themselves
through any type of reasonable proof
of concept. The economic situation is
also negatively impacting the academic
community. Large-scale laboratories with
top talent are vulnerable. And the ability
77
“Our biggest challenge as an industry is increasing
the productivity of R&D. Look at where our
billion-dollar drugs have come from and you’ll see
that this industry survives on two or three new
mechanisms a year. But we are not very good at
identifying early the ones that are likely to succeed.”
for even the largest academic institutions to provide interim
funding based on income generated from endowments and
discretionary funds is disappearing.
The health of the entire life sciences ecosystem is a critical
part of this industry’s ability to innovate. I believe we will see
some transactions structured to assure the survivability of
smaller companies. This is a survival strategy not only for small
firms but also for large companies and, indeed, for innovation
itself. Look for more deal structures with earn-outs and other
structures that balance the risk of not surviving with the risks
of earlier-stage innovations. To assure our own success in this
environment, we are finding increasingly innovative ways of
working with our partners.
Amin: The current financial environment for smaller
companies is creating new challenges for us as well. We are
seeing an increasing number of companies facing financial
challenges and approaching us for partnerships. Even before
the present crisis, there were constraints on our ability to
make deals, and I’d highlight three. The first constraint is
our competency in assessing opportunities outside our core
therapeutic areas. When we go outside therapeutic areas
and disease pathways where we have extensive knowledge
and expertise — such as neurodegenerative, immunology,
oncology and acute heart failure — we would need to rely
much more on outside experts to help us assess and identify
opportunities. As a result, we’ve been reticent to partner
outside these areas. Our second constraint is resources — we
already have a large late-stage clinical pipeline today, which
is, of course, both people- and capital-intensive, so adding
more clinical-stage opportunities at present is not a high
priority for us. Our third key constraint is the amount we can
allocate to R&D. Our R&D spend is about 30% of revenues,
which is one of the highest in the industry. And while, as a
profitable, cash-flow-positive company we aren’t strapped for
capital the way many smaller firms are today, we still have to
meet our profitability goals.
In the current environment, we are seeing falling valuations of
companies. In situations where we are not making an outright
acquisition but we are buying equity in the other company as
part of a strategic relationship, how those assets are valued is a
concern, and there is the risk of having to take write-downs.
78
Ernst & Young: Where do you see the balance of power between
large and small companies today? What implications does this
have for deal-making?
Amin: Clearly, the environment is very tough for small
companies right now. Many would argue that this is a buyer’s
market. But those buyers still need to find quality assets, and
the quality of the asset drives value. So innovative, promising
assets will still be valued fairly, because often more than one
company will recognize the asset’s potential.
But it’s not just about balance of power — you also need a
balance of incentives. If large companies want to retain the
culture and entrepreneurship of their small-company partners,
then they need to negotiate appropriate incentives and remain
open about how rights and risk are shared.
Goddard: Has the balance of power changed? Absolutely. But
what hasn’t changed is how we value an asset. We still do the
same analysis to determine how much we think an asset is worth
to us. In an acquisition, we always like to think we strike a fair
price based on market conditions — the quality of the asset,
the number of people who wish to buy it and how much they’re
prepared to pay. But we would never pay more than we think it’s
worth, because that would destroy shareholder value.
In an alliance, other considerations can enter the picture. If you’re
doing a license deal rather than an acquisition, you want to make
sure that the asset you’re licensing is developed in ways both
partners want — so any agreement would need to be clear on
matters such as development plans, resources, conflict resolution
and change of control.
Elton: I agree. We can talk about bargaining power all we like,
but the simple truth is that nothing is a bargain if it fails. So
if an asset is high-quality, and if it makes sense for the buyer
economically as well as from a scientific perspective, then it’s
in the buyer’s interest to pay a price that reflects the asset’s
market value. If you’re not careful, you can de-motivate your
“We can talk about bargaining power all we like, but
the simple truth is that nothing is a bargain if it
fails ... The true spirit of partnership is neither about
dumping lots of money on somebody nor about
seeing how little you can get away with paying.
Instead, it’s about making sure that everybody
believes the deal is fair, feels motivated by the
structure and incentives, and knows that when there
is an upside, all parties will get an appropriate share
of the return.”
Beyond borders Global biotechnology report 2009
“One thing that has changed in the current
environment is that cash is king and buyers
have more negotiating power, so I suspect we
will see more deals that are structured to share
risk ... Therefore, having acquisitions with
success-related payments should encourage more
transactions in the current market environment.”
partners to the degree where they are not incented to maximize
what they are doing for you. The true spirit of partnership is
neither about dumping lots of money on somebody nor about
seeing how little you can get away with paying. Instead, it’s
about making sure that everybody believes the deal is fair,
feels motivated by the structure and incentives and knows
that, when there is an upside, all parties will get an appropriate
share of the return.
Ernst & Young: Strategic alliances are essentially about the
sharing of risk and reward. Do you see any changes in how risk
is being shared between large and small companies?
Turner: There’s a lot of talk about the balance of risk having
changed in favor of big pharma. I would say that isn’t true. We’re
absorbing far more risk now because of the increase in failure
rate in late-stage development. We’re seeing Phase III failures at
unprecedented levels, and they’re failing for strategic reasons.
Either they’re not meeting the commercial goals because of
imposed hurdles, or they’re not overcoming emerging safety
issues, or they’re just plain ineffective.
I realize that biotechs also face a lot of risk. Their risk is in the
capital market — their inability to progress their assets to a point
where they can get a true value inflection. We’re all in a very
difficult situation when it comes to risk.
Goddard: There are some basic principles that always hold
true. In an acquisition, the buyer takes on all the risk of
projects, while a licensing deal is a way of sharing that risk.
Of course, everything else being equal, in most cases, our
preference would be to share the risk through alliances
rather than acquisitions. One thing that has changed in the
current environment is that cash is king and buyers have more
negotiating power, so I suspect we will see more deals that are
structured to share risk.
I’ve seen a couple of interesting structures in the recent past. The
first is alternative mechanisms of funding, such as private-equity
funds, for drugs in development. A good example is the deal
among TPG-Axon, Quintiles’ NovaQuest unit and Eli Lilly to pursue
specific drug targets. This makes sense conceptually, but the
details can be challenging.
The second interesting development is acquisitions with some
form of deferred contingent payments. This allows buyers to
share the R&D and commercialization risk with sellers. As you
know, buyers face a binary, all-or-nothing risk around whether
a compound passes a particular milestone. And, as Merv points
out, that risk has only gone up, with lower approval rates, delays
and additional testing being requested from the Food and Drug
Administration. Having to assume all that risk by making a very
large up-front cash payment is enough to make even the big
pharmas pause for thought. Therefore, having acquisitions with
success-related payments should encourage more transactions
in the current market environment.
Has bargaining
power shifted
toward big pharma?
79
“At a time of depressed valuations, buyers need
to find ways to leave enough upside incentive
for smaller companies to remain viable and
entrepreneurial ... Buyers could consider deals where
they take overseas rights and leave US rights for the
seller. With large companies becoming increasingly
global and getting more of their revenues from
overseas, this could be a win-win.”
Amin: One recent trend around the sharing of risk and reward is
licensing deals that are nonexclusive, allowing the out-licensor
to strike deals with multiple companies. These transactions are
typically around platforms and would probably be fraught with
challenges if applied to a particular compound (unless it involved
a very different delivery system).
What’s changed in recent months, of course, is that valuations have
plummeted. At a time of depressed valuations, buyers need to
find ways to leave enough upside incentive for smaller companies
to remain viable and entrepreneurial. If the seller only has one
asset and you are going to enter a partnership with them in which
you bear all the risk, then you’ve left no incentive for the seller to
perform. So I think we may see more creative use of geographic
rights. Buyers could consider deals where they take overseas rights
and leave US rights for the seller. With large companies becoming
increasingly global and getting more of their revenues from
overseas, this could be a win-win. It allows a buyer to get rights
that they are better equipped to exploit than a small seller, while
still giving the seller lots of potential upside through the US rights.
Ernst & Young: Big pharma companies are now going out of
their way to preserve the independent names, workforces and
cultures of the smaller companies they acquire. How well do
you think these efforts will work, and do you see them leading
to real dividends in R&D productivity? What other changes,
if any, are needed for this approach to succeed? How will the
competing pressures of boosting innovation versus cost-cutting
play out?
Turner: This is something we’ve tried with some of our platform
acquisitions, such as Sirna and GlycoFi. We purchased them at an
immature stage of development. These platforms were developed
by very creative and entrepreneurial scientists and we wanted to
move those platforms from 50% or 60% completion to the finish
line. So, we needed to make sure that the people who knew the
area the best remained motivated. So far, it has worked. Our
GlycoFi team, for example, has been enormously motivated by
their move to Merck, and they are excited about the expanded
opportunities we’ve been able to offer them.
80
Regarding the cost-versus-innovation question, certainly there is
a cost associated with maintaining large numbers of autonomous
subsidiaries. But I can tell you that the organization I run is all
about searching for innovation, and we have been unencumbered
by the (quite appropriate) focus on driving down the cost base.
That’s not to say that we spend our money recklessly. We
don’t. But while we have a fiduciary responsibility, our prime
responsibility is to find innovation opportunities. That’s why we
have a scouting model, with individuals around the world who
function as our antennae in the local biotech and academic
communities. It’s an innovation-based business. And at the end of
the day, you can’t cost-cut your way to a pipeline.
Elton: Large pharmas are looking for ways to become more
entrepreneurial — ways to combine the incentive structures and
motivational factors of smaller companies with the larger scale
of big pharma. I think some of these new models that maintain
some degree of autonomy are moving in the right direction.
For any individual project, this model offers an answer for a
period of time, but it would likely need to change down the road.
The strengths of the autonomous unit that helped get something
through clinical trials may not be the best thing to handle
broader-scale commercialization.
Goddard: Time will tell how successful this approach is. We’ve
certainly used it with some of our acquisitions, but you need
to evaluate its relevance on a case-by-case basis. It’s easier to
use this model when the acquired assets are very different from
the rest of your business. For instance, if you acquire biologics
assets, where many aspects of R&D and manufacturing are
different from small-molecules activity, then it’s easier to argue
for the intangible benefit of keeping the acquisition autonomous
versus the tangible synergies from integration.
I would emphasize two additional points. First, by preserving
an entity separately, you clearly retain some strategic
flexibility down the road that you would lose if the asset was
totally integrated. The second point I would make is that the
real test always comes when a difficult decision has to be made
and it’s no longer being made by the top person in the acquired
company. There may come a point when there’s a difference of
“Regarding the cost-versus-innovation question,
certainly there is a cost associated with maintaining
large numbers of autonomous subsidiaries. But
I can tell you that the organization I run is all
about searching for innovation, and we have been
unencumbered by the (quite appropriate) focus on
driving down the cost base ... And at the end of the
day, you can’t cost-cut your way to a pipeline.”
Beyond borders Global biotechnology report 2009
Are today’s challenges pulling companies in opposite directions?
Focus
Cut costs
Protect upside
opinion between the autonomous unit and the parent company,
and that’s when the limits of independence get truly tested.
Ernst & Young: Could you discuss some examples of deals that
you consider “creative”?
Amin: One area where I’m seeing a creative approach is where
multiple competitors are collaborating to develop a shared
resource in certain challenging or precompetitive areas.
One example is answering challenging questions that are an
Achilles heel for everyone competing in a given disease. For
instance, we may not have enough information for a given
disease on what distinguishes responders from nonresponders
to current treatments. Trying to answer this may be too
expensive or resource-intensive for any one company, but
if several of us who are trying to address the same problem
come together, at least we can collectively try to answer the
question. This lack of information is a bottleneck that’s holding
us all back, so once it’s addressed we can each take our best
shot at developing our drugs.
Turner: In terms of specific examples, I like the deal we closed
with ARIAD Pharmaceuticals for their mTOR inhibitor in
late-phase clinical development for the treatment of metastatic
sarcomas. We recognized their expertise and their ability to
continue the development for that particular molecule for the
sarcoma indications. That deal has several interesting financial
structures, which I believe meet the needs of both parties. I
Diversify
Spend to innovate
Partner to survive
would also highlight the acquisition of GlycoFi. That was a very
interesting technological play and an extraordinary tour de force
of modern molecular biology done on a shoe string. We were
very pleased with the way that developed for us. It allowed us
to think about biologics for the first time, almost to the degree
of precision that you can think about small molecules. As a
company trying to build its way into the biologic space, this
seemed to be an excellent way for us to get our feet wet.
Elton: I can think of a couple of models that may be
particularly relevant at the current time, when it’s vital that
we maintain a sustainable ecosystem of companies. The first
involves companies with proven teams that have successfully
delivered projects to the clinic but which are currently without
a program. We have novel structures where we identify a
target and implant that as a program inside the other company
“One area where I’m seeing a creative approach is
where multiple competitors are collaborating to
develop a shared resource in certain challenging
or precompetitive areas ... Trying to answer this
may be too expensive or resource-intensive for any
one company, but if several of us who are trying to
address the same problem come together, at least we
can collectively try to answer the question.”
81
“What’s really interesting, though, are the models
and approaches that we might start to consider at a
time when we all face such tremendous challenges.
Could big pharma companies get creative and
explore ways to combine their clinical and scientific
expertise with private-equity or venture-capital
investing principles?”
with distinctive capabilities in that specific area. This benefits
them but can also benefit us tremendously, allowing us to
overcome capacity constraints and tap different creative
approaches to the same problem — which is obviously a big
part of improving R&D productivity.
The second model is the one we just discussed, where you
acquire another firm and maintain its operating autonomy.
The other firm has relatively advanced programs, has clearly
been successful and you want to continue that success. Our
acquisition of Protez Pharmaceuticals would be one example,
and there are certainly others in the recent past.
What’s really interesting, though, are the models and
approaches that we might start to consider at a time when we all
face such tremendous challenges. Could big pharma companies
get creative and explore ways to combine their clinical and
scientific expertise with private-equity or venture-capital
investing principles? They could bring a more integrated
approach and invest on a larger scale than private investors
alone. What if a pharma created a portfolio of investments
in specific scientific areas of interest — newly emerging
technologies, sets of targets or focused pathways — and
matched those investments with internal resources?
Could we use our current economic challenges to revisit the
industry’s organizational model and approach to the value-chain
specialization? As we all know, big pharmas, and even some
mid-cap pharmas, have a high degree of vertical integration.
Today, many of these companies are massively downsizing in
specific disease areas or stages of the value chain. Eventually,
they will get to the point where they no longer have enough
scale, critical mass and expertise to effectively conduct
those activities. Rather than slowly reaching that point of
diseconomies of scale, it would be better to turn over those
stages of the value chain to someone else. The first wave
of outsourcing to India and China was primarily driven by
cost-cutting in areas such as chemistry. We could now look at
partnering with Asian companies around entire areas of the
value chain. We could look at bringing in outside capital from
private equity and others and set up new companies.
82
A third area where we could get more creative is around
mid-size companies pooling some of their discovery and
early clinical approaches to specific emerging target areas,
in combination with investing companies. The firms could
prenegotiate terms around the resulting assets — right of first
refusal, allocation by geographic area, etc. One approach could
even be for European, American and Asian mid-size firms to
partner, which would make the allocation of geographic rights
quite straightforward. For mid-size firms, the risk and cost
from the failure of a lead clinical program is so high in the
current environment. If the next program is five years behind
the lead one, the firm may not be able to continue. But this
sort of pooling arrangement would greatly enhance the ability
of such firms to withstand failures.
Ernst & Young: What advice do you have for small and mid-size
biotech companies in the current deal environment?
Turner: It’s tough out there. We all have to recognize the
realities of the marketplace and the very high hurdles for
drug approval and reimbursement. So my advice is focus,
focus and focus. Do everything you can to develop the
highest quality asset you can provide. It’s an almost worthless
piece of advice, because it’s as obvious as it is difficult, but
that’s what it will take to succeed.
Elton: In this environment, many small and mid-size
companies may see getting acquired as their exit. But I
don’t think you can plan on being acquired. So, in spite of their
considerable constraints, these companies need to remain
focused on what is going to bring therapeutic value to patients.
In addition, they might want to identify other companies with
which they could have some complementarities, and consider
a combination to enhance the likelihood of reaching that next
value-creating milestone.
Goddard: I would say: understand what you have, and
understand what it’s worth. At big pharma, we often find that
when we do due diligence in a deal, the smaller company’s
asset is not quite as good as they think it is. That sets back
the negotiation while the smaller firm realigns its thinking and
recalibrates its expectations. In this environment, a biotech
company will need a realistic assessment of its asset, how
much it will cost to advance it to the next stage, and what the
company’s true options are. With that, they’ll be better prepared
for negotiating rather than conducting strategy on the fly.
Beyond borders Global biotechnology report 2009
Ernst & Young: At a time of tremendous economic uncertainty,
let’s close with some predictions. What deal trends and
developments might we see in the next 12-24 months? Do
these trends have any implications for large companies, small
companies and overall deal creativity?
after a merger and less focused on innovation. Third, as large
numbers of companies go under, this is likely to reduce the
appetite for risk, leading to less funding in the future. All of
this is worrying, because for innovation, the model still needs
to be driven by smaller companies, which is where the real
breakthroughs often originate.
Turner: The physicist Niels Bohr once famously said that
prediction is very difficult, especially about the future. Still, I
think it’s safe to anticipate additional rounds of consolidation
across all tiers of the drug industry — big pharma and small
and large biotechs. As we have already observed, big pharmas,
because of their pipeline issues, will be active acquirers if they
see quality assets at a good price. The big challenge for all of
us will be to identify unsuccessful programs more quickly and
cheaply. What sorts of deal structures will emerge around those
principles? That should be very interesting to watch.
Elton: If I could take some liberties to peer beyond your 12–24
month window, I see a somewhat different picture. First, no
matter how you slice the numbers, the longer-term outlook for
life sciences is very attractive. We have more people around
the world with the capability to access therapeutics. We have
more people that are living longer, at much higher functional
levels. And we have health systems that want to keep these
people productive for longer without needing to put them
into high-cost institutions. So under any scenario you can
create, under any economics — even if we see our fears about
pricing pressures and everything else come true — the sheer
numbers will work in our favor. I can’t paint a picture where
the fundamental outlook in terms of the demand for innovative
medicines is not attractive.
Goddard: With all due respect to Niels Bohr, I think it’s actually
become somewhat easier to make some predictions in the
current environment! The lack of funding has left many
companies with few good options, so there’s no doubt that
the number of smaller companies is going to decrease. But I
think these difficult economic circumstances will be somewhat
Darwinian. While there’s always the risk that we will fail to
fund what might have turned out to be the next big thing, I
suspect that the truly promising candidates will still find ways
to raise capital. And when we look back in 20 years, this will
probably be a blip rather than the elimination of an entire
wave of new science.
“Understand what you have, and understand what it’s
worth ... In this environment, a biotech company will
need a realistic assessment of its asset, how much
it will cost to advance it to the next stage, and what
the company’s true options are. With that, they’ll
be better prepared for negotiating rather than
conducting strategy on the fly.”
Amin: I agree that more consolidation is in the works, but in my
mind that raises some concerns about the industry’s ability to
innovate going forward. First, with fewer companies, there will
be fewer platforms and products entering the drug-development
funnel, which will hurt us all in the long run. Second, many
mergers are driven by commercial considerations — scale
economies, expanded reach and so forth — which don’t
fundamentally drive innovation. If anything, there’s the danger
that acquirers could become distracted by integration issues
One question is where those innovative drugs will be developed.
So far, the United States, along with a few other countries, has
been a leading innovative force. The US industry has benefited
from its pioneering venture-capital community, its long history
of funding from the National Institutes of Health (NIH), its strong
research infrastructure and its ability to attract top talent to
its universities and research-based companies. But the US has
been hit hard by the economic crisis, while other countries are
investing in biotech and are now benefiting from “returnees”
who are creating new centers for life sciences. As policy-makers
and business leaders move to revive the US economy, we all
need to focus on the issues that will keep this innovative industry
going — NIH research funding, supportive immigration policies
and funding for early-stage, higher-risk opportunities. We may
even need to apply some of the stimulus funds to ensure that
these early-stage companies don’t disappear, because that could
have such a high cost for long-term innovation.
In the life sciences industry and beyond, we are in a climate of
tremendous uncertainty that is forcing us to question even our
most basic assumptions — how do we organize, what’s efficient,
how do the fundamental economics of risk and reward play out?
This, more than ever, is the time for us to rapidly adopt new
models of collaboration and cooperation that we’ve been talking
about for a long time. And that is the real opportunity that any
market downturn brings.
83
European financing
Down, but not out
After several years of sustained growth,
European biotechnology financing
fell dramatically in 2008 because of
macroeconomic events. With less than €2
billion (US$2.94 billion) raised, 2008 was
the third-worst year in the past decade
for European biotech financing, ahead
of only 2002 and 1999. The bulk of this
collapse came from the disappointing totals
in public-equity financing, which shrank
from a recent high of more than €4 billion
(US$5.49 billion) in 2007 to only €833
million (US$1.22 billion). The market for
IPOs all but disappeared — only €75 million
(US$111 million) was raised, and there
were no stock-exchange debuts at all in the
second half of the year. Follow-on and other
financing also shrank to less than €800
million (US$1.18 billion). And while venture
capital held up better than the public
markets, the amount raised was still 20%
lower than in 2007.
Investors retreat
Conditions in the public markets severely
restricted the ability of companies to
undertake IPOs or follow-on offerings,
driving down the total amount raised from
public markets to levels not seen since
2003. Only three companies successfully
completed IPOs in 2008, raising a total
of €75 million (US$111 million), and
follow-on and other financing fell to €758
million (US$1.12 billion), from €3.5 billion
(US$4.8 billion) in 2007.
The public markets have cooled
dramatically toward biotech investments
since the second half of 2007, when
the onset of the credit crunch prompted
investors to flee to stocks with less
perceived risk. In the first two quarters
of 2007, biotech companies raised €600
million (US$822 million) through IPOs
and more than €3.1 billion (US$4.3
billion) through follow-on and other
84
public offerings. The falloff since then has
been striking — in the six quarters since,
the cumulative amount raised has been
less than 40% of the total raised during
the first half of 2007.
Interestingly, while the full fury of the
global financial crisis was only unleashed
in the fourth quarter of 2008, there was
no dramatic decline in the last months of
the year.
Venture financing held up better than the
public markets in 2008. Nevertheless,
with €932 million (US$1.37 billion)
secured by European biotechs, the
amount raised in 2008 was down 20%
relative to the €1.17 billion (US$1.6
billion) secured in 2007. This represents
the second consecutive year of decline
after the all-time high achieved in 2006,
and it is one of only two years since 2000
in which the amount of venture capital
raised by the European industry has
dipped below €1 billion (US$1.47 billion)
(the other being 2003).
Indeed, despite tough conditions, a
number of European biotechs managed
to raise venture capital in early 2009,
with follow-on rounds in excess of
€20 million (US$29.4 million) each
secured by a handful of companies. In
January, the Swiss biotech AC Immune,
which is focused on discovering drugs
targeted at Alzheimer’s disease,
raised €25.2 million (CHF40 million;
US$37.1 million) in a third round. Also
in January, another Swiss company,
Synosia Therapeutics, which is
engaged in discovery therapeutics for
psychiatric and neurological disorders,
raised €20 million (CHF32 million;
US$29 million) in a second-round
transaction. In February, the Danish
company Symphogen secured €33
On a quarterly basis, European
venture financing levels were lower
in each quarter of 2008 than in the
corresponding quarter of 2007.
European yearly biotech financings
Venture financing
IPO
Follow-on and other offerings
€b
7
6
5
4
3
2
1
0
1999
2000
2001
2002
2003
2004
2005
2006
Source: Ernst & Young, BioCentury, BioWorld, VentureSource, Windhover and company news via NewsAnalyzer
Beyond borders Global biotechnology report 2009
2007
2008
a string of strategic acquisitions in the
second half of the year that included
the acquisition of four pharmaceutical
products from Roche and the
acquisition of Valeant Pharmaceutical’s
pharmaceutical business in Western and
Eastern Europe. The remaining twelve
follow-on and other offerings largely
consisted of small private investments in
million (US$44 million) to support the
clinical development of its portfolio
of recombinant polyclonal antibodies.
Encouragingly, support for early-stage
businesses was also evident in the
opening months of 2009, with a number
of companies successfully closing first
rounds — these included CT Atlantic,
DNA Therapeutics, Evostem Finland and
Immune Targeting Systems.
Follow-on and other financings also fell
sharply in 2008. In contrast with 2007
when there were eight transactions above
the €100 million threshold, there was only
one such financing in 2008: the €157
million (SEK1.5 billion; US$231 million)
rights offering by Swedish specialty
pharma company Meda in late November.
Meda’s rights offering in 2008 financed
Public financings: few and far between
Public investors have been cool to biotech since the second half of 2007 ...
In March, the Italian biotech MolMed,
which has a pipeline largely composed of
anticancer therapeutics, made its debut
on the Milan stock exchange in a €56.2
million (US$82.3 million) offering — a
rare event for the Italian market, which
last saw a biotech IPO in 2000 with the
flotation of Novuspharma (since acquired
by Cell Therapeutics in 2004). Three
months later, in June, France’s Ipsogen
and Norway-based PCI Biotech completed
their IPOs. Drug delivery specialist PCI
Biotech raised €8.1 million (NOK$60
million; US$11.9 million) on the Oslo
Access Exchange, and Ipsogen, which
develops molecular diagnostic tests for
cancers, raised €11.8 million (US$18.7
million) on the Alternext market (a
submarket of NYSE Euronext).
In another indication of the softness of
public financings in 2008, all three IPOs
priced at the bottom of their filing ranges.
The new entrants could not escape the
overall tumult in the markets, and all three
stocks declined by year-end. While MolMed
and PCI Biotech lost 50% and 63% of their
market valuations, respectively, Ipsogen
performed somewhat better, losing 19%
of its value. Ipsogen showed impressive
62% year-over-year revenue growth that
exceeded expectations, and investors
were likely placated by the fact that the
company already had marketed products
and a predictable revenue stream. MolMed
and PCI Biotech, on the other hand, were
in preclinical development and years away
from commercializing products.
Follow-on and other offerings
IPO
€b
2.5
2.0
1.5
1.0
0.5
0
Q1 2007
Q2 2007
Q3 2007
Q4 2007
Q1 2008
Q2 2008
Q3 2008
Q4 2008
Source: Ernst & Young, BioCentury, BioWorld, VentureSource, Windhover and company news via NewsAnalyzer
… while there has been no significant decline in venture funding
Venture capital (€m)
350
300
250
200
150
100
50
0
Q1 2007
Q2 2007
Q3 2007
Q4 2007
Q1 2008
Q2 2008
Q3 2008
Q4 2008
Source: Ernst & Young, BioCentury, BioWorld, VentureSource, Windhover and company news via NewsAnalyzer
85
public equity (PIPEs). Denmark’s Lifecycle
Pharmaceuticals was responsible for the
second- and third-largest deals — a €71
million (DKK529 million; US$105 million)
royalty financing and a €55 million
(DKK408 million; US$80.9 million)
rights offering.
Venture funding: down, but not out
The breakdown of venture financing
by round was comparable with 2007,
but notably there was an expansion in
the number of second- and later-stage
rounds and a contraction in seed and
first rounds. Seed and first rounds
accounted for approximately 32% of the
total number of venture financings in
2008, down from 45% in 2007. Venture
funds are now showing a reduced
appetite for risk, preferring companies
with more advanced pipelines that
offer relatively low-risk, short-term
return horizons. While it is possible
that the fall in the number of seed and
first-round financings in 2008 is an early
indicator of such a shift, one should not
over-interpret the data — the distribution
in financings in 2008 is not markedly
different from investment patterns
between 2004 and 2006.
Highlighting the attraction of later-stage,
lower-risk assets, the year’s three largest
first-round financings were completed
by companies with programs in clinical
development and with their origins in
established pharmaceutical businesses.
The year’s largest first-round deal, for €25
million (US$40 million), was completed
by Albireo, a Swedish spin-out from
AstraZeneca focused on gastrointestinal
disorders. Vantia Therapeutics, a
UK-based spin-out from Ferring Research,
raised €24 million (£19 million; US$35
million) in first-round financing in March.
At the time of its financing, Vantia had
two clinical programs for its lead product.
Lumavita, a Swiss company focused on
anti-infectives for women’s health, raised
€11 million (CHF18 million; US$16.2
million) in September. The Swiss firm was
formed out of the operations of Japanese
86
Quarterly breakdown of European biotechnology financings 2008 (€m)
IPO
Q1 2008
€ 56
Q2 2008
€ 19
Q3 2008
€0
(1)
(2)
(0)
(0)
(3)
€0
€0
€ 26
€0
€ 26
Follow-on
Venture
Total
€ 75
(0)
(0)
(1)
(0)
(1)
€ 302
€ 170
€ 257
€ 203
€ 932
(44)
(25)
(43)
(26)
(138)
€ 58
€ 254
€ 202
€ 218
€ 732
Other
Total
Q4 2008
€0
(10)
(23)
(26)
(13)
(72)
€ 416
€ 443
€ 485
€ 421
€ 1,764
(55)
(50)
(70)
(39)
(214)
Source: Ernst & Young, BioCentury, BioWorld, VentureSource, Windhover and company news via NewsAnalyzer
Figures in parentheses are number of financings
European venture funding by round class
Seed round
First round
Second round
Later round
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0
2000
2001
2002
2003
2004
2005
2006
2007
2008
Source: Ernst & Young, BioCentury, BioWorld, Windhover and VentureSource
pharmaceutical company Shogoo KK. At
the time of its financing, Lumavita had
product candidates in Phase IIb and
Phase I development.
The most significant European
venture-backed round of the year
(and the third-largest globally) was a
fourth-round fundraising by the German
biotech Ganymed Pharmaceuticals,
which raised €65 million (US$95.6
Beyond borders Global biotechnology report 2009
million) in November from private
investors. The company, focused on
monoclonal antibodies and oncology,
plans to use the funds to further develop
its Phase Ib monoclonal antibody
claudiximab (iMAB362) and a pipeline of
preclinical assets.
Other major venture financings of 2008
included three second-round deals: a
€27.2 million (US$40 million) round
by Israeli company Vascular Biogenics
in May, a €27.5 million (US$40 million)
transaction by Apogenix of Germany
in April, and a €26 million (US$38
million) deal by SpePharm Holding of the
Netherlands in August.
Regional breakout of funding
In 2008, as in 2007, Germany,
Switzerland and the United Kingdom
led Europe in venture capital raised.
While Germany once again took the
top spot with €198 million (US$291
million), this was a 38% drop from the
Top European venture funding in 2008
Amount
raised
(€m)
65
Company
Ganymed
Pharmaceuticals
Country
Germany
Round
Fourth round
Date
November
Apogenix
Germany
Second round
April
28
Vascular Biogenics
Israel
Second round
May
27
SpePharm Holding
Netherlands
Second round
August
26
Albireo
Sweden
First round
May
25
Endotis Pharma
France
Third round
January
25
Pieris
Germany
Second round
March
25
Vantia Therapeutics
UK
First round
March
24
PanGenetics
Netherlands
Third round
March
23
Synosia
Therapeutics
Switzerland
Second round
December
20
Creabilis
Therapeutics
Italy
Second round
June
20
Source: Ernst & Young, BioCentury, BioWorld, Windhover and VentureSource
€319 million (US$437 million) it raised
in 2007. In fact, 11 of the 15 countries
saw reductions in venture-capital funding
relative to 2007, and in two of them,
Ireland and Norway, venture funding fell
to zero in 2008 from a combined €56
million (US$76.7 million) a year earlier.
Meanwhile, the UK, Netherlands, Israel
and Italy saw increases in venture capital
raised. In the UK, this represented a
reversal from three years of consecutive
declines between 2004 and 2007.
Taking evasive action — business
restructuring and alternative financing
Depending upon its length and severity,
the current crisis has the potential to
profoundly impact the European biotech
industry. Indeed, the crisis has already
begun to either eliminate or reshape
many of the companies that make up the
population of European biotechs.
A number of companies went into
administration during 2008. Ardana
Bioscience, a UK-listed biotech focused
on reproductive health, ceased trading in
June. Phoqus Pharmaceuticals followed
in July, after the company failed to
find a partner for its lead project. In
Denmark, Curalogic went into liquidation
in November.
European venture capital by country, 2007 and 2008
2008 €m
2007 €m
2008 average (€m)
2007 average (€m)
Total raised (€m)
Average round size (€m)
350
14
300
12
250
10
200
8
150
6
100
4
50
2
0
0
Germany
UK
Switzerland
France
Netherlands
Denmark
Sweden
Israel
Italy
Belgium
Austria
Spain
Finland
Ireland
Norway
Source: Ernst & Young, BioCentury, BioWorld, VentureSource, Windhover and company news via NewsAnalyzer
87
Facing the possibility of a deep and
prolonged financing drought, many
companies undertook strategic reviews
and embarked on restructuring
programs. In addition to headcount
reductions, companies began to close or
sell operations and leverage marketed
portfolios and pipeline assets to raise
capital. The UK biotech Vernalis provides
a case in point. Triggered by the failure of
the company’s migraine drug to receive
Food and Drug Administration approval
for the additional indication of menstrual
migraine, Vernalis announced plans to
close its Canadian clinical operations and
has sold its US commercial operations
and rights to its Parkinson’s drug Apokyn
to Ipsen, raising €7.8 million (US$11.5
million) in up-front payments and an
additional €4.1 million (US$6 million) in
potential milestone payments. Separately,
Vernalis struck a royalty financing deal
by selling 90% of frovatriptan royalties
to Paul Capital Healthcare in return
for €18.4 million (US$27.1 million) in
nondilutive financing.
Terminating or freezing the development
of projects has also been a common
feature of restructurings, and many
smaller companies are now focusing
their resources on just one lead program.
Having failed to hit its financing target
Select restructuring programs announced by European biotech companies
in 2008 and early 2009
Headcount
reductions
√
Other restructuring
measures
Switzerland
√
√
BioAlliance Pharma
France
√
Biovitrum
Sweden
√
Compugen
Israel
DeCode Genetics
Iceland
√
√
Elan
Ireland
√
√
Genmab
Denmark
√
√
GPC Biotech
Germany
√
√
Oxford Biomedica
UK
√
Pharmexa
Denmark
√
√
Reneuron
UK
√
√
Sareum Holdings
UK
Stem Cell Sciences
UK
√
√
TopoTarget
Denmark
√
√
Tripep
Sweden
√
Vernalis
UK
√
√
York Pharma
UK
√
√
Company
Alizyme
Location
UK
Arpida
√
√
√
Source: Ernst & Young and company announcements
88
Beyond borders Global biotechnology report 2009
in a January rights issue, Danish biotech
Pharmexa announced its intention to
freeze development of bone-disease and
early-stage oncology projects in order
to focus on higher-priority programs. In
February 2008, Germany’s GPC Biotech
announced a restructuring in order to
extend its cash reserves to sustain three
years of burn. More recently, in November,
Switzerland’s Arpida announced plans to
focus on its lead product, the intravenous
antibiotic iclaprim, while reviewing and
halting a number of noncore clinical
development programs.
Other companies have sought to spin off
operations. For example, in January 2009,
as part of its efforts to refocus on specialty
markets and protein therapeutics, Swedish
company Biovitrum announced plans
to spin out its UK-based small-molecule
subsidiary Cambridge Biotechnology as
well as primary care assets.
Going beyond cost reduction and
restructuring, other businesses took
action to become self-sustaining from
a cash perspective. In September, the
UK biotech BTG acquired Protherics,
another UK business, in a €274 million
(£218 million; US$403 million) deal.
Protherics, which has a portfolio of
niche-market products, brings BTG an
income stream and moves the business
toward cash self-sustainability.
In addition to restructuring, companies
looked to alternative sources of
financing in 2008 to help sustain their
businesses. For many firms, deals with
pharmaceutical companies represent
their best opportunities for securing
funds, either through the realization
of milestone payments under existing
agreements or via new deals. Aggregate
data (based upon instances where cash
payments to European biotechs have
been publicly disclosed) suggest that
the total cash flowing into the sector
through deals with large companies
remains healthy and that the average
size of cash payments is stable relative
to previous years. In the current
financial market environment, pharma
money is becoming increasingly
important to the survival of Europe’s
biotech companies. It should be
noted that while good innovation is
always likely to attract buyers, many
big pharma companies are becoming
increasingly cash conscious and more
discerning in their deal-making — trends
that could squeeze Europe’s biotech
sector still further.
Other financing options include royalty
financing deals such as those struck by Paul
Capital Healthcare with Vernalis (over Frova
royalties) and with Plethora Solutions (over
the company’s male health portfolio). The
largest royalty financing deal of the year
was struck by Lifecycle Pharmaceuticals,
which sold the future North American
royalty stream of Fenoglide, its cholesterol
drug, to Cowen Healthcare Royalty Partners
for a total payment of up to €71 million
(US$105 million) (dependant upon sales
milestones) including an up-front payment
of €19.7 million (US$29 million).
Others companies secured financing in
the form of grants and loans. For example,
in January 2009, Cardio3Bioscience,
a Belgian company specializing in
cell-based therapies for the treatment
of cardiovascular diseases, successfully
raised €13.7 million (US$20.2 million)
through a combination of a €7.2 million
(US$10.6 million) venture round and a
€6.5 million (US$9.6 million) grant.
For some biotechs, Europe’s national
innovation funds have been an
important source of grant and loan
financing. Companies that secured
financing from these sources in 2008
included: Santaris Pharma (€6 million;
DKK45 million; US$8.8 million),
from the Danish National Advanced
Technology Foundation; Noxxon Pharma
(€1.0 million; US$1.47 million), from
the German Ministry of Education
and Research; and BioTie Therapies
(€1.7 million; US$2.5 million), from
TEKES, the Finnish Funding Agency for
Technology and Innovation. In addition,
Genfit (€7.1 million; US$10.4 million),
Cellectis (€7.2 million; US$10.6 million)
and Genomic Vision (€1.1 million; US$1.6
million) all secured financing from the
French state innovation agency OSEO.
of advancing projects into the clinic,
securing an IPO and either outlicensing
to pharma or commercializing products
in-house — is slow, expensive and
high-risk. To sustain this model,
companies will, at the very least, need
creative solutions to the European
sector’s financing challenges. In the
absence of such solutions, companies
may have to seek sustainability earlier in
their lifecycles through fee-for-service
revenues or the acquisition of portfolios
of marketed products. Firms may focus
on acquisitions by pharmaceutical
companies for exits and tailor their
strategies toward this end.
Outlook
One solution to the financing
challenge might be for biotech-pharma
partnerships to move toward early-stage,
long-term alliances. A model where
biotechs partner with pharma companies
earlier in their lifecycles using financing
structures that provide a steadier
flow of capital than those currently
used could improve the sustainability
of biotech companies. For at the
end of the day, improving biotech’s
sustainability is in the interest not only
of biotech firms themselves but also
of other constituents of the healthcare
economy — pharma, payors, providers
and, of course, patients.
The year ahead promises to be
challenging for European biotech
companies. Public markets are offering
little support for biotech assets, and the
IPO window is shut for the foreseeable
future. Venture money is still moving
into the sector, but the financing tap is
tightening. If a lower appetite for risk
translates into an investor preference
for late-stage assets, a financing crisis
for early-stage companies could emerge.
Companies are likely to fail, while others
will attempt to restructure and exploit
alternative funding sources to survive.
The coming months and years will
certainly test the creativity and
flexibility of the European industry.
More fundamentally, the situation is
likely to force executives to revisit
the industry’s funding model itself.
The prevailing model — based on
several venture rounds with the aim
89
European deals
Dealing by dealing
Deal activity remained strong in the
European biotechnology sector in 2008,
with sustained activity across all segments.
Pharmaceutical companies continued
to secure technologies and early-stage
assets through acquisitions and strategic
alliances, while attractive late-stage assets
continued to attract favorable deal terms,
as demonstrated by GlaxoSmithKline’s
record-breaking deal with Actelion.
With many biotechs struggling under
the impact of the global financial crisis,
smaller businesses struck deals with each
other to combine strengths; some even
purchased income-generating assets from
big pharma.
Mergers and acquisitions
M&A transactions worth a combined
€3.4 billion (US$5.0 billion) were
announced in 2008, with the value of
deals split somewhat evenly between
biotech-biotech and pharma-biotech
deals. While the total value of European
M&A deals in 2008 fell far short of
the €14.3 billion (US$19.6 billion) in
2007, three deals accounted for 87%
of the 2007 figure. These were Merck
KGaA’s €10.1 billion (US$13.8 billion)
acquisition of Serono, Qiagen’s €1 billion
(US$1.42 billion) acquisition of Digene
and Shire’s €1.9 billion (US$2.6 billion)
acquisition of New River. When these
large deals are excluded, 2008 emerges
as one of the most active M&A years
by value in the history of the European
biotech sector.
The United Kingdom was a particular hot
spot for transactions. Accounting for 38%
of European M&A activity by value, six
UK companies were acquired by overseas
entities, and consolidation occurred
between a number of local players.
90
European M&A activity remains strong
Biotech-biotech
Biotech-biotech megadeals
Pharma-biotech
Pharma-biotech megadeals
Number of M&As
Number of M&As
Value (€b)
16
40
14
35
12
30
10
25
8
20
6
15
4
10
2
5
0
0
2005
2006
2007
2008
Source: Ernst & Young, Windhover Information, MedTRACK, BioWorld and company news via NewsAnalyzer
European alliances by year
Biotech-biotech
Pharma-biotech
Biotech-biotech average value
Pharma-biotech average value
Average value (€m)
Potential value (€b)
12
200
180
10
160
140
8
120
100
6
80
4
60
40
2
20
0
0
2005
2006
2007
2008
Source: Ernst & Young, Windhover Information, MedTRACK, BioWorld and company news via NewsAnalyzer
Chart shows potential value, including up-front and milestone payments, for alliances where deal terms are publicly disclosed
Pharma-biotech deals include transactions in which biotech companies were buyers
Beyond borders Global biotechnology report 2009
Biotech-biotech consolidation
There was significant consolidation within
the population of biotech companies.
Biotech-biotech deals accounted for
nearly 50% of total deal value, amounting
to €1.7 billion (US$2.5 billion). A
key driver of consolidation has been
corporate weakness, with stronger
companies acting opportunistically to
capitalize on depressed share prices.
For example, the acquisition of the UK’s
CeNeS Pharmaceuticals by Germany’s
Paion for €13.8 million (US$20.3 million)
followed a period of decline in the British
company’s share price as it struggled
to find a marketing partner for its lead
product. Other companies sought out
opportunities to realize synergies,
pool cash resources and reduce costs.
For example, Italian biotech Newron
Pharmaceuticals acquired the private
UK company Hunter Fleming. The deal
will allow the companies to combine
R&D portfolios, building on Newron’s
central-nervous-system pipeline and
expanding it into neuro-inflammation.
Similarly, in a drive to achieve cash
sustainability, BTG acquired Protherics
for €274 million (£218 million; US$402
million), which has bought BTG an income
stream from a portfolio of niche-market
products. The consolidation trend
continued into early 2009, driven by
macroeconomic conditions and the tight
financing environment. In February,
following the start of a restructuring
program a year earlier, Germany’s GPC
Biotech announced its proposed merger
with US-based Agennix.
Pharma acquisitions
In 2008, pharma’s attention was
essentially balanced between public and
privately held targets. A particularly
interesting development is the emergence
of acquisitions with success-based
milestones. In Wyeth’s acquisition of
UK-based private biotech Thiakis, for
instance, the firm paid €20.4 million
(£16.2 million; US$30 million) up front
for a portfolio of synthetic oxyntomodulin
peptides and could make a further €81.6
million (£65 million; US$120 million) in
success-based payments depending upon
the achievement of certain developmental
milestones. In a similar transaction, Roche
acquired Piramed, another privately
backed UK business, for €119 million
(US$175 million). The deal terms include
a success-based payment of €10.2 million
(US$15 million) upon the start of Phase II
trials of Piramed’s lead oncology program.
Another significant early-stage deal
was Daiichi Sankyo’s acquisition of the
privately backed German company
U3 Pharma for €150 million (US$234
million), under which Daiichi Sankyo
secured the rights to a pipeline of
therapeutics targeting, among other
indications, breast, lung and colorectal
cancers. U3’s lead project (being
codeveloped with Amgen), is a fully
human monoclonal antibody and is due to
enter the clinic in 2009.
In a purer technology play, Bayer paid
€210 million (US$300 million) in cash
to buy Direvo Biotech, the German
protein-engineering business which
has a number of high-throughput
platform technologies for optimizing
the performance of proteins, including
therapeutic antibodies and proteases.
Bayer will integrate Direvo into its R&D
organization as a center of excellence
for bioengineering.
Late-stage assets and marketed products
The pressing need of pharmaceutical
companies to replace end-of-lifecycle
blockbusters was highlighted by the
largest M&A deal of the year: Novartis’
acquisition of a controlling interest in
Speedel Holding in September 2008
for €571 million (CHF907 million;
US$840 million). The acquisition gives
Novartis full ownership of revenues
flowing from the hypertension drug
Tekturna/Rasilez, a follow-up to Novartis’
blockbuster Diovan which generated
€3.9 billion (US$5.7 billion) in 2008
and faces patent expiration in 2012. In
addition to Tekturna, Novartis gained
a pipeline of follow-on renin inhibitor
targeted at cardiovascular disorders.
The deal brings Tekturna full circle.
Novartis spun out Tekturna to Speedel in
1998 and exercised its callback option
to the product in 2002. Tekturna was
subsequently approved and launched in
Europe and the US.
The other significant late-stage M&A deal
of the year was the €328 million (US$517
million) acquisition of Germany’s Jerini
by Shire. The all-cash deal added the
orphan drug Firazyr to Shire’s growing
human genetic therapies (HGT) portfolio.
Having gained the HGT portfolio in 2005
through the acquisition of Transkaryotic
Therapeutics, Shire has focused its
Top 10 M&As involving European companies
Company
Novartis
Country
Switzerland
Acquired or
merged company
Speedel Holding
Country
Switzerland
Value
(€m)
571
Sanofi-Aventis
France
Acambis
UK
347
Shire
UK
Jerini
Germany
328
Ipsen
France
Tercica
US
275
BTG
UK
Protherics
UK
274
Bayer Healthcare
Germany
DIREVO Biotech
Germany
210
Solvay
Belgium
Innogenetics
Belgium
201
Daiichi Sankyo
Japan
U3 Pharma
Germany
150
Intercell
Austria
Iomai
US
129
Roche
Switzerland
Piramed
UK
119
Source: Ernst & Young, Windhover Information, MedTRACK, BioWorld and company news via NewsAnalyzer
91
Leading alliances involving European companies
Company
GlaxoSmithKline
Country
UK
Partner
Actelion
Country
Switzerland
Stage
Clinical
Value
(€m)
2,079
1,055
GlaxoSmithKline
UK
Cellzome
Germany
Early
Roche
Switzerland
ThromboGenics/
BioInvent
International
Belgium/
Sweden
Clinical
500
Merck & Co.
US
Addex
Pharmaceuticals
Switzerland
Early
477
GlaxoSmithKline
UK
AFFiRiS
Austria
Clinical
430
Cephalon
US
ImmuPharma
UK
Clinical
350
Janssen
Pharmaceutica
Netherlands
Astex
Therapeutics
UK
Early
343
Merck KGaA
Germany
Ablynx
Belgium
Early
335
AstraZeneca
UK
Biocompatibles
International
UK
Early
327
Tibotec
Belgium
Medivir
Sweden
Early
277
Source: Ernst & Young, Windhover Information, MedTRACK, BioWorld and company news via NewsAnalyzer
strategy on building a portfolio of products
which, like Firazyr, address rare, highly
symptomatic and serious disorders.
Shire’s offer was at a significant premium
to Jerini’s share price at the time of
the announcement. After the US Food
and Drug Administration (FDA) issued a
nonapprovable letter for Firazyr in April,
Jerini’s share price dropped significantly
amid concerns that the company would
need to raise additional capital. Soon
after the announced acquisition, Firazyr
received European approval and Shire
has expressed confidence that the issues
raised in the FDA’s letter can be addressed.
Building on a long-term relationship, the
vaccines division of Sanofi-Aventis acquired
the UK vaccines company Acambis for
€347 million (£276 million, US$550
million). The deal highlights the recent
resurgence of interest in the vaccines
market by major pharmaceutical companies
and follows a series of similar acquisitions
by the major vaccine manufacturers.
Strategic alliances
After steady rises between 2005 and
2007, the total value of European strategic
alliances decreased by twelve percent in
2008, to €8.8 billion (US$13 billion).
92
Clinical-stage deals
Novel clinical-stage projects continue to
be in high demand, remain scarce and
can command significant premiums. In
2008, a handful of European biotechs
negotiated such deals. Of particular note
was GSK’s August 2008 deal with Actelion
for almorexant, which ranks as the largest
development and commercialization deal
in the history of the biopharmaceutical
industry. GSK acquired the worldwide
rights (excluding Japan) to codevelop
and comarket almorexant, Actelion’s
orexin receptor antagonist in Phase III
development for primary insomnia. The
deal, which covers additional indications,
is structured to provide total contingent
development and sales-related payments
of up to €2.079 billion (CHF3.3 billion;
US$3.058 billion).
While the deal included a significant
up-front payment of €92.5 million
(CHF150 million; US$139 million) and
potential milestone payments of up
to €255.8 million (CHF415 million;
US$384.6 million) for the insomnia
indication, Actelion will lead the
development program and registration
of almorexant in insomnia with GSK
contributing only 40% of development
costs. For additional indications, all
Beyond borders Global biotechnology report 2009
associated program costs and profits are
to be shared equally between Actelion
and GSK with total contingent payments
to Actelion totaling €1.723 billion
(CHF2.735 billion; US$2.534 billion).
For GSK, almorexant adds a first-in-class
compound to the pipeline of insomnia drugs
it has been building. Meanwhile, Actelion
gains not only GSK’s development expertise
and primary-care commercialization muscle
but also an income stream that will reduce
its reliance on Tracleer, the pulmonary
arterial hypertension drug that accounts for
the vast majority of its revenues.
In another significant late-stage deal,
Cephalon signed a €10.2 million (US$15
million) option agreement to acquire the
rights to Lupuzor, ImmuPharma’s treatment
for Systemic Lupus Erythematosus, which
was in Phase IIb development at the time
of signing. In February 2009 and following
positive results from the Phase IIb trial,
Cephalon exercised its option, triggering a
€20.4 million (US$30 million) license-fee
payment, and Phase III development and
commercialization responsibilities were
transferred to Cephalon. In total, up-front
fees and success-based payments to
Immupharma could reach as much as €350
million (US$500 million). It is hoped that
Lupuzor, which has a novel mechanism of
action, will be the first therapeutic agent
able to halt the progression of the disease
in patients.
Although the achievement of clinical
proof of concept in Phase II trials has
traditionally been a key inflection point
for value creation and asset price,
pre-proof-of-concept assets attracted
favorable deal terms. Three of the five
largest clinical deals involved assets
in Phase I development. Indeed, the
third-largest European deal of 2008 was
struck between Roche and two European
biotechs, Bioinvent International and
ThromboGenics, for worldwide rights
to TB-403, a monoclonal antibody
against placental growth factor for
the treatment of solid tumors. Other
significant Phase I deals were GSK’s
agreement with the Austrian biotech
AFFiRiS for its Alzheimer’s disease
vaccine program.
Preclinical deals
Preclinical deals provide the opportunity
to gain access at an early stage to drug
discovery platforms and technologies,
biological targets and lock-in rights to
novel candidates. In recent years, these
partnerships have become more frequent,
as pharmaceutical companies attempt to
externalize more of their drug discovery
and access novel technology platforms,
particularly in areas where they have
historically underinvested. The values of
such deals have also increased, as they
have become broader in scope — today,
they often encompass more than one
biological target, with multiple associated
discovery programs and contingent
payments linked to the commercialization
of as many as ten therapeutic agents.
In fact, 11 of the 15 largest European
deals in 2008 involved discovery programs
or assets in preclinical development. GSK’s
discovery-stage alliance with Germany’s
Cellzome was the year’s second-largest
deal, albeit structured to provide GSK
with little financial risk until achievement
of clinical proof of concept. Focused on
inflammatory disorders, the alliance gives
GSK access to Cellzome’s Kinobeads
platform technology. The transaction
is broad in scope, giving GSK exclusive
options to license drug candidates against
a total of seven targets, three of which
have yet to be identified. Cellzome could
be eligible to receive a total of €1.055
billion (£840 million; US$1.552 billion) in
addition to double-digit royalties. Another
significant deal was AstraZeneca’s
agreement with the UK’s Biocompatibles
for the development of its GLP-1 analog
for the treatment of obesity and diabetes.
Big pharma pays for innovation
Of the top 15 European deals by value,
GSK’s deals with Actelion, Cellzome
and AFFiRiS accounted for more than
50% of total value. Innovation is a key
theme across these deals, showing that
pharma will pay substantial sums for good
innovation. The Actelion deal gave GSK
rights to a first-in-class compound; the
AFFiRiS deal, a clinical Alzheimer’s vaccine
program and the AFFiRiS AFFiTOPE
technology platform; and the Cellzome
deal, the Kinobeads discovery platform.
With so much emphasis placed on the
therapeutic potential of biologics, it is
interesting to note that 10 of the largest
15 European deals were focused on either
small-molecule discovery programs or
small-molecule compounds demonstrating
the continued therapeutic relevance of
small-molecule drugs.
A two-way street
Financing and economic conditions are
making it difficult for many biotech firms
to fund their pipeline development.
At the same time, pharmaceutical
companies, seeking to streamline
operations and optimize product
portfolios, are out-licensing noncore
assets. This confluence of trends creates
an opportunity for biotech companies
to bring in revenue-generating assets,
and a number of smaller European
firms acquired rights to commercialized
products from large companies in 2008.
For example, in September, Sweden’s
Biovitrum acquired the marketed biologics
Kepivance and Stemgen from Amgen,
as well as a worldwide license to market
Kineret in its current indication — a
portfolio of drugs which generated €48
million (US$70 million) for Amgen in
2007. Other pharma divestment deals
included Meda’s acquisition of four
European alliances by country, 2008
Biotech-biotech
Pharma-biotech
Average value
Potential value (€b)
Average value (€m)
3.5
490
3.0
420
2.5
350
2.0
280
1.5
210
1.0
140
0.5
70
0
0.0
Switzerland
UK
Germany
Sweden
Austria
Belgium
Denmark
Italy
France
Netherlands
Ireland
Israel
Source: Ernst & Young, Windhover Information, MedTRACK, BioWorld and company news via NewsAnalyzer
Chart shows potential value, including up-front and milestone payments, for alliances where deal terms are publicly disclosed
Pharma-biotech deals include transactions in which biotech companies were buyers
93
marketed products from Roche for €120
million (CHF195 million; US$176 million).
For smaller companies, acquiring products
(or retaining rights to their own products)
has always come with the risk that they
will not have the resources and expertise
to realize value from those assets. But
now, companies also face increased
uncertainty about being able to finance
the transaction in the first place. In the
case of the York/Solvay deal, product
rights have since been returned to Solvay
because of problems financing the deal.
The road lengthens
A core theme in last year’s Beyond
borders was that the road to
commercialized products has become
longer. While companies have traditionally
looked at product approval as the final
destination, they now face considerable
risks even after launching products,
due to increased post-marketing safety
surveillance and a fast-changing pricing
and reimbursement environment. This
reality is now being reflected in the
structures of R&D alliances, with many
of the 2008 deals containing contingent
payments that are linked to commercial
milestones such as sales performance
rather than R&D milestones.
Two deals highlight the extent to which
payments are being back-loaded. In the
case of AstraZeneca’s option-to-license
agreement with Biocompatibles for a
GLP-1 analog for use in type II diabetes
and obesity, 78% of the total €327
million (US$444 million) deal value is
contingent upon the achievement of
sales-related milestones. Similarly, Onyx
Pharmaceuticals and BTG’s deal over
BTG’s preclinical anticancer compound,
BGC 945, was structured so that 73% of
the €218 million (US$320 million) deal
value is contingent upon product approval
and commercial performance.
Outlook
For many biotech companies, the
biggest challenge nowadays is to remain
sustainable. One way to deal with this
challenge is through the creative use of
strategic deals — dealing by dealing, so
94
to speak. Biotech-biotech consolidation
is likely to pick up as a survival strategy
at a time when many firms will find
themselves with dwindling cash reserves
and limited financing opportunities.
We are also likely to see biotechs
pursuing sustainability by acquiring
rights to commercialized products
and/or divesting themselves of noncore
assets and operations. While some
large pharma companies are merging
in a cost-cutting drive, they will still
need strategic alliances with biotech
to address their pipeline issues. In the
current environment, the challenge will
be to structure these transactions in
ways that value assets appropriately
and give both parties sufficient
upside. There have been some notable
transactions in the US and Europe with
sizeable up-front payments in recent
months, and the question is whether
we are likely to see more of them going
forward. (In addition to the strategic
imperatives for large up-fronts, such deal
structures can also have implications for
companies’ bottom lines, depending on
the accounting standards under which
they file their financial returns — issues
that could become more consequential
over the next few years, as accounting
standards converge and large companies
come under growing earnings pressure.
For more details, see “A closer look”
on this page.) Ultimately, of course,
structuring deals in ways that provide
sufficient capital to advance assets and
provide upside will help sustain not just
individual companies but also innovation
across the industry.
A closer look
Up-fronts and bottom lines: accounting for up-front payments
under IFRS
The world of accounting is moving toward a single global standard, with many countries
now on board to adopt International Financial Reporting Standards (IFRS) as their
principal body of rules. In 2008, the United States made significant strides in this
direction, although the ultimate date of adoption in the US remains uncertain. In the
meantime, the governing bodies are cooperating and looking to achieve convergence of
standards wherever possible — for example in the accounting for M&A transactions and
through an ongoing project to harmonize revenue recognition rules. As more countries
and companies adopt IRFS, financial statement readers will need to be aware of the
differences between those rules and the Generally Accepted Accounting Principles
(GAAP) that govern US registrants.
One area of difference between the two standards that could be consequential for
biotech companies is the accounting for up-front license payments in collaborative
agreements. In the US, if such payments are for products that have not reached
technological feasibility, they are charged as an expense. The same is true for ongoing
R&D support payments and milestone payments.
Under IFRS rules, on the other hand, companies can (and often do) record
up-front and milestone payments as assets — which are periodically reviewed for
impairment during development. If a product is approved, these payments are
then amortized to expense over the commercial life of the product. Ongoing R&D
support payments, however, are charged to expense, as they are under US GAAP.
Thus, an IFRS-reporting company could make a larger up-front payment in lieu of
making ongoing R&D support payments and potentially defer the earnings charge.
Of course, this comes with a price — the assumption of more risk embodied in a
higher (nonrefundable) up-front payment. Nevertheless, as big pharmaceutical
companies face growing earnings-per-share pressure, this standard may allow an
IFRS-reporting company more flexibility in closing transactions.
Beyond borders Global biotechnology report 2009
European products and pipeline
A surging pipeline and a trickle of products
The product pipelines of European
biotech companies demonstrated robust
growth across all stages in 2008. Product
approval success was less pronounced:
only one new molecular entity (NME)
received US Food and Drug Administration
(FDA) approval, and two received approval
from the European Medicines Agency
(EMEA) for marketing throughout the
European Union (EU) (as opposed to
single-territory approvals). Moreover,
product-approval success was dominated
by specialty pharmaceutical companies
such as Ipsen, Ferring and Shire.
Approvals from “core” biotechnology
companies consisted largely of new
formulations of already-approved and
marketed molecules. Therefore, while the
European sector might be described as
promising from a pipeline perspective and
has made consistent progress in recent
years, success did not translate into
approvals of new and innovative medicines
for smaller biotechs during the year.
sector. More positive still is the movement
of projects from Phase II to Phase III
development — the number of products in
Phase III increased 11% to a total of 157.
The United Kingdom continues to lead
country rankings, accounting for 20% of
the total clinical pipeline and 23% of Phase
III assets. The UK does not, however,
have the lead that it once had. In 2006,
for example, the UK accounted for 35%
of all products in development and 41%
of Phase III products. Switzerland, which
in 2006 occupied the number two spot
behind the UK, has also seen its relative
contribution diminish, falling behind
Germany, Denmark and France in 2007
and holding this position in 2008.
Ironically, the relative decline of the UK
and Swiss pipelines is at least partially
a reflection of the strength of these
biotech clusters. A significant reason
for the decline, for instance, is the
acquisition of mature biotech companies
from these countries by big pharma
players. More than companies in other
locations, mature British and Swiss
biotechs have attracted buyers in recent
years, including Acambis (acquired
by Sanofi-Aventis in 2008), Speedel
(Novartis in 2008), Serono (Merck
KGaA in 2007) and Cambridge Antibody
Technology (AstraZeneca in 2006).
While these acquisitions may have hurt
the pipeline rankings of Switzerland and
the UK, the transactions themselves
reflect pipeline strength rather than
weakness. These biotechs were not
struggling companies snapped up at
bargain-basement prices, but robust
firms valued for their mature pipeline
assets. In addition, Switzerland’s ranking
decline with respect to the number of
Phase III items — the country fell from
the number two spot in 2007 to fifth
place in 2008 — was driven not just by
acquisitions, but also by the success of a
number of Swiss companies in securing
regulatory approval for marketing in
prior years.
Pipeline
Critically, Europe’s Phase II product
portfolio grew 15% to more than 600
products, matching the success achieved
in 2007. As we noted last year, Phase II
trials are a critical make-or-break stage
on the path to commercialization. This is
where the first clinical proof of concept is
typically achieved, and it is often pivotal
for value creation. Growth in the number
of therapeutics in this stage is a positive
indicator of the health of the European
European product pipeline by phase, 2006–08
2006
2007
2008
800
Number of product candidates in studies
The European pipeline grew across all
phases of clinical development during
2008, continuing the success of previous
years. More than 100 projects were added
to the clinical pipeline of Europe’s biotech
and specialty pharmaceutical companies,
taking the total number of therapeutics to
more than 1,000 clinical projects.
600
400
200
0
Phase I
Phase II
Phase III
Source: Ernst & Young, MedTRACK and company websites
95
To some extent, the overall decline
of leading countries is also driven by
the growing strength of companies in
up-and-coming second-tier markets. For
instance, the UK, Germany, Denmark,
France and Switzerland collectively
accounted for about 70% of the total
European pipeline and Phase III products
in 2006. By 2008, their share had
declined to about 64%. In addition to
acquisitions, this reduced share reflects
growth and maturity in the biotech
industries of countries such as Israel,
Sweden, Italy and the Netherlands,
which saw their collective share of the
European Phase III pipeline increase from
12% in 2006 to 23% in 2008. Indeed,
Sweden had 13 products in its Phase III
pipeline in 2008.
The therapeutic composition of the
European pipeline with regard to
indications targeted changed very little
in 2008. Oncology remains the dominant
area of development activity, accounting
for 21% of pipeline projects. This reflects
the growing market opportunity created
in this category by aging populations in
traditional markets, high unmet need and
an increased understanding of disease
biology and new therapeutic approaches.
Therapeutics addressing the neurology
(15%), metabolic and endocrine (11%)
and autoimmune and inflammatory (11%)
segments follow.
European clinical pipeline by country, 2008
Phase II
Phase I
Phase III
UK
Germany
Denmark
France
Switzerland
Sweden
Italy
Israel
Netherlands
Spain
Norway
Ireland
Belgium
Austria
Finland
0
50
100
200
Source: Ernst & Young, MedTRACK and company websites
The Phase III share of the top five countries has shrunk,
while other countries have advanced rapidly
100%
Product approvals
The year 2008 was relatively lean in
terms of new product approvals for the
European industry. European biotech
and specialty pharmaceutical companies
achieved only a handful of major new
approvals in the US and Europe. In
addition to NME approvals, two biosimilar
products became the first follow-on
granulocyte colony stimulating factor
(rG-CSF) products approved in the EU.
80%
Swiss specialty pharmaceutical company
Ferring was the only European company to
gain a product approval in the US market.
Firmagon (degarelix), for the treatment of
10%
Netherlands, 3%
Netherlands, 2%
Italy, 2%
90%
Sweden, 5%
Israel, 3%
Italy, 6%
Sweden, 8%
Israel, 6%
70%
Switzerland, 23%
60%
50%
Switzerland, 11%
France, 4%
Denmark, 5%
40%
Germany, 12%
30%
France, 11%
Denmark, 11%
Germany, 8%
20%
UK, 30%
96
150
Number of product candidates
UK, 23%
0
2006
Source: Ernst & Young, MedTRACK and company websites
Beyond borders Global biotechnology report 2009
2008
250
advanced prostate cancer, was approved
by the FDA just before the end of the year.
The product also went on to achieve EMEA
approval in February 2009.
The European biotech approval highlight
of the year was Shire’s orphan and
first-in-class medication Firazyr (icatibant)
in July. Firazyr was developed by Jerini AG
prior to its acquisition by Shire. Firazyr,
which received EMEA authorization for
the symptomatic treatment of acute
attacks of hereditary angioedema
in adults (with C1-esterase-inhibitor
deficiency), is the first product to receive
pan-European approval for this indication.
Firazyr faces greater regulatory
uncertainty in the US, where the FDA
responded to its NDA submission with
a “not approvable” letter in April. A
placebo-controlled trial is planned for
2009 in an attempt to secure FDA
approval. Shire estimates that Firazyr,
which will enjoy market exclusivity in the
EU until 2018, could achieve peak sales
of US$350–400 million, conditional upon
approval in the US.
The other NME approved for marketing
throughout the EU in 2008 was Ipsen’s
Adenuric (febuxostat), which was
approved in April for the treatment of
chronic hyperuricemia in conditions
such as gout.
Europe’s population of smaller biotech
companies had less success on the
product approval front. Nevertheless,
a small number of companies achieved
approvals for NMEs in some European
markets and Canada.
Basilea Pharmaceutica of Switzerland
received marketing authorization in
Switzerland for Zeftera (ceftobiprole),
and the product was launched in Canada.
Zeftera, which was outlicensed and
codeveloped with Janssen-Cilag
(a Johnson & Johnson company), is the
first approved broad-spectrum anti-MRSA
antibiotic belonging to the cephalosporin
class. The product also received an
approvable letter from the FDA in March,
and in November, the EU Committee for
Medicinal Products for Human Use (CHMP)
issued a positive opinion for use in the
treatment of complicated skin and softtissue infections.
However, following the FDA’s letter, the
agency conducted additional inspections
of investigator sites and later concluded
that study-monitoring deficiencies had
arisen. In November, the FDA indicated in
a complete response letter that further
resolution of specific deficiencies in
study conduct would be necessary.
Subsequently, in February 2009, Basilea
was informed that European approval
would be delayed pending good clinical
practice inspections by the EMEA.
Basilea has since filed a claim against
Johnson & Johnson for damages
incurred due to the delay of approval and
lost milestone payments.
Basilea also had success in 2008
with Toctino, an oral formulation of
alitretinoin, which was recommended
for regulatory approval under the
European decentralized procedure as
a therapy for severe refractory chronic
hand eczema and subsequently received
approval in Denmark, Finland, France,
Germany and the UK.
Santhera Pharmaceuticals, another Swiss
company, achieved approval for Catena
(idebenone), a treatment for the rare
neuromuscular disease Friedreich’s Ataxia,
and subsequently launched the product
in October. Oralair Grasses, Stallergenes’s
sublingual “desensitization” product for the
treatment of rhino-conjunctivitis symptoms,
received German approval in June.
The remaining 2008 approvals
were for reformulations and line
extensions of molecules already
approved for marketing. In the US,
Sular — SkyePharma’s Geomatrix
reformulation of Sciele Pharma’s
nisoldipine for hypertension — was
approved by the FDA, as was Antisoma’s
oral fludarabine as a second-line
treatment for chronic lymphocytic
leukemia. In Europe, Orexo AB’s Abstral
(a fast-dissolving tablet for sublingual
administration of fentanyl) received
marketing authorization for the
European Phase III pipeline by indication, 2008
Inflammation and autoimmune
11%
Metabolic and endocrine
11%
Infectious
9%
Neurology
15%
Dermatology
7%
Cardiovascular and hematology
6%
Gastrointestinal
6%
Cancer
21%
Other
14%
Source: Ernst & Young, MedTRACK and company websites
97
treatment of acute breakthrough cancer
pain in the UK, Germany and Sweden, via
Orexo’s licensing partner, ProStrakan.
Biosimilars
Progress was also made in the biosimilar
market, which has been emerging in
recent years. In 2005, Sandoz’s Omnitrope
(somatropin) became the first biosimilar
to receive marketing authorization in
the EU, followed in 2007 by the first
erythropoietin biosimilars. Continuing
this trend, the first rG-CSF biosimilars
received marketing authorization in 2008.
Referencing Amgen’s originator product
Neupogen (filgrastim), CT Arzneimittel’s
Biograstim, Ratiopharm’s Ratiograstim
(developed by subsidiary BioGeneriX) and
Teva’s Tevagrastim were approved by the
A closer look
Growing pains in the European biosimilars market
While the European biosimilars market is still in its infancy, these products are
facing tough market conditions and have yet to match the success of small-molecule
generics. Concerns about comparative efficacy and safety have limited uptake
with patients and physicians, who are often reluctant to switch from better-known
originator products.
National rules that prevent automatic substitution — common in many countries,
including France, Spain and the UK — have further restricted adoption. Since patients
and physicians do not bear the cost of product procurement, they have little incentive
to opt for cheaper biosimilars. Over time, governments will need policies to increase
biosimilars adoption. Until then, companies launching biosimilars will need to
address business planning and forecasting challenges that arise from this near-term
uncertainty and adopt a sales and marketing model that actively promotes products.
Even with an abbreviated regulatory pathway, demonstrating similarity to a
reference product is more onerous and costly for biosimilars than for small-molecule
generics. Biologics are highly heterogeneous and regulatory guidelines are likely to
be developed case-by-case. To date, only biosimilars of relatively simple and well
characterized hormones and therapeutic proteins have been approved, and more
complex biologics, such as monoclonal antibodies, might pose significant challenges
to regulators and companies.
Facing potentially high development costs, comparability challenges and a
difficult market environment, some companies might opt to pursue a traditional
full development route, bypassing the abbreviated pathway. This option might be
particularly attractive for companies for which cost and/or time differences between
approval routes are narrow or where there is reason to believe that a product might
have a superior safety or efficacy profile to the originator. Indeed, some companies
are likely to abandon biosimilars in favor of “bio-betters” — enhanced versions of
originator products.
Looking forward, originator, biosimilar and enhanced bio-betters will likely compete
against each other on the merits of relative safety, efficacy and value. The global
regulatory landscape will remain fragmented. Even within a single jurisdiction, the
regulatory approach to products and classes of biologics will vary on a case-by-case
basis. In the European Union, policy decisions have so far been made at the
member-state level, further fragmenting the marketplace.
98
Beyond borders Global biotechnology report 2009
EMEA in September for the treatment
of neutropenia. Early in 2009, rG-CSF
products from Hexal (Filgrastim) and
Sandoz (Zarzio) were also approved.
Zarzio is the third biosimilar that Sandoz
has successfully steered through the
abbreviated approval process. Outside
of the EU, Mepha was granted marketing
authorization for Filgrastim-Mepha in
Switzerland, becoming the first biosimilar
to be approved in this market. The
biosimilars market is still in relatively early
stages, however, and remains fraught with
uncertainty. (See “A closer look” on this
page for more details.)
Orphan drugs
In February 2009, in an attempt to
encourage the development of orphan
medical products, the EMEA revised the
fee structure payable for preauthorization
activities such as protocol assistance,
as well as for products using the
centralized procedure, application for
marketing authorization, inspections and
post-authorization activities. Companies
qualifying as micro, small and medium-sized
enterprises (SMEs) no longer have to
pay fees for submission of orphan drugs
for approval, and fees for post-approval
activities have, in most cases, also been
eliminated. Fees for non-SMEs have also
been reduced considerably.
Crossing the fourth hurdle
While European companies have new
opportunities related to biosimilars and
orphan drugs, companies looking to sell
in European markets must also contend
with growing regulatory risks. In a
climate of increasing pricing and safety
concerns, securing marketing approval
is no longer the end of the road for
drug manufacturers. In Europe, pricing
pressures have been particularly visible
in the UK market, where the National
Institute for Health and Clinical Excellence
(NICE) uses cost-utility methodologies in
its coverage decisions. In recent years,
NICE has not recommended several
Selected European products approved, 2008
Company
Antisoma
Country
UK
Brand
name
Oral
fludarabine
Generic
name
fludarabine
Type
New formulation
Disease
category
Oncology
Basilea
Pharmaceutica
Switzerland
Toctino
alitretinoin
New formulation
Dermatology
Severe
refractory
chronic hand
eczema
Denmark,
Finland, France,
Germany and
the UK
Basilea
Pharmaceutica/
Janssen-Cilag
Switzerland/
Netherlands
Zeftera
ceftobiprole
New molecular
entity
Infectious
disease
MRSA skin
and soft tissue
infections
Switzerland
Santhera
Pharmaceuticals
Switzerland
Catena
idebenone
New molecular
entity
Neurology
Friedreich's
ataxia
Canada
Ferring
Pharmaceuticals
Switzerland
Firmagon
degarelix
New molecular
entity
Oncology
Prostate cancer
US
Ipsen
France
Adenuric
febuxostat
New molecular
entity
Metabolic
Chronic
hyperuricaemia
European Union
Jerini/Shire
Germany/
UK
Firazyr
icatibant
New molecular
entity
Cardiovascular
Hereditary
angioedema
(HAE)
European Union
Orexo/
ProStrakan
Sweden/UK
Abstral
rapinyl
New formulation
Neurology
Breakthrough
cancer pain
UK, Germany
Sweden
SkyePharma/
Sciele Pharma
UK/US
Sular
nisoldipine
New formulation
Cardiovascular
Hypertension
US
Indication
Chronic
lymphocytic
leukemia (CLL)
Approved/
registered in
US
Source: Ernst & Young, EMEA, FDA and company websites
of the leading biotech cancer drugs
for reimbursement, often generating
controversy in the process. In 2007,
these trends resulted in the industry’s
first-ever money-back guarantee, when
Velcade was approved for treatment of
multiple myeloma only after Janssen-Cilag
promised to refund the cost of treating
patients who did not show improvement
based on predetermined decision points.
These trends continued in 2008. In
August, NICE rejected four drugs under
consideration for the treatment of kidney
cancer — Sutent, Avastin, Nexavar and
Torisel — based on its cost-effectiveness
criteria. In February 2009, however, the
agency reversed course on Sutent after
the denial-of-coverage decision generated
considerable public outcry and Pfizer
offered to reduce the cost of the drug by
paying for the first cycle of treatment.
Under the terms of the agreement, the
National Health Service (NHS) will pay
for subsequent treatment cycles if the
drug appears to be working. Bayer made
a similar offer, agreeing to pay for the
first pack of Nexavar, but has so far failed
to secure coverage. Interestingly, Pfizer
received independent confirmation of the
effectiveness of Sutent exactly one month
later and, in reaction, announced that it
was prematurely ending a Phase III trial of
the drug. While trials are typically halted
because of poor results, this decision was
made because patients with pancreatic
islet cell tumors were showing a significant
increase in progression-free survival, and
the company wanted to let other patients
switch from a placebo to Sutent.
These creative risk- and cost-sharing
arrangements were not limited to cancer
drugs. In September, NICE approved
Lucentis for the treatment of wet
age-related macular degeneration under
an arrangement where the NHS will pay
for the first 14 injections of Lucentis,
with the manufacturer picking up the bill
for any more that are needed.
NICE has announced some changes in
its methodologies over the last year
and plans to revisit issues related to the
value of innovation in 2009. (For more
information, see the article “Valuing
innovation” by Andrew Dillon and Sarah
Garner in this issue of Beyond borders.)
99
Outlook
European companies made solid pipeline
progress during 2008, but product
approvals from European companies still
lag behind those from the more developed
and mature US sector. In a tight financing
environment, companies will need to
focus on continued pipeline progress and
particularly on advancing compounds into
Phase IIb and Phase III trials.
Positive news from larger companies
is helpful, as it tends to move investor
sentiment toward the sector as a
whole. Encouragingly, the start of 2009
provided positive late-stage news for
some of Europe’s more mature biotech
100
companies. In March, the EMEA accepted
Genmab’s marketing authorization
application for its HuMax-CD20 antibody
Arzerra (ofatumumab) for the treatment
of chronic lymphocytic leukemia,
triggering a milestone payment from
marketing partner GSK. Arzerra was
also submitted for FDA approval in late
January. Actelion’s Zavesca (miglustat)
received EU approval in January for the
treatment of progressive neurological
manifestations in patients with
Niemann-Pick type C disease, making
it the first product approved in this
indication and expanding its use outside
of Gaucher’s disease. In April, the
European Commission granted approval
Beyond borders Global biotechnology report 2009
for Germany-based TRION Pharma’s
Removab (catumaxomab) for the
intraperitoneal treatment of malignant
ascites in patients with EpCAM-positive
carcinomas. The European Commission
also approved Austria-based Intercell’s
IXIARO vaccine for the prevention of
Japanese Encephalitis.
A number of companies are awaiting
results for important late-stage trials and
product-approval submissions in 2009,
and more good news would certainly help
attract investors in what promises to be a
challenging year financially.
Karl-Heinz Maurer, Ph.D. Marcel Wubbolts, Ph.D.
Holger Zinke, Ph.D.
Henkel AG & Co. KGaA
DSM Innovation Center
BRAIN AG
Director Biotechnology, Global
R&D: Chemistry, Laundry and
Home Care
Program Director, White
Biotechnology
CEO
Roundtable on industrial biotechnology
Evolution, progress and sustainability
Ernst & Young: Has industrial (white)
biotechnology developed differently in
Europe and the United States?
Wubbolts: Historically, the differences
in the development of industrial
biotechnology between Europe and the
US have not been significant. On both
continents, early processes made use of
fermentation such as for alcohols (e.g.,
ethanol and butanol), organic acids (e.g.,
citric acid), vitamins (e.g., biocatalytic step
for Vitamin C), amino acids (e.g., Lysine
and MSG) and the production of antibiotics
(e.g., penicillins and cephalosporins). Early
adopters included both US and European
companies, including the likes of Archer
Daniels Midland, Bristol-Myers Squibb,
Cargill, Roche, Eli Lilly, Novo Nordisk and
Gist-Brocades (now DSM).
In recent periods, Europe has specialized
more in the application and production
of industrial and specialty enzymes.
European companies have also focused
on higher-value-added molecules
(semi-synthetic antibiotics, vitamin B2
and biocatalysis for active ingredients
in pharmaceutical applications). More
traditional processes (e.g., amino acids,
organic acids, penicillin and MSG) have
remained strong in the US, but have
also found a new haven in Asia. The
US, of course, has become dominant
in bioethanol production as a result of
strong governmental support for biofuels
to supplement gasoline — even to the
point where the US has overtaken Brazil.
Zinke: Historically there was a strong
scientific base on both sides of
the Atlantic in areas such as strain
development, molecular evolution and
biocatalysis. But when the biotechnology
industry took off — during the late
eighties in the US and a decade later in
Europe — this scientific base was rarely
visible. So industrial biotechnology
attracted relatively little interest at the
large investor conferences or, for that
matter, in the capital markets. Despite the
fact that there have been very prominent
examples of dedicated industrial biotech
companies, for example Genencor (now
a division of Danisco), these companies
were not the primary focus of attention.
Maurer: In Europe, industrial biotech
developed largely in collaboration with
the chemical industry and therefore
targeted process improvements in chemical
production, rather than focusing on
developing alternatives for specific raw
materials such as oil. Industrial biotech
in Europe is a core competence in a wide
array of companies, ranging from pure-play
companies such as Novozymes and
Genencor to midsized and small biotech
entities. White biotech is also widely
distributed throughout industries such
as chemicals, consumer goods and food.
And lastly, academic research in industrial
biotech has always been a strong asset.
In the US, biotechnology has been
primarily associated with red (health)
applications, and industrial biotech has
traditionally had less focus and attention.
Companies such as Maxygen and Diversa
(now Verenium) have pursued industrial
applications and there have been US
Department of Energy-funded projects
focused on energy and new-platform
chemicals from renewable sources. I
agree with Marcel that at the moment
the industrial biotech arena in the US is
dominated by primary and secondary
biofuel initiatives.
Ernst & Young: What major business and
public-policy trends are driving industrial
biotechnology today?
Zinke: The situation has changed today.
As already mentioned, the visibility of
industrial biotechnology efforts in the
US has been influenced by the objective
of achieving energy independence.
The political spotlight on industrial
biotechnology as part of the solution
has increased investor interest in the
past few years. In Europe, established
industry players adopted biotech on a
case-by-case basis, resulting in a relatively
dense network of diverse efforts.
Remarkably, despite the different focus
of the companies and the diversity of the
applications and markets, a small but
coherent industrial-academic community
has been established.
101
Interestingly, the political efforts as
well have resulted in diversity. While
there are several European and national
initiatives using the industrial or white
biotech label, many are aimed in
different directions. This would seem
to be ineffective at first glance, but the
multifaceted situation creates room for
entrepreneurial activities and academic
clusters. We see groups of newly founded
companies in technologies ranging from
biocatalysis, bioinformatics and metabolic
engineering to product-innovation-driven
concepts. At this time, one can only
speculate as to whether having so many
emerging companies pursuing different
applications is a strength or a weakness
for Europe.
Maurer: I agree completely that in the
US the main drivers come from the
political area and the focus is biofuels,
as well as platform chemicals. In Europe
there is almost no political motivation
visible beyond an interest in starting
new companies. The focus in Europe
is on the application of biotechnology
for innovation that meets the needs
of customers, and on sustainability. If
the transformation of the industry is
the consequence, it will occur because
it makes sense in the market and not
because there is a political motivation.
Ernst & Young: Can you point to some
significant examples of industrial
processes that have been transformed
through the use of biotechnology? What
advantages or efficiencies do these
applications create?
102
Wubbolts: There are certainly many
instances where the use of biotechnology
has transformed industrial processes.
Prominent examples in the European
industry include processes for vitamins
C and B2, amino acids, and food and
feed additives such as alpha-amylase,
glucose oxidases, pectinases, proteases,
(phospho)lipases and fytases.
In many cases, biotechnology has
been the enabling technology. In most
cases, cost reduction has been the main
advantage, combined with an increase
in product quality and lower usage
of raw materials and energy — which
has direct environmental benefits and
indirect cost advantages as well. Capital
expenditures for these new processes,
in many cases, have been lower than for
traditional alternatives.
Maurer: I believe that the transformation
of laundry-detergent products is an
important example. We have seen a move
from products that required the use of
high quantities of detergent and high
temperatures in the 1970s, to today’s
laundry detergents which can work in
small amounts over a temperature range
from 20°C to 100°C and which contain
up to seven different enzymes. We
have seen similar progress in automatic
dish-washing detergents, in which
enzymes were used for the first time in
the early 1990s. Since then, the amount
of chemicals used in these detergents has
declined significantly. The role of enzymes
in the performance of many of today’s
products cannot be overestimated.
New and improved enzymes will
demonstrate improved performance
Beyond borders Global biotechnology report 2009
that allows for differentiation between
competing products. At the same time,
we may also see further reduction of
chemicals used in the process. Replacing
substances with biocatalysts also
allows for more concentrated product
and packaging material, and as a
consequence, the amount of fuel needed
for transport can also be reduced. To
some extent, enzymes can also be used
to balance the volatility of petrochemical
raw material costs.
Zinke: Industrial biotechnology can be
defined as using the toolbox of nature
for industrial production. This is fine,
but most discussions tend to focus on
the production of standard chemical
products or intermediates by means of
fermentation or biotransformation. The
biology competes with established and
mostly large-scale chemical processes.
If we regard the toolbox of nature as
a resource for new functionalities,
the scope of industrial biotechnology
is wider. We are absolutely convinced
that new products will result, including
cosmeceuticals, nutraceuticals, functional
biomaterials and adhesives. Nature has
invented solutions, and it is our task to
translate the resulting functionalities in
technical use.
Process innovation is the main area
of interest for the larger, integrated
companies. However, I think there is
potential for true value creation by
entrepreneurial companies in the field
of novel functionalities. Given that most
speciality chemicals target biological
structures, I would not be surprised to
see novel classes of specialty biologics.
We are currently in a situation of mining
the biological inventory, securing
intellectual property positions and
developing prototypes. We can also
profit from the technologies originally
developed for biopharmaceutical
development and apply them for
cosmetics and nutrition. Collaborations
between dedicated industrial biotech
companies and established industry
players can be of significant value, since
they will permit the creation of novel
noncommodity products.
Ernst & Young: Does this industrial
transformation lead to advantages
beyond product and process innovation?
Maurer: The so-called industrial
transformation is only just beginning. I
agree that the major impact is on product
efficiency and performance, and this
performance is based on sustainability,
a key fact for us at Henkel. All new
products are evaluated in this light,
taking into account every aspect of the
product life cycle, from production to
use. Apart from that, there are new
suppliers, new business models and new
business opportunities that result from
industrial transformation.
Zinke: Industrial biotech products are
being boosted by a major societal trend:
consumer preferences are shifting toward
sustainable products. Remarkably, this
trend has not been disrupted by the
financial crisis; to the contrary, the
demand for sustainability is stronger than
ever, even in the investment community.
Sustainability does not mean reduced
convenience, innovation or performance.
It means premium products for a
quality-oriented consumer.
Wubbolts: Besides product innovation,
process innovations that are part of this
industrial transformation have led to
higher product efficiencies for specialty
and technical enzymes in food, feed,
textiles and paper/pulp. In addition, lower
energy consumption through processing
at ambient temperatures, reduced solvent
use and solvent recycles, and reduced
use of hazardous intermediates and
reagents has occurred. As a consequence,
fermentation and enzyme-catalyzed
processes can be performed at sites that
are not linked to crude oil pipeline networks
or that have lower risk standards than
some chemical plants.
Ernst & Young: What’s the outlook
for industrial biotechnology? In which
segments or applications are we likely to
see significant growth?
Zinke: Today we are in a position
where a technology push is meeting
a societal trend toward sustainable
living and sustainable products. Look at
breakthroughs such as the meta-genome
technology that allows us to work with
millions of genomes which are valuable
resources for new biocatalysts. Look at the
minimal genome initiatives, where we will
see highly efficient producer organisms.
Or look at the metabolic engineering or
in vitro evolution technologies we can
use today. We have had an explosion in
recent years in technology portfolios and
corresponding throughput, enabling the
use of nature’s toolbox in new ways.
Maurer: Pragmatically speaking,
the driving factors are always cost,
performance, convenience in application
and a “natural” or “green” message
that can be linked to the product. Apart
from these factors, there is always the
hope for new innovations branching out
from an initial discovery — mostly there
is greater opportunity for this to occur
with enabling technologies than with
product innovations.
My belief is that with respect to
second-generation biofuels, we still have
a long way to go. But if successful, this
progress will certainly lead to further
innovation opportunities in the industrial
biotech area.
Wubbolts: “Omics” and other
high-throughput technologies, including
synthetic biology, are critical to ongoing
innovations. Enzyme optimization and
cell engineering to adapt to industrial
conditions are imperative.
Biorefineries may be driven by a focus
on energy, but they will not achieve
the desired sustainable profitability
unless by-products are used at a level
of efficiency similar to the oil-based
refineries’. Food and feed uses are
less likely outlets for biomass-based
processes, and therefore alternatives
will need to be implemented. Complex
feed streams are likely to be fractionated
and used in a variety of large-scale
applications. Lignin, as an example, will
be available in vast amounts and can
mostly be used for energy generation,
but more valuable applications are likely
to emerge.
103
Seeds of change?
The Asia-Pacific perspective
Asia-Pacific introduction
Seeds of change?
In 2008, the global economy underwent
changes on an unprecedented scale:
dizzying stock market volatility, a
fundamental restructuring of global
finance, economies struggling with deep
recessions, and major public policy
responses. The seeds of these changes,
it is fair to say, were sown in the West.
The crisis started, after all, in the US
mortgage markets; but it spread rapidly
beyond national borders as it touched a
series of industries around the world.
Biotech industries in the West certainly
felt these changes. Small-cap companies
in most markets now face a much tougher
environment for raising capital. They
are scrambling to raise funds, cut costs
and lower cash burn. Much of this year’s
Beyond borders discusses these impacts
and the outlook for biotech industries in
Western economies.
But the seeds of change have also been
carried to the shores of Asia, where the
crisis is clearly having consequences.
Since Asia’s rapidly growing biotech
industries are fundamentally different
from those in the West, it is quite likely
that the fallout in this region will be
unlike that in the West. Some of the likely
effects are described below.
Seeking cost efficiency: outsourcing
and services
As discussed in recent issues of Beyond
borders, the biotech industries of
many Asian economies have developed
competitive niches in specific industry
segments. One of these is contract
services, where Asian companies
have attracted increasing amounts
of work from the West. While Asian
contract research organizations
(CROs) and contract manufacturing
organizations (CMOs) may have seen
some immediate backlash from the
crisis as Western companies cut back
106
defensively in reaction to tremendous
market uncertainty, the next iteration of
responses carries considerable promise.
As Western companies navigate an
environment where capital is scarce, they
are under increasing pressure to lower
cash burn and contain costs. Many Asian
CROs and CMOs expect that this should
lead to an increase in outsourcing of
clinical trials and manufacturing to Asia.
But this crisis is also unlike anything
else in recent memory. Because of “the
interconnectedness of all things” (refer to
the Global introduction article for more
details) there are many hidden sources
of risk lurking beneath the surface
that Asian contract service providers
will need to monitor. As they enter or
expand contracts with Western firms,
they will need to watch for increased
counterparty risk. Rapid growth could
also increase reputational risk, if firms
are unable to keep up with the work and
deliver high-quality services. Indeed, in
anticipation of these changes, a number
of companies are investing in developing
their infrastructure and controls.
Seeking markets: inward investment
Western companies have been investing
significantly in Asia in recent years,
and many larger companies have
included the growing economies of Asia
in their long-term plans. As Western
markets mature, these firms recognize
the tremendous potential for higher
growth in Asian economies, where
vast numbers of people with medical
needs do not have access to healthcare.
Yet these plans are predicated on
assumptions of growing middle
classes and rising incomes. If growth
slows substantially in these markets
because of the global recession — while
meanwhile big pharma companies are
becoming more selective about their
Beyond borders Global biotechnology report 2009
investments — there is the risk that
some companies could move more
slowly on their Asia strategies.
Seeking sustainability: business
models and partnering
As discussed in this year’s “Global
introduction” article, the current
environment is putting the biotech
industry’s business model under
unprecedented stress. As the industry
searches for a path to a sustainable
business model, there may be
opportunities for Asian companies
to sow seeds of change in the other
direction — by providing examples
and solutions that make sustainability
possible. In many Asian countries,
for instance, companies have had to
evolve without the benefit of success
factors that are typically considered
critical for the emergence of biotech
clusters in the West — strong university
research, technology transfer laws that
support commercialization, experienced
venture capitalists and adequate
funding. Consequently, companies have
developed different business models.
For example, the absence of sufficient
capital has led many Asian companies
to hybrid models that combine contract
services activities with innovative drug
development. At a time when Western
companies face similar constraints,
there could be models to borrow from
Asian companies.
The dream of the sea turtles:
can China offer a new model for
Western biotech companies?
Samantha Du, Ph.D.
Hutchison MediPharma Limited
necessitated by bare-bones operating
budgets, it fragments knowledge into
far-flung pockets, which often inhibits
the integration of expertise. But life
sciences activities are complicated and
interdependent, and integration across
diverse disciplines is critical.
Biotech companies in the West have been
hit hard by the financial crisis. Traditional
funding sources have dried up. Many
firms have less than a year of cash on
hand and prospects for raising more
capital look bleak.
It could be argued that the biotech business
model is now truly broken. At the least,
critical aspects of that model are under
unprecedented strain — there is a complete
mismatch between investors’ appetite for
risk and the long product-development time
frames and relatively low success rates
for drug R&D. This threatens the survival
of firms in the short run and the ability to
fund innovation over the long term.
There are two basic ways for companies
to work around this mismatch. In an
environment where capital has become
scarce, they can lower costs to make their
limited means go further. Alternately,
they can increase research productivity
to lower R&D risk and make the biotech
business model more attractive to
investors. On both fronts, China offers
the opportunity to do things differently.
Chinese models
By now, the West has become habituated
to an organizational model in which
most biotech companies are lean
organizations. While this is often
In contrast, by leveraging some of the
country’s comparative advantages,
Chinese companies are starting to build
enterprises that are more integrated
than Western firms. It is no secret, for
instance, that China has a vast supply of
affordable human capital. The country
produces more than six million college
graduates each year. These resources
are now being supplemented by a
growing pool of Western-educated and
experienced returnees (nicknamed “sea
turtles” in China) drawn back by explosive
economic growth and the opportunity
to make substantive contributions to
China’s blossoming biotech industry. This
combination of abundant human capital,
lower business costs and experienced
returnees is allowing entrepreneurs to build
Chinese biotech firms that are far more
integrated — with significant capabilities in
disciplines ranging from discovery research
through clinical development — than
their counterparts in the West. And this
integrated approach can produce more
efficient and productive R&D.
Western companies can exploit these
advantages by leveraging China’s
capabilities in their business models or
partnering with Chinese firms. For instance,
at Hutchison MediPharma — an integrated
biotech company led by sea turtles and
employing more than 200 scientists — we
are not only driving internal programs
to clinical development but also entering
into risk-sharing alliances with Western
majors. The firm’s partnerships with Eli
Lilly and Merck AG, initiated in 2007, bore
fruit in 2008, when Hutchison delivered
discovery milestones for both partners
Chief Executive Officer
and expanded its alliance with Lilly. In late
2008, Hutchison and Johnson & Johnson
announced a collaboration in which
J&J selected a project on inflammation
from Hutchison’s internal program. The
risk-sharing business model focusing on
a specific disease target can not only
mitigate R&D risks for biotech firms but
also produce deeper knowledge and mutual
learning. It also enables multinationals to
access China’s capital efficiencies, human
resources and, eventually, the fast-growing
domestic market.
Outlook
Of course, there are challenges to be met.
The local talent base lacks specialized
experience, although this is at least
partially compensated for by passion, the
ability to learn and the contributions of sea
turtles. The industry will need supportive
policies and regulations, and the Chinese
government is helping on this front. The
government is actively investing and has
designated biotech a high-priority “pillar
industry.” In January 2009, the SFDA
implemented a fast-track “green channel”
to accelerate first-in-man studies — a
measure that should boost Chinese clinical
trial activities.
While China’s economy is not immune
to the financial crisis, the economic
devastation in the West could prompt
talent and capital to flow to emerging
markets. The movement of returnees
could accelerate from a steady stream of
sea turtles swimming up to China’s shores
to a much larger mass migration. And
for Western companies straining against
a challenging business model, the China
advantage might offer new approaches to
boost R&D productivity, to the benefit of
the global biotech industry and patients
everywhere with unmet medical needs.
107
M.K. Bhan, M.D.
Secretary to the Government
of India, Department of
Biotechnology
Ernst & Young: Could you give us a
brief update on the state of the Indian
biotech industry?
Bhan: The Indian biotech industry is
spread over several sectors, including
healthcare, agricultural biotechnology,
contract services, bioinformatics and
others. According to the 2008
ABLE-BioSpectrum survey, the industry
is growing at an impressive annual growth
rate of about 20%. A large chunk of this
activity is in generics, contract services
in the early stages of drug discovery,
clinical development, and manufacturing
of clinical supplies. However, we are seeing
that several Indian companies are now
engaging in product innovation and are
developing their own novel molecules.
To support this core biotech space, the
National Biotechnology Development
Strategy has been implemented by the
Department of Biotechnology.
Ernst & Young: What role is the
government playing in boosting
the Indian biotech industry? What
measures are you taking to spur
innovation and develop a supportive
regulatory structure?
Bhan: Indian companies have traditionally
been risk averse when it comes to new
product development. To a large extent,
this has resulted from the Patents Act
of 1970, which did not provide patent
protection for products (the act instead
protected the process used to make
a product). As a result, there was no
incentive to develop new products and India
did not develop considerable skills in the
area of innovation. This was visible not only
in the scientific arena but also in the areas
of finance and government regulation.
Indian bankers never developed a deep
108
A conversation with M.K. Bhan
Changing realities
understanding of the risk-reward nature of
drug innovation, and the regulatory system
was never challenged with having to
regulate new drug innovation, especially in
the early stages, where the risk is highest.
With the reform of the Patents Act in 2005,
India fully enforces product patents. This
has inspired many Indian companies to
go the innovation route, but the industry
lacks sufficient risk capital to fund this
increase in R&D. The Indian government
has responded with a host of programs to
fill the gap. A new government program,
the Biotechnology Industry Partnership
Program, specifically recognizes this
aspect and provides funds for industry to
undertake high-risk research. It provides
support in the form of grants and soft loans
to innovative projects within companies,
both at early stages as well as late-stage
clinical trials.
Similarly, the Pharma Fund supports
innovation at companies, while the New
Millennium Indian Technology Leadership
Initiative program assists public-private
partnerships. The government has
provided early-stage funding through
the Small Business Innovation Research
Initiative — a measure that has been
well received and has initiated industry
platforms in biopharmaceuticals,
vaccines, cell therapy and agricultural
biotechnology. The Union Cabinet has
approved a bill for the public funding of
R&D to boost innovation and technology
transfer; the bill has since been introduced
in the parliament.
In addition to funding, the government
is actively developing a supportive
regulatory framework. The National
Biotechnology Regulatory Authority is
close to receiving final endorsement — this
would create, for the first time, a single
regulatory body overseeing all aspects
of biotech drug regulation. Meanwhile,
Beyond borders Global biotechnology report 2009
“With the reform of the Patents
Act in 2005, India fully enforces
product patents. This has
inspired many Indian companies
to go the innovation route, but
the industry lacks sufficient risk
capital to fund this increase in
R&D. The Indian government
has responded with a host of
programs to fill the gap.”
the various agencies currently charged
with regulating the industry — the Genetic
Engineering Approval Committee, the
Review Committee on Genetic Manipulation
and the Drugs Controller General of
India — have also improved and streamlined
their procedures. A recently approved
National Science and Engineering
Board will become operational in April
2009 to give a boost to science and
technology. The majority of commitments
made in the National Biotechnology
Development Strategy have already
been included in budgetary allocations,
resulting in a nearly five-fold increase
in the biotech budget in India’s Eleventh
Five-Year Plan — one-third of which will be
focused on industry innovation.
Ernst & Young: What potential
risks or challenges could the global
financial crisis produce for Indian
biopharmaceutical companies? What
potential opportunities could it produce?
Bhan: The global economic crisis has
the potential to create both positive and
negative impacts for India’s biotechnology
industry. Though small, the Indian biotech
sector is integrated into the global industry,
with nearly two-thirds of its revenues
coming from exports of products and
services. In the short term, there could be
some decline in export orders for India’s
biotech products due to liquidity constraints
in importing countries. In addition, the
majority of Indian products are imported
by a number of multilateral agencies,
which could delay placing new orders in the
current environment.
However, as organizations in the West
adjust to the recession, there could be new
opportunities for Indian firms. As Western
firms move to reduce their costs, they
are more likely to turn to Indian biotech
companies to source their products.
Multilateral agencies may place more
orders with Indian companies to cover
more patients with limited resources at a
time when fundraising and endowments
are down. Outsourcing of a number
of activities in the drug-development
value chain to Indian companies may
also accelerate in the next few years.
India’s contract research organizations
are anticipating increased business,
and we are likely to see them upgrade
“Whether or not companies in
India and the West can learn
lessons from each other, the
important question is really
how they can capitalize on
each other’s strengths in the
current situation. If we can all
do that, we would be better
equipped to face today’s
tremendous challenges in
ways that provide affordable
healthcare for patients
around the world.”
infrastructure and expertise to cater to
surging demand over the next few years.
Ernst & Young: In the current climate,
many Western companies will need new
models for funding R&D, structuring
strategic transactions and approaching
commercialization and pricing. But
Indian firms have often followed a
different path over the years, driven
by market conditions that are different
from those in the West. What lessons,
if any, could Western firms learn from
their Indian counterparts?
Bhan: In both geographies, the
business models that have evolved have
been driven primarily by the macro
environment — financial backing, legislation,
regulatory frameworks and other factors.
Whether or not companies in India and the
West can learn lessons from each other, the
important question is really how they can
capitalize on each other’s strengths in the
current situation. If we can all do that, we
would be better equipped to face today’s
tremendous challenges in ways that provide
affordable healthcare for patients around
the world.
Ernst & Young: What advice would you
give Western biotech companies looking
at opportunities in India? What sorts of
creative approaches and thinking will
Indian and Western firms need?
Bhan: It is our view that India offers
Western companies highly competitive,
cost-effective alternatives for research
and manufacturing work. But for the
partnership to evolve further, both sides will
need to think progressively.
“The willingness to learn is an
inherently Indian trait, and
India is a changing country. To
Western companies considering
India, I would say: don’t let
yesterday’s perceptions cloud
your assessment of today’s
changing realities.”
demands of Western organizations, by
upgrading their infrastructure, adhering
to timelines, attracting and retaining
top-quality human resources and
maintaining global quality standards
with government support. A few dozen
Indian biopharmaceutical companies
have started to look at the industry from
a new perspective and are investing
heavily in innovation. These organizations
have excellent human resources,
are run by people who have worked
extensively in Western markets, are
highly quality-conscious and are open to
collaborating with the best in the world.
Western companies should take a close
look at the facilities of these Indian firms
and engage them at a deeper level to
understand their immense capabilities for
partnership in a variety of segments. The
willingness to learn is an inherently Indian
trait, and India is a changing country.
To Western companies considering
India, I would say: don’t let yesterday’s
perceptions cloud your assessment of
today’s changing realities.
Indian institutions will need to make
sure they are geared to meet the
109
Australia year in review
Haves and have-nots
After a strong financial performance
in 2007, the Australian biotechnology
industry has been hit hard with funding
challenges caused by the global
economic crisis. However, financial
performance remained strong — largely
because of product sales at CSL — and
the sector’s pipeline looks very robust,
with a sizeable group of companies
approaching commercialization.
Financial performance
The financial performance of the
Australian biotech sector continued to
improve steadily in 2008 — revenues grew
26% relative to 2007 and R&D increased
by 32%. The industry also continued to
remain profitable in aggregate, with both
Celletis and Cogstate joining the growing
list of profitable biotech companies.
As in prior years, however, the financial
performance of the industry was driven
by the largest firm, CSL, which posted
a profit of A$702 million (US$626
million) on revenues of A$3.6 billion
(US$3.2 billion), a 30% increase from
2007. This gain, which was tempered by
negative foreign-exchange swings, was
due primarily to the continuing demand
for CSL’s plasma products as well as
increasing royalties from Gardasil, its
cervical cancer vaccine. While CSL’s
market capitalization increased only
4% to A$20 billion (US$17.9 billion) at
year-end, this is in stark contrast to the
rest of the sector, which lost 57% of its
market value in 2008.
stage and continue to enjoy support
from venture-capital backers. After
these two groups, however, come
the have-nots — companies that were
compelled to go public prematurely
because of a lack of venture capital, and
which often continue to struggle. The
Australian Stock Exchange (ASX) has
traditionally been used for early-stage
financing by relatively immature
companies, and more than 70% of IPOs
over the last six years raised less than
A$10 million (US$8.9 million) each. At
the other end of the spectrum, more than
half of the follow-on capital raised over
this same period went to the 15 largest
drug-development companies.
The financing totals for the year, as in
most parts of the world, were down. The
IPO market was essentially closed, with
only two IPOs getting off the ground.
Meanwhile, funds raised in the “follow-on
and other” category fell sharply. These
funds, which tend to significantly exceed
capital raised through IPOs, fell from a
record-breaking A$483 million (US$380
million) in 2007 to A$112 million
(US$99.8 million) in 2008. Follow-on
funding plummeted to levels not seen
since 2002, and consisted primarily of
small financings — notable exceptions
were Peplin, which raised A$27.1 million
(US$24.0 million), and Chemgenex and
Neuren, which raised about A$12.9 million
(US$11.5 million) respectively. “Other”
financings — including private placements,
rights issues and convertible debt — were
primarily small, with most transactions
under A$2 million (US$1.79 million).
Unfortunately, this lack of access to
capital was exacerbated in May 2008
when the Australian federal government
terminated the Commercial Ready
Grant Scheme, a program that used to
provide direct financial assistance to
both private and publicly listed biotech
companies on a “one dollar for every
two dollars spent” basis. Bioshares,
Australia’s leading independent biotech
investment stock report, estimates that
this program and two other programs
that it replaced together invested
over A$300 million (US$268 million)
in the life sciences industry between
1996 and 2008. With commercial
funding essentially dried up, the federal
government’s timing could not have
been worse. Continued public-sector
funding could have allowed many
companies to sustain their R&D activities
and ultimately improve their ability to
attract commercial investment when the
markets open up.
With government grant money
unavailable and the window to the public
markets firmly closed, there is added
pressure for private companies that
Australian biotechnology at a glance
Public company data
2008
2007
% change
Revenues (US$m)
3,602
2,857
26%
Financing trends
R&D expense (US$m)
499
377
32%
Australia’s publicly traded biotech
companies are divided into haves and
have-nots. At the top of the list are
companies with advanced pipelines
and solid financing, followed by firms
that raised venture funding at an early
Net income (US$m)
134
102
31%
Number of employees
10,480
9,770
7%
Market capitalization (US$m)
21,519
21,450
0%
6,541
5,431
20%
84
85
-1%
Total assets (US$m)
Number of public companies
Source: Ernst & Young analysis of company financial statement data
110
Beyond borders Global biotechnology report 2009
would previously have turned to the ASX
to raise early-stage capital. Times will
also be challenging for listed companies
that did not tap the markets for follow-on
financing over the last few years while
money was comparably easy to raise.
In spite of the challenging markets, a pair
of venture-capital firms (VCs) managed
to close funds during 2008. Starfish
Ventures closed a A$185 million (US$165
million) fund for investment in cleantech,
information technology and life sciences,
and GBS Ventures closed a A$100million
(US$89.3 million) fund dedicated to life
sciences. However, VCs that did not close
funds in the past few years and need to
go back to raise new funds in 2009 will
likely find it very difficult. This, coupled
with VCs’ need to focus relatively limited
uncommitted capital on sustaining
existing portfolio companies, will make
raising venture capital challenging for
many biotechs.
Exits have become more difficult as well.
Data collected by the Australian Private
Equity & Venture Capital Association shows
that only 16 exits occurred in 2007–08,
in contrast to 44 in 2006–07. CM Capital,
a leading Australian venture fund, noted
that several Australian venture-backed
biotech companies are now close to market
and could become profitable relatively
soon. This could, in turn, boost investor
sentiment toward the sector and permit
VCs to exit their investments and return to
fund new companies.
Deals
The biggest M&A transaction of 2008
was the one that was not completed (at
least not yet.) In August, Australian giant
CSL announced an agreement to acquire
US-based Talecris Biotherapeutics for
A$3.5 billion (US$3.1 billion) in cash. The
merger seeks to combine the second- and
third-largest firms in the global market
Australian biotech public equity raised, 2002–08
Follow-on offerings
IPO
Number of transactions
A$m
700
70
600
60
500
50
400
40
300
30
200
20
100
10
0
0
2002
2003
2004
2005
2006
2007
2008
Source: Ernst & Young, Bioshares and company annual reports
for medical products derived from human
plasma. Privately held Talecris — which
had been purchased from Germany’s
Bayer in 2005 by US-based venture fund
Ampersand Ventures and private-equity
firm Cerberus Capital Management — had
initially tried to go public in 2007 before
agreeing to be acquired a year later. The
deal would give CSL greater access to the
North American and European markets
while giving Talecris a reliable supply of
products for its customers and helping
it build its plasma supply platform in a
measured, quality-compliant way. As this
publication goes to press, the deal has not
yet been approved by regulators, and the
companies are complying with requests
for additional information from the US
Federal Trade Commission.
Other significant deals include Sigma
Pharmaceuticals’ acquisition of privately
held specialty pharmaceuticals company
Orphan Holdings for A$130 million
(US$116 million) in cash in February
2008. The deal, which gave existing
owners such as AMP Capital Investors
an exit, will allow Sigma to diversify its
interests and expand in certain niche
specialty pharmaceuticals markets. Also
in February, Progen Pharmaceuticals
acquired privately held US oncology
firm CellGate. The transaction expanded
Progen’s pipeline in oncology, and Progen
gained platform technologies in the areas
of epigenetics and polyamines that will
form the foundation for new compound
development. Progen issued new shares
worth A$1.7 million (US$1.5 million) and
assumed CellGate’s net liabilities of A$1.1
million (US$1 million). The deal also
includes additional earn-out payments
totaling up to A$21.8 million (US$19.5
million) if certain clinical and regulatory
milestones are achieved.
At a time when cash is king and many
companies are finding it difficult to
raise capital for their long-term needs,
activist shareholders in some US biotech
companies have started to demand that
companies with failed clinical trials return
their remaining capital instead of funding
more R&D. These trends were mirrored
111
in the failed merger between Progen and
Avexa. Avexa, a company with Phase
III HIV studies in progress, intended
to merge with Progen, a well-financed
oncology company with over A$70 million
(US$62.5 million) in cash and a failed
Phase III trial. However, a block of Progen
shareholders, attracted by the company’s
healthy cash balance, sought a larger
return of capital than the A$20 million
(US$18 million) proposed in the Avexa
merger. To mollify these shareholders,
Progen announced a A$40 million (US$36
million) voluntary share buyback at a
price of A$1.10 (US$0.96) per share.
Before this plan could proceed however,
the board was required to face another
general meeting, this time instigated by
the Cytopia Shareholder Group where the
shareholders were asked to vote on the
removal of all current board members and
the appointment of three new directors.
The Cytopia Shareholder Group indicated
that the new board, if elected, would
implement a share buyback and consider a
merger of Progen with Cytopia Limited (an
ASX-listed biotech company), a deal that
had already been rejected by the Progen
board in favor of the Avexa transaction.
The shareholders voted against the
appointment of the Cytopia Shareholder
Group nominees. However, they also voted
out four of the six Progen directors. The
remaining Progen board members are now
focused on rebuilding the company and
implementing the previously announced
A$40 million (US$36 million) voluntary
share buy-back.
The need for sustainable models
The daunting financing environment
raises questions about sustainability — not
just for individual companies struggling
to survive, but also for the Australian
biotech sector as a whole.
As of December 2008, approximately
36% of listed biotech companies had
less than six months of cash on hand, up
from 13% a year earlier. Not surprisingly,
this has led to corporate restructuring
initiatives. Many companies are shelving
112
early-stage R&D programs for at least
the short term to concentrate on their
lead drug candidates and reduce cash
burn. Alchemia initiated a broad program
of cost-reduction measures to maintain
sufficient capital for near-term projects
until revenues from its lead product,
fondaparinux, begin. These steps included
suspending several projects, reducing
headcount by 60% and restructuring the
board of directors. Cytopia took similar
steps by capping staff, trimming expenses
and focusing on later-stage trials.
Circadian Technologies, a long-standing
investor in biotech companies, sold many
of its shareholdings and refocused its
business model to become a developer of
anticancer drugs. The refocus has given
Circadian more than three years’ worth
of cash. Others were not as lucky. Apollo
Life Sciences and Chemeq appointed
administrators to initiate bankruptcy
proceedings, and Diversa Limited exited
the biotech space after acquiring a retail
superannuation (pension) fund.
Of course, the challenging circumstances
will also likely produce an uptick in
acquisitions as companies consolidate to
survive or are taken out by competitors.
Unfortunately, many of these
transactions will happen at distressed
valuations and unattractive terms. In
an ideal world, M&A deals would be
initiated to achieve cost efficiencies and
clinical effectiveness, secure top-notch
management teams and deepen
pipelines, while financing transactions
would happen at optimal pricing when
capital was not necessarily needed.
While the global economic crisis was
created by factors far beyond the control
of Australian biotech companies — it
had its genesis half a world away, in
US subprime mortgage markets — the
Australian sector’s long-standing models
for company formation and financing
have left firms ill-equipped to withstand
these challenges.
The problem begins with how new
start-ups are formed. Most Australian
universities and research institutions have
Beyond borders Global biotechnology report 2009
incentives tied to the number of start-ups
they generate rather than the quality
of those companies. Consequently, the
industry has a large number of companies
formed around a single compound
rather than a complimentary group of
compounds, resulting in a larger group of
companies competing for the same small
pool of funds.
Australia’s biotech funding model — both
private and public investment — has
historically been based on “drip feed”
financing that gives firms small injections
of capital to fund operations for 6–12
months to avoid shareholder dilution.
Unfortunately, this also forces companies
to run very lean operations, which
prolongs product-development times,
makes retaining high-quality management
challenging and — in difficult economic
times — creates a real risk of insolvency.
Australian companies have traditionally
resisted consolidation, whether for
reasons of board/management egos or
shareholder dilution. In addition, they
have often avoided making the difficult
decisions to terminate projects that fail
to meet milestones or have questionable
commercial viability.
These factors have contributed to the
quandary facing many public and private
companies today. More than 52% of
listed companies have a market cap
under A$10 million (US$8.9 million),
and about 36% of companies have less
than six months of cash left. Many of
these companies could have benefited
from consolidation prior to going public,
making them more attractive to investors.
As such, they might have raised venture
capital, giving them access to a wider,
more sophisticated, shareholder base.
There are lessons in all of this that could
help build a strong, sustainable biotech
industry after the downturn is over. The
sector needs to restructure university
incentives and focus on cutting-edge,
readily commercializable technologies.
Companies should not be built around
single products, which should help them
raise adequate funding and make them
more resilient. When needed, companies
must make the tough decisions to
terminate projects that do not show
early commercial viability. Building a
sustainable industry is not about avoiding
shareholder dilution at all costs. It is
about ensuring that the company and the
technology are as well funded as possible
to either reach commercialization quickly
or demonstrate sufficient value to attract
a licensor. It is only through measures
such as these that Australia will develop
a truly successful and sustainable biotech
industry that can provide consistent
financial returns to patient shareholders.
Promising pipelines
The good news on the sustainability
front is that a number of prominent
Australian companies are currently in or
getting ready to launch pivotal Phase III
Will Australian biotech wean itself off the “drip-feed” model?
trials, including Chemgenex, Pharmaxis,
Acrux, Alchemia, Peplin, Clinuvel, Avexa,
Halcygen and QRxPharma. Certainly, the
odds are that not all of these trials will
succeed. The year 2008 brought two
disappointments. Progen announced the
termination of its pivotal Phase III clinical
trial in liver cancer in July 2008, and
Neuren announced the failure of its Phase
III trial of Glypromate to reduce cognitive
impairment in patients undergoing
cardiac surgery with cardiopulmonary
bypass. While such setbacks are inevitable
in the high-risk endeavor that is drug
R&D, if several of the leading companies
in late-stage trials receive positive results
in the months ahead, it could rekindle
investor interest in the sector.
Looking ahead
Small capital
injections
Talent-retention
challenges
Lean
operations
Prolonged
development times
Insolvency risk
in downturns
In the current risk-averse and
capital-constrained financing
environment, the chasm between the
haves and have-nots is widening, and
not everyone will have access to capital.
Early-stage funding will be limited.
Investors will instead continue to fund
lower-risk companies that are on the cusp
of commercialization. Unfortunately,
companies approaching Phase II trials and
in need of significant capital injections
may also find few good options. Many
companies will not survive the downturn,
and we expect significant consolidation to
leave us with fewer companies.
Still, if this proves to be a Darwinian
moment for the industry, companies that
do survive are likely to emerge stronger
on the other side. The Australian biotech
industry has yet to experience sustained
commercial success from a broad group
of profitable firms. If many of the sizeable
cohort of companies in late-stage trials
can successfully bring new products to
market, the sector will gain much-needed
momentum. And if biotech firms and
their investors are willing to develop new
models for company formation, R&D and
financing, the sector could gain not just
strength but sustainability.
113
India year in review
Nurturing growth
India’s biotechnology industry has grown
rapidly in recent years. Patent reforms
have exposed domestic companies
to foreign competition and spurred
innovation. Western companies, attracted
by a large base of skilled manpower and
lower-cost research, have boosted the local
contract-services industry. And supportive
government officials are responding with
reforms to encourage innovation and
streamline regulations. (For more details,
refer to “Changing realities,” our interview
with Dr. M.K. Bhan, Secretary to the
Government of India, Department
of Biotechnology.)
These trends continued over the last year.
Regulators have been quick to anticipate
the huge potential of India’s biotech
industry. In late 2007, the government
approved the National Biotechnology
Development Strategy (NBDS), which
aimed to strengthen the industry’s
human resources and infrastructure while
promoting growth and trade. To further
support the NBDS, the Indian government
has allocated Rs18 billion (US$351
million) for biotech R&D in fiscal year
2009. This forms about 30% of the total
budget allocation for this sector.
Moving toward standardized approvals
Most significant is the development of
far-reaching legislation to standardize
regulatory approvals. Currently, the
authority to approve biotech products
rests with various agencies: the Review
Committee on Genetic Manipulation,
the Genetic Engineering Approval
Committee and the Drugs Controller
General of India (DCGI). Ad hoc
committees are also convened on a
case-by-case basis, resulting in a lack
of uniformity. Consequently, the NBDS
proposed to establish an independent
and autonomous statutory body, the
114
National Biotechnology Regulatory
Authority (NBRA), to provide a consistent
mechanism for regulatory approvals.
In July 2008, India’s Department
of Biotechnology (DBT) drafted new
legislation, the National Biotechnology
Regulatory Act, which would establish
and empower the NBRA. The latter
would have the authority to approve
genetically modified (GM) crops, food,
recombinant biologics such as DNA,
vaccines, recombinant gene therapy
products, and recombinant and
transgenic plasma-derived products such
as clotting factors, veterinary biologics
and industrial products. The DCGI
would still retain the rights to approve
recombinant therapeutic proteins.
While the new legislation would
consolidate biotech regulations and
improve the business environment for
both domestic and global players, the
proposed bill faces stiff opposition,
especially from the anti-GM-crop lobby.
Nevertheless, the reforms are widely
regarded as a breakthrough in advancing
India’s global position in biotech.
Furthermore, the government of India is
planning to upgrade the DBT to the status
of a separate ministry, in recognition of
biotech’s emergence as a thriving sector.
Improved monitoring of clinical trials
India’s growing clinical-trials industry
is also moving toward a streamlined
regulatory set-up. On the agenda are
guidelines for better monitoring of
clinical trials conducted in India. A
newly launched clinical-trials registry
and a plan to introduce e-governance
for clinical trials — including fingerprint
mapping — of volunteers by 2013 is
expected to boost clinical-research
outsourcing and the health sciences
Beyond borders Global biotechnology report 2009
sector in general. The government is
also planning to relax its ban on carrying
out early-stage clinical trials for drugs
developed outside India.
All these steps are likely to attract more
investments in India from the major
pharmaceutical and biotechnology
innovators across the globe. For example,
Merck is planning to initiate clinical trials
of its cervical vaccine Gardasil in India and
has sought approval from the DCGI for this
trial to be conducted in four major Indian
institutes over a period of three years.
Growing clusters and biotech parks
Domestic biotechnology companies
such as Bharat Biotech and Biological
E have announced large investments
in biotechnology parks to be set up in
partnership with state governments
or major corporate conglomerates.
Various state governments, such those
of Karnataka, Orissa, Assam, Kerala and
Andhra Pradesh, have announced new
proposals for setting up biotechnology
parks and Special Economic Zones.
While India’s biotech sector continues to
show strong growth and attract interest
from Western companies, the field of
biotech parks has certainly become
more crowded, and park developers and
prospective tenants will need to focus on
differentiating offerings to stand out in
the crowd. (For more information, see
“A closer look” on the next page.)
Mounting interest and investments in
biotech have given rise to many new
biotech clusters in India. Bangalore has
emerged as a leader in this trend, with
around 200 diverse companies present in
the area. Other cities, including Hyderabad,
Chennai, Pune and Mumbai, also have
materialized as preferred destinations to
set up new biotech facilities.
A closer look
Deals
A number of Indian companies entered deals
with foreign biotech companies. Continuing a
trend seen in recent years, domestic players
were active in grabbing new opportunities
arising out of Western markets, especially
for generic biotechnology products. In
the past year, Indian biotech companies
increasingly focused on investing in
Western companies to strengthen their
research capabilities and develop a
foothold in US and European markets.
India’s largest biotechnology company,
Biocon, and another big player, Panacea,
acquired stakes in Western companies
to strengthen their distribution base in
these markets. By acquiring Etna Biotech,
a subsidiary of Dutch pharmaceutical
company Crucell, India’s Cadila
Pharmaceuticals expects to obtain a
research platform to develop new vaccines
and biologicals. Etna is focused on the
research and development of vaccines
for hepatitis, using the virosome vaccine
technology platform, and for malaria
and HPV, using the measles technology
platform. With the aim of enhancing
its core biotech capabilities, contract
research and manufacturing services
provider Intas Biopharmaceuticals
acquired California-based Biologics
Process Development.
The year also saw several noteworthy
developments on the strategic-alliance
front. In June, US-based Itero
Biopharmaceuticals entered into a
partnership with Biological E concurrent
to raising US$21 million in a first-round
venture financing to develop and
commercialize biopharmaceuticals.
Under the terms of the agreement, Itero
will finance drug development, while
Biological E will be responsible for global
manufacturing of resultant products.
Itero retains commercial rights in the
If you build it, will they come?
Biotech parks have played a prominent role in providing specialized infrastructure
for India’s growing biotech industry. India’s first “knowledge” park, focused primarily
on R&D, was the Hyderabad-based ICICI Knowledge Park, set up in 2000. The
country’s first biotech-specific park, S.P. Biotech Park, was established soon after in
close proximity to ICICI Knowledge Park. Since then, a number of parks have sprung
up across the country, with the aim of attracting biotech companies and boosting
emerging clusters.
The early biotech parks covered a broad swath of activities, servicing companies
across the value chain. But over the last two years, new generations of parks have
tried to differentiate themselves by focusing on niche segments within the biotech
sector, including agricultural biotech, marine biotech and nanobiotechnology. And
while government support was initially instrumental in creating parks, many of the
recent developments are being backed by private infrastructure developers.
With growing competition from a larger group of parks and the onset of a global
economic downturn, these facilities could face more challenges in attracting the
right kinds of tenants. As a result, it is even more important for the parks to create
differentiated offerings, as some have begun to do, through measures such as:
• Arrangements with investment banks for seed and development funding
• Stepped rentals that grow with the maturity of the enterprise
• Arrangements with equipment manufacturers to provide pooled equipment at
affordable costs
• Collaborations with universities for internships
• Focusing on building all elements of the value chain, even if it means bringing in
key anchor tenants across the value chain at differentiated rates
As Western companies consider setting up Indian operations to cut costs, India’s
parks could benefit. But as they select the right parks for their needs, companies
will need to consider a number of factors, including:
• The amount of area available for future growth
• The existence of centers of learning, universities and research institutions
• Access to clients and customers and proximity to international airports
• Proximity to regulatory agencies and ease of obtaining regulatory clearances,
especially from an environmental perspective
• The existence of other stakeholders in the value chain
• Whether local governing institutions are business-friendly
• The vibrancy and responsiveness of local industry associations
If sales will be predominantly exports, companies should also consider setting up
facilities in tax-advantaged Special Economic Zones.
115
Indian biotechnology venture and private-equity funding, 2006–08
Amount raised (US$m)
Number of deals
US$m
Number of deals
10
140
9
120
8
100
7
6
80
5
60
4
3
40
2
So far, it is not clear what impact the
global financial crisis will have on the
Indian biotech sector. In the short run at
least, many Indian companies could see
new opportunities as Western firms seek
to lower costs by shifting operations and
activities to emerging markets. Indian
companies, which have been vigorously
acquiring Western firms, are likely to
actively seek undervalued assets in
the current environment. Many Indian
firms also see opportunities in the
healthcare-reform debate in the United
States, particularly from the prospect of
increased coverage and the emergence of
a market for biosimilars.
20
1
0
0
2006
2007
2008
Source: Ernst & Young
US, Europe and Japan, while Biological
E will have rights in all other markets.
Biological E also signed a development
agreement with US-based Heparinex
and Choncept to produce heparin- and
chondroitin-based compounds.
India’s Jubiliant Biosys, a subsidiary of
Jubiliant Organosys, inked a deal with
biotechnology giant Amgen to carry out
preclinical studies of drugs discovered
by Amgen. Amgen will take over the
compounds once they reach late-stage
preclinical and clinical development, and
will retain marketing rights. Genzyme
Corporation formed an alliance with two
Indian organizations, Advinus Therapeutics
and the International Centre for Genetic
Engineering and Biotechnology, to develop
antimalarial medicines.
Financing
India does not have a pool of venture
capital sufficient for the needs of its
relatively new, rapidly growing biotech
industry. In recent years, the government
has stepped in with a number of
funding programs to foster R&D. (See
116
the interview with Dr. M.K. Bhan for a
discussion of some of these programs).
Encouragingly, private-sector funding
from venture capitalists, private equity
and banks has also been increasing in
recent years. In 2008, the Indian industry
raised over US$120 million, up sharply
from the prior year. Sources of funding
included not only Indian government
and private funds and banks but also a
number of US venture funds which have
made inroads into the Indian market. As
biotech companies around the world reel
from the impact of the financial crisis,
time will tell whether these trends will be
sustained in 2009.
Outlook: poised for growth?
India’s biotech sector remains poised
for growth, spurred by increased
competition, a focus on developing
innovative drugs and the prospect of
growing markets at home and in the
West. Governmental efforts to reform the
regulatory regime and provide supportive
infrastructure and funding should help
address some of the gaps and challenges
confronting the sector.
Beyond borders Global biotechnology report 2009
There are certainly risks. In the immediate
term, there is the issue of exchange-rate
risk. The rupee devalued significantly in
2008 — good news for Western companies
looking to outsource activities to India,
but making Indian companies’ efforts to
expand overseas more costly. And while
the economic slowdown in the West
may create new opportunities for Indian
companies in the immediate future,
things could conceivably change if the
financial crisis devolves into a prolonged
and deep recession. For instance, the
shelving of a large number of drugs in
development because Western companies
are focusing on their most important
pipeline candidates — or worse, going
out of business — could hurt clinical-trials
work in India. And job losses and slower
income growth around the world could
mean reduced opportunities for Indian
companies looking to tap Western markets
as well as a change in Western companies’
perceptions of the growth potential of the
Indian market.
For the time being, though, these
second- and third-order effects are
relatively distant. While Indian firms will
need to monitor these developments and
include comprehensive risk assessments
in their plans and strategies, many
companies are gearing for increased
activity in the months ahead.
China year in review
On the road to innovation
While the Chinese economy has been
impacted by the global financial crisis,
the prognosis for China’s biotech industry
may not be as grim as in Western
markets. In the current environment,
China could be an increasingly viable
development partner for Western firms
that are looking to reduce budgets and
eliminate fixed costs. Meanwhile, as
the Chinese industry tries to increase
its presence in the development of
innovative products, it is increasingly
turning to deals and benefiting from
government attempts to reform.
biotechs). Despite increased wages in
the larger commercial cities, there are
significant cost advantages to conducting
preclinical development and clinical trials
in China, which should drive growth in
outsourcing to the multitude of Chinese
contract research organizations (CROs)
and other service providers. China’s
increased openness to global business,
an enlarging pool of qualified researchers
and clinicians, and improvements to
intellectual property and product safety
regimes may further help China’s biotech
during the current economic turmoil.
The global financial crisis
Financing
China was not spared the impact of the
chain of events that began in the US
financial markets and rippled to every
corner of the globe. The ChinaBio Stock
Index, which is comprised of 15 US-listed
biopharmaceutical companies, declined
57% during 2008, after rising 70% in 2007.
The IPO market slowed significantly as
well, both for domestic new issues and for
listings in the West.
The venture-capital community investing
in China is still relatively small, and sums
raised are modest compared to those in
the more mature markets of the West.
Investments in 2008 were made by a
handful of local firms as well as established
Western players, and recipients included
Despite the financial market turmoil,
China has cause to remain optimistic.
Stimulus activities on the part of the
Chinese government, a key investor in
the life sciences industry, could give
biotech and pharmaceutical concerns
enough of a boost to sustain growth. A
burgeoning middle class with greater
access to medical care is also driving
revenue growth for domestic and
multinational companies.
China is also positioned to be part of the
solution for companies in the West that
wish to continue to innovate and advance
their pipelines but must trim costs
either due to expected revenue declines
(many pharmaceutical companies)
or to extend capital resources (many
a mix of CROs, active pharmaceutical
ingredient (API) manufacturers, distribution
companies, research-tool companies,
traditional Chinese medicine (TCM) firms,
specialty-pharmaceutical companies and
novel-drug developers. Investors active
in China continue to favor companies
with existing or very near-term revenue
streams. However, as the industry matures,
the expectation is that earlier-stage
innovative technologies will draw interest.
Companies that raised venture capital in
2008 included NovaMed Pharmaceuticals,
which secured US$14 million from Atlas
Ventures and Fidelity Asia Ventures.
NovaMed, based in Shanghai, provides a
range of services from clinical development
through distribution. Also attracting capital
from Western investors was API supplier
Futaste Pharmaceutical, which raised funds
from 3i Group. Taking the international
angle one step further was ProGenTech,
which is based in both Emeryville,
California, and Shanghai. The company
In 2008, overseas-listed Chinese biotech companies fell along with broader market indices
Nasdaq
Hang Seng
SSE Composite
ChinaBio Today Index
+20%
0%
-20%
-40%
-60%
-80%
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Source: Ernst & Young, finance.yahoo.com and ChinaBio Today
117
secured US$21 million to further the
development of its automated nucleic acid
purification system from US-based Bay City
Capital and China-based DT Capital.
While several Chinese healthcare
companies have successfully completed
IPOs in the West in recent years, there
were no new market debuts outside China
(including Hong Kong) in 2008. Mirroring
venture investment trends, the companies
seeking to raise funds through public
offerings are more mature than their
IPO peers in the West, with significant
infrastructure and product sales.
However, there were still a few IPOs on
Chinese exchanges, including Jiangsu
Nhwa Pharmaceutical and Bloomage
BioTechnology Corporation. Jiangsu Nhwa
completed its IPO in July 2008, before
the worst of the market turmoil, raising
RMB 178 million (USD$25 million) on
the Shanghai exchange. The company
develops and distributes drugs for central
nervous system disorders. Bloomage
BioTechnology, which operates in China
but is incorporated in the Cayman Islands,
manufactures hyaluronic acid used as
an ingredient in various pharmaceutical
and cosmetic products. The company
successfully completed its IPO in Hong
Kong, raising HK$78 million (US$10
million) in October.
In the absence of an IPO market, a reverse
merger into a publicly traded company has
become a mainstream strategy in the West
in recent years. Kun Run Biotechnology
followed a similar strategy in its November
2008 merger into Nevada-based
Aspen Racing Stables. Kun Run, which
develops and sells polypeptide drugs,
now has access to US investors through
an over-the-counter listing.
It remains to be seen whether the
China market will sustain new issues in
2009 and when, if ever, a market for
innovative precommercial companies
will emerge. In the meantime, such
companies are wise to seek alternate
sources of revenue through collaboration
or service arrangements.
118
Deals and infrastructure investments
Chinese firms continued to seek deals,
both with other domestic firms as well as
with companies beyond Chinese borders.
Much of the activity occurred in the first
half of the year, prior to the full impact of
the financial crisis.
WuXi PharmaTech, which went public
in the US in 2007, acquired AppTec
Laboratory Services for US$151 million.
AppTec is a contract testing, R&D and
biologics services company based in St.
Paul, Minnesota. WuXi, which announced
plans to seek other acquisition targets,
had an active year of deal-making. The
company also entered into a collaboration
agreement with AstraZeneca, providing
the pharmaceutical giant with compounds
for specific products.
Simcere Pharmaceutical Corp., another
2007 IPO, agreed to acquire a 70% stake
in Wuhu Zhong Ren Pharmaceutical
Co., a producer of branded cancer
drugs, for US$9.3 million. In October,
American Oriental Bioengineering
(AOBO) completed the acquisition of
pharmaceutical wholesaler and distributor
Nuo Hua Investment Co. for US$39.5
million. AOBO also completed the
acquisition of R&D firm GuangXi HuiKe
R&D Co. for US$13.6 million.
Western companies continued to invest
in infrastructure in China during 2008.
Genzyme committed to build a new R&D
center in Beijing, and Charles River Labs
announced that it would set up a new
good-laboratory-practice preclinical
screening facility in Shanghai. US-based
Crown Bioscience announced plans
to expand its CRO presence in China,
and Toronto’s Microbix Biosystems
announced a joint venture with the
Hunan provincial government to build
an influenza vaccine facility.
Product safety
After a steady stream of reforms geared
at improving product safety in China,
the Chinese government continued its
focus on product-safety issues in 2008.
Beyond borders Global biotechnology report 2009
In March, it announced that the State Food
and Drug Administration (SFDA) would be
moved back under the Ministry of Health to
improve overall efficiency and oversight.
Despite these reform measures, two
high-profile scandals arose. One
issue that gained international media
attention was tainted infant formula that
reportedly stemmed from an industrial
chemical used to fool quality-control
tests that measure milk protein. The
other notable issue involved a tainted
supply of heparin, a widely prescribed
anticoagulant distributed by Baxter
International, which resulted in
numerous adverse reactions and deaths.
The heparin situation highlighted the
need for multinational companies to
manage the increased risk of a global
supply chain and the need for global
regulatory cooperation. In response
to the heparin incident, the US FDA
announced the opening of China branch
offices. The China branches are tasked
with certifying third-party inspectors
and working with Chinese agencies to
inspect US-bound products.
Intellectual property
Critical to the development of
innovative products is a strong
intellectual-property (IP) regime
that recognizes and protects novel
discoveries. China’s “third amendment”
to its IP law, approved in December
2008, institutes several reforms that
are slated to go into effect in October
2009. Under the amendment, in order
to file a patent, an idea must be not
only new to China but new globally as
well. The amendment also contains a
provision concerning genetic material,
requiring that applicants who submit
inventions that rely on genetic
resources must disclose their direct
sources and prove that the material was
lawfully obtained. For the moment, the
significance of this change is unknown;
its implications will depend largely on
how the law works in practice and how it
is interpreted over time.
Outlook
Despite trying economic times,
prospects for China’s biotech industry
appear to remain positive. The Chinese
government has made the development
of scientific industries a major priority,
and is investing heavily. By 2020, the
government plans to invest 2.5% of GDP
in R&D, up from 1.3% in 2005.
The country is also implementing a series
of healthcare reforms. This includes
building more health clinics in rural
areas, a zero markup policy on drugs
prescribed by government hospitals and
clinics and a goal of providing universal
healthcare by 2020. Universal healthcare
for a population as large as China’s would
significantly expand the Chinese market,
benefiting not only the fledgling Chinese
biotech industry but multinationals as well.
More and more Chinese citizens are
gaining access to higher education.
In recent years, China’s population
of researchers has increased to
926,000 — placing it second behind the
US. Every year, 40,000 Chinese students
receive doctorates. In addition, the “sea
turtles” — Chinese-born nationals who
spent their early careers in Western
countries and are now returning
with advanced degrees and relevant
industry experience — are boosting
entrepreneurship and innovation.
As Western companies grow more
comfortable with offshore research and
clinical development, China continues
to enhance its infrastructure and
the education and development of a
skilled workforce. The focus on moving
beyond generic drugs and services to
developing innovative new products will
need time to pay dividends, but given
China’s infrastructural and educational
commitment, and its market size, this
transition could be significant in realizing
China’s potential to introduce treatments
for local, as well as global, medical needs.
119
Japan year in review
Seeking investors, seeking innovation
While Japan is one of the world’s leading
industrial powers, its biotechnology
industry has long lagged behind its
peers in the West. Traditionally, much
of the biotech sector has been housed
within the walls of large pharmaceutical,
chemical, brewery and food companies,
and despite recent efforts to encourage
innovation, the country has had little
success generating large numbers of
start-ups or growing new commercialstage companies.
One reason for this is Japan’s regulatory
and legal framework, which is often
faulted for failing to encourage biotech
innovation. To its credit, the Japanese
government has been taking steps in
recent years to improve this and promote
the development of a globally competitive
drug-development industry. In 2004,
the government implemented extensive
reforms in its university system, including
rewriting intellectual property laws to
give universities increased incentives for
commercializing their research. Related
to these reforms, the government made
start-up formation a key goal of its
biotechnology strategies. That same year,
three government organizations were
merged to create a new regulatory body,
the Pharmaceuticals and Medical Devices
Agency (PMDA), which is charged with
streamlining, accelerating and increasing
the transparency of the country’s drug
approval process.
Financing
A major reason for the lack of a vibrant
community of Japanese biotech start-ups
is the lack of venture capital. It’s no
secret that venture capitalists (VCs) have
played a vital role in the development of
successful biotech clusters in the West.
VCs provide not just financial capital, but
120
also valuable strategic and management
guidance based on years of experience
operating and building similar companies.
And while public investment has ebbed
and flowed over the years, VCs have
generally remained steady investors in
the biotech sector.
for IPOs shrank dramatically — data from
the Venture Enterprise Center, created by
Japan’s Ministry of Economy, Trade and
Industry (METI), shows that the number
of companies that went public in 2008
declined by 60% relative to 2007, while
the amount raised fell by more than 70%.
Japanese VCs have not played a similar
role. Unlike VCs in the United States
and Europe, Japanese venture investors
tend to be far more hands-off. Many
Japanese VCs tend to be subsidiaries of
banks or security companies and most
do not focus on biotech. In addition,
the amount of capital provided is very
small compared to venture investments
in the West. According to JETRO (Japan
External Trade Organization), the average
“A Round” biotech investment in Japan
is about US$100,000–500,000 (¥10-50
million), a small fraction of the size of a
similar financing in the West, and very
small relative to the cost of bringing
a new product to market. With less
access to the capital required for truly
innovative R&D, Japanese start-ups
have often gravitated to activities
that are less capital-intensive and
lower-risk — but also offer less potential
upside. In addition, raising money in such
small tranches makes it difficult to build
the multi-disciplinary teams needed for
successful discovery and development.
Despite these conditions, there were
three biotech IPOs in 2008 — all of them
in the first four months of the year.
NanoCarrier, a company developing
technologies to deliver drugs directly to
cells using nanoparticles called micelles,
went public on the Mothers Market in
March. The company’s offering priced
at ¥20,000 (US$200), at the bottom
of its range, and raised ¥600 million
(US$6 million). Later that month, Carna
Biosciences listed on the Jasdaq’s NEO
market in a transaction that raised
¥957 million (US$9.57 million). In April,
R-Tech Ueno listed on Osaka’s Hercules
market for total proceeds of ¥670 million
(US$6.7 million).
In 2008, Japanese capital markets, like
those in most parts of the world, were
hit by the tsunami of the global financial
crisis. The world’s second-largest economy
shrank by 2.9% in 2008, and is forecasted
to drop 4% in 2009 — its worst quarterly
contraction in more than three decades,
exceeding even the stagnation seen
during the worst of Japan’s infamous “lost
decade.” The Nikkei 225 Index lost 42%,
its worst performance ever. The market
Beyond borders Global biotechnology report 2009
Deals
Japan’s big pharmaceutical companies
face pipeline productivity pressures
similar to those faced by pharma
companies in the West, and they have
responded with aggressive deal-making.
In 2005, the industry underwent a
wave of large-company mergers, akin
to the mega-merger activity currently
occurring in the West. Since then,
Japan’s pharma companies have been
actively purchasing innovative assets
to boost their pipelines and product
offerings, frequently reaching beyond
their borders to do so.
These trends continued in 2008. The
year kicked off with Eisai’s acquisition of
US-based MGI Pharma for US$3.9 billion
(¥390 billion). The deal will serve to
strengthen Eisai’s presence in oncology,
which is one of three major areas of focus
for the company.
In February, Takeda Pharmaceuticals
announced an exclusive collaboration
under which Takeda will develop and
commercialize for the Japanese market
up to 13 experimental therapies from
Amgen’s pipeline in a deal that may be
worth over US$1 billion. In addition to
the Japanese rights on these molecules,
Takeda gained worldwide rights to
another product by becoming Amgen’s
worldwide partner for motesanib
diphosphate (AMG 706). In addition to
up-front and milestone payments, Takeda
agreed to pay 60% of ongoing clinical
development expenses outside Japan
for AMG 706 and split profits outside
Japan with Amgen. The deal helps
Amgen realize value from pipeline assets
that are lower strategic priorities while
helping fill Takeda’s pipeline with early
to mid-stage clinical-stage candidates
in the areas of oncology, inflammation
and pain. The deal also gave Takeda
control of Amgen’s Japanese subsidiary,
Amgen KK, which was relaunched as
Takeda Bio Development Center. In
total, the deal has a potential value of
more than US$1.1 billion (¥110 billion),
with a whopping US$300 million (¥30
billion) exchanging hands in up-front
payments — among the largest up-fronts
of the year.
Takeda also entered a deal with US-based
Alnylam Pharmaceuticals that gave it
nonexclusive access to Alnylam’s platform.
The transaction, which has a potential
value of up to US$1 billion (¥100 billion),
included an up-front payment of US$100
million (¥100 billion).
Daiichi Sankyo aggressively pursued
expansion of its global footprint with
two major deals. First, in May, Daiichi
announced its purchase of a privately held
German biotech, U3 Pharma, for €150
million (US$234 million, ¥23.5 billion).
The purchase gives Daiichi a pipeline of
novel antibody therapeutics focused on
various cancers. In June, the Japanese
firm increased its ownership stake in
India’s largest generic pharmaceutical
company, Ranbaxy Laboratories, to nearly
64%. The deal expands Daiichi’s global
presence in the generics market. Ranbaxy
continues to operate independently, with
the CEO of Daiichi joining the company’s
board of directors.
A fourth Japanese pharma, Astellas,
was also active on the deals front. The
company signed deals with US-based
CoMentis for up to US$760 million
(¥76 billion) and with Maxygen for
up to US$180 million (¥18 billion).
In early 2009, the company made a
hostile takeover bid for US-based CV
Therapeutics, but was ultimately bested
by US-based Gilead.
Regulatory reforms
The Japanese government continued
efforts to reform its regulatory structure
in order to increase the competitiveness
of the Japanese drug industry. To speed
up drug approvals, which currently lag
those in other parts of the world, the
PMDA increased staff levels from 341
employees (206 of which were reviewers)
in fiscal year 2007 to 426 employees
(277 reviewers) by the end of fiscal year
2008 (April).
of subjects in clinical trials conducted
outside Japan have hampered companies’
ability to use data from such trials when
seeking drug approvals in Japan. The
PMDA has attempted to change this
situation by formalizing the requirements
for acceptance of clinical trial data and
stating that multinational trials do not
have any requirements regarding the
minimum number of Japanese subjects.
To increase efficiencies and facilitate
information sharing with major foreign
regulatory agencies, the PMDA created
the Office of International Programs
(OIP) in November. The OIP is tasked with
increasing Japan’s collaboration with
other countries on clinical trials.
Outlook
Japan’s biotech and pharma companies
continue to wrestle with challenges they
have faced for some time, but the global
financial crisis has added pressure.
For biotech companies operating in an
environment where capital has been less
accessible than in the West, the search
for investors could become still more
difficult as capital markets reel under the
weight of the crisis. For companies of all
sizes, the challenge will be to focus on
developing innovative products. Japan’s
big pharma companies have been looking
for innovation overseas in recent years.
The financial crisis, which has led the
Japanese yen to strengthen against
the US dollar and has resulted in the
devaluation of assets in the West, could
bring new buying opportunities — and
increased cross-border deal activity — for
Japan’s big pharma companies.
The agency also reformed regulations
covering clinical trials. In the past,
restrictions regarding the ethnicity
121
New Zealand year in review
Strong research and creative approaches
While New Zealand is considered an
emerging market in the biotechnology
industry, it is maturing in terms of its
ability to work within its constraints.
New Zealand-based companies are
embracing creative approaches to
overcome traditional obstacles:
geographic isolation, limited sources of
funding and a small domestic market.
Venture funding: a perfect storm
A significant challenge facing the New
Zealand biotech industry is access to
capital. The sector has not received
funding from local public equity
markets in the past, and has instead
had to rely primarily on venture
capital to fund R&D. According to data
collected by Ernst & Young and the New
Zealand Venture Capital Association,
the biotechnology/health sciences
segment has attracted an impressive
52% of total venture-capital investment
over the last five years.
Unfortunately, venture funding fell
sharply in 2008, due to the confluence
of two setbacks. The first of these, not
surprisingly, is the global financial crisis,
which has had a dampening effect on
biotech venture capital in most parts of
the world. The crisis has made venture
capitalists (VCs) more risk-averse, forced
venture-capital firms to allocate more
funds to sustaining existing portfolio
companies and made it more challenging
to close new funds.
In New Zealand, the financial crisis hit
precisely when VCs were going out
to raise new capital — an unfortunate
coincidence that resulted from the funds’
origins. New Zealand’s venture funds
were mostly created several years ago,
spurred by a government program that
provided a dollar-for-dollar public-money
122
A closer look
Attracting new investment: New Zealand’s new LP structure
As of May 2008, New Zealand has a
limited-partnership (LP) regime. The
LP regime was introduced following
lobbying from the venture-capital
industry, and has been modeled on the
Delaware Limited Liability Partnership
structure that is familiar to offshore
investors. The New Zealand LP provides
for a separate legal identity for the
partnership, limited-liability status
for limited partners and minimal
public-disclosure requirements.
The tax treatment is similar to that
in other limited-partnership regimes:
partners are subject to tax or can
access losses from the partnership
in proportion to their capital
contributions. There are, however,
limitations on the levels of losses
that can be utilized by New Zealand
limited partners for tax purposes,
and these are based on the level of
the limited partners’ funds at stake
in the LP.
match. Since the funds were all created
around the same time, they have reached
the end of first vintage simultaneously.
They have been unable to demonstrate
significant returns for their limited
partners, which is further impeding
their fundraising, particularly in the
current environment.
As a result, there was a 75% reduction
in venture capital raised by the biotech
sector in 2008. While the number of
deals remained roughly consistent with
prior years, there was a heavy skewing
toward seed rounds — which represented
a staggering 85% of the deals done
Beyond borders Global biotechnology report 2009
For overseas limited partners, there
may be no New Zealand tax obligations
arising from an investment in an LP,
subject to the extent of business
activities of the LP. This, together with
the absence of a capital-gains tax regime
in New Zealand, means the LP is an
attractive vehicle for overseas investors.
The LP regime also allows for more
tax-effective structures for angel
investors than were previously
available, with angels being able to
access tax losses arising from their
investments in LPs.
Since the introduction of the LP regime,
we have already seen spinoffs from
established biotech companies looking
to make use of the LP structure. In
addition, a number of ventures have
established new LPs as an investment
vehicle as well as a means of preserving
some benefit from historic tax losses
that might be forfeited because of
shareholder dilution.
during the year — leading to a decline
in overall funding amounts. Funding
continues to be challenging, and this is
forcing New Zealand biotech companies
to increasingly look offshore for capital.
Since companies raising seed capital will
need follow-on rounds to be sustainable,
the lack of new venture funds could be an
ongoing challenge.
Government support
The biotechnology sector has been an
economic-development focus for the
New Zealand government for some time.
In November 2008, the newly elected
National-party government abolished
the recently introduced R&D tax-credit
regime. The credit would likely have
helped New Zealand biotech companies,
since firms in a tax-loss situation would
have been eligible for the incentive.
The new government was concerned
that the credit would reward companies
for their existing activities rather than
spur an increase in new R&D. To this end,
the government is calling for industry
to develop targeted solutions to boost
R&D investment, and companies are
actively engaged in a dialog to develop
an alternative. Developing a solution that
would provide appropriate incentives for
R&D is critical. Developing innovative
drugs and technologies is an expensive,
R&D-heavy undertaking, and companies
will be challenged to finance these
activities at a time when funding sources
are strained. Interestingly, because of
the timing of its repeal, companies will
still be able to claim the R&D credit in
the 2008–09 income year — potentially
providing some temporary relief in the
current market environment.
For instance, KODE has formed R&D
partnerships with firms such as CSL,
Immucor and MediCult. KODE’s platform
is a novel range of synthetic molecules
which can harmlessly and accurately
“paint” functional molecules onto
the surface of cells. Similarly, Living
Cell Technology (LCT), a New Zealand
company listed on the Australian
Securities Exchange, has licensed its
patented encapsulation technology
to a noncompeting partner to help
fund ongoing trials. LCT is perfecting
a treatment for a range of conditions
including diabetes, stroke and
Huntington’s disease.
Emerging local companies such as
LanzaTech and KODE Biotech have also
utilized the new limited-partnership regime
to facilitate investment. (See “A closer look”
on the previous page for more details.)
Food technology company EnCoate’s
approach is to identify partners in
the food industry with which it will
codevelop commercial applications of
its proprietary bacteria-stabilization
technology. This will involve an
ongoing process of experimentation
that is intended to develop EnCoate’s
technology to the point where it can be
licensed for production — an approach
that the company thinks will accelerate
the commercialization pathway. EnCoate
is developing its technology in the fields
of probiotics, biocontrol agents and
seed coatings.
Outlook
New Zealand companies are betting that
these creative approaches will make
them more competitive by bringing in
revenues to fund R&D, accelerating
commercialization and providing access
to European and US markets. If they
are successful, this could in turn spark
increased interest from international
investors. It is encouraging that new
legislation has made it easier for offshore
investors to invest in New Zealand.
Creative approaches
While the New Zealand market is not an
efficient market for commercialization,
there is a wealth of intellectual property
in the country’s research institutes, much
of which may not currently be noticed
by foreign companies. At the same
time, the relative paucity of domestic
funding is driving New Zealand firms to
seek other sources of capital to achieve
sustainability. In response, some domestic
firms are outlicensing their technologies
at an early stage to larger companies
through noncompetitive partnerships,
which provides New Zealand firms with
funding and gives their partners early
access to new technologies.
123
Singapore year in review
Looking beyond borders
Singapore has had success attracting
investment from Western biotechnology
and pharmaceutical companies and is
a destination of choice in the region
for manufacturing operations and
headquarters because of its access to
talent, a modern healthcare system,
sophisticated infrastructure and strong
regulatory framework. Like other Asian
economies, the country remains optimistic
that cost-cutting in Western companies
could create further outsourcing
opportunities. However, with the growth
of other biotech outsourcing hubs in Asia,
Singapore is also focused on innovation.
Inbound investment
In October 2008, Eli Lilly opened
the city-state’s largest drug research
facility. The company plans to spend
S$150 million (US$100 million) on
the center over the next five years. In
January 2009, Abbott Pharmaceuticals
opened an R&D facility — its first in Asia.
Schering-Plough expanded its presence
with a new multimillion-dollar R&D
facility in February 2009. At the time,
the company, which has since announced
plans to merge with Merck & Co.,
indicated it was also planning to open a
Singapore-based translational medicine
unit in the future. Finally, Quintiles,
a global leader in outsourced clinical
124
research services, announced plans to
expand its presence.
On the biotechnology front, seven new
biologics facilities are expected to open in
2009, joining those opened in recent years
by Genentech, Codexis, Novartis, Qiagen,
GlaxoSmithKline, Lonza and others.
Local financing
Singapore has established itself as a
biotech center through significant and
strategic government investment over
many years. This was evident in 2008,
when the government announced the
launch of a S$180 million (US$120
million) research center to be shared by
the National University Hospital and the
National University of Singapore. The
facility is modeled after several that exist
in the United States that house research
institutions near universities and
hospitals to foster collaboration.
But given the significant sums necessary
to bring a biotech product candidate
from discovery to the market, the real
lifeblood of an entrepreneurial and
innovative biotech cluster is a vibrant (and
experienced) venture capital community.
Singapore’s local venture community is
still quite small, so that companies must
look overseas for investments. Currently
these companies also have little access to
additional capital through IPOs on a local
exchange. This situation is a significant
constraint for the goal of growing an
innovation-based industry.
However, local companies did manage
to secure investment from funds based
overseas in 2008. Moleac raised US$3.5
million in a first round in April from
Hunza Ventures and several private Asian
and European investors. The company
is currently developing NeuroAid, a
traditional Chinese medicine marketed
in more than 30 countries, for use in the
recovery of stroke patients.
Beyond borders Global biotechnology report 2009
In October, S*BIO received US$26 million
in venture capital funding to conduct
human trials of two potential cancer drugs.
The financing round was led by Aravis, a
European venture firm with operations
in Singapore. The company continued to
make news on several fronts. In May, it
received orphan-drug status from the US
Food and Drug Administration for SB1518,
which is intended to treat a group of rare
blood diseases known as myeloproliferative
disorders (MPD). In January 2009,
S*BIO entered into a license and option
agreement with Onyx Pharmaceuticals for
SB1518 and a second product, SB1578.
Under the terms of the agreement, S*BIO
is eligible to receive up to US$550 million,
including an up-front payment and equity
purchase totaling US$25 million, plus
royalties. S*BIO will perform all the clinical
development activities for SB1518 and
preclinical to clinical development activities
for SB1578 during the option period.
Onyx can elect to exercise its options for
the products at predetermined stages
of development. In another example of
carving up geographic rights to the benefit
of both partners, the Onyx option converts
into an exclusive license for development
and commercialization in all indications in
the US, Canada and Europe, while S*BIO
retains rights to develop and commercialize
the products in the rest of the world.
Outlook
By necessity, the Singapore economy has
been built on trading and collaborating
with others. It has been no different
for its biotech industry, which has
been very successful attracting capital
and talent from around the world. To
succeed in building companies focused
on discovering and developing novel
products, however, local companies
will need continued creativity to access
capital and expertise in the current
economic environment.
Acknowledgements
Project leadership
Glen Giovannetti, Ernst & Young’s Global
Biotechnology Leader, provided overall
strategic vision for this project and brought
his years of experience to the analysis of
industry trends. Glen’s perspective and
insights helped define many of the themes
we explore in the book. Beyond leadership,
Glen brought a hands-on approach,
writing articles and helping to compile and
analyze data.
Gautam Jaggi, Managing Editor of the
publication, directed the project, wrote
or edited all of the articles and managed
the data collection and analysis for the
Canadian and Asia-Pacific sections.
Gautam developed several new themes
and elements for this year’s book,
including the global introduction, and had
responsibility for the entire content and
the quality of the publication.
Siegfried Bialojan, Germany Biotechnology
Leader and Julia Schueler, Editor of the
European section, led and managed the
development of the European section.
Their high-quality analysis of European
data and deep understanding of the
science and business trends in Europe were
invaluable in producing this book.
Strategic direction
Special thanks to Scott Morrison,
Jürg Zürcher and Chris Nolet, who
continued to play a key role in the
development of this publication, by
providing invaluable strategic insights
based on their long experience and a feel
for the pulse of the industry.
Data analysis
Julia Schueler led the collection and
analysis of US and European data,
assisted by Natalie Prib, Nadine
Rauh, Anne Scholz and Ulrike Trauth.
Nina Hahn, Eric Duhaime and
Jimmy Zhong provided assistance with
data collection and analysis.
A number of colleagues were instrumental
in helping collect private company
financial data, compile company lists
and conduct follow-ups with survey
respondents, including Lisa Almen
and Christian Trautner (Denmark),
Anne-Charlotte Bernard (France),
Warren Singh and Ruth Flynn (Ireland),
Keren Dahan (Israel), Enrico Ronchi and
Valentina Urbano (Italy), Christine Aardal
and Hege Urdahl (Norway), Jacob Hellman
(Sweden) and Jörg Schmidt (Switzerland).
The collection of private company data
was based on a survey implemented by
Ulrike Trauth.
Eric Duhaime, Amir Hakakha,
Jason Hillenbach, Susan Jones,
Kim Medland, Mike Spencer and
Richard Yeghiayan helped with fact
checking and quality review of numbers
throughout the publication.
We wish to thank Matthew Chervenak of
General Biologic for providing data on China.
Numerous contributors helped draft and
write “A closer look” text boxes, including
Bruce Bouchard, David Johnson,
Glen Giovannetti, John Babitt, Ron Xavier,
Michael Vukcevic and Utkarsh Palnitkar.
Russ Colton brought his incomparable
skills as a copy editor and proofreader to
this project. His patience, hard work and
careful attention to detail make this book
a richer product. Lisa Pease proofread the
report in layout.
Design and layout
This publication would not look the way it
does without the creativity and hard work
of John Fogarty and Heather McKinley.
As the lead designer, John was responsible
for managing and implementing the
publication’s design and layout. As design
consultant, Heather provided creative
advice and designed the special two-page
spreads that grace this year’s report.
Oliver Voigt helped with layout and related
marketing materials.
Writing and editing assistance
Andrew Jones led the writing and
analysis for the European deals,
financings and products articles. Andrew
contributed the “A closer look” text box
on biosimilars, and this year’s report
has benefited from his knowledge of
European biotechnology trends.
Sue Carrington led the writing of the US
public policy article, and Scott Sarazen
led on the US products article. Country
overview articles were drafted and written
by professionals in numerous countries,
including Winna Brown (Australia),
Rod Budd (Canada), Hitesh Sharma
(India), Utkarsh Palnitkar (India),
Priya Pradeep (India), Gaurav Narang
(India), Mike Spencer (Japan), Jon Hooper
(New Zealand) and Michael Vukcevic (New
Zealand). Stephanie Nickerson helped edit
some of the guest articles. Heath McKay
provided research and writing assistance.
Rama Ramaswami helped edit the
India article.
Marketing and support
Public relations efforts related to the
book and its launch were led by Mike
Spencer along with Samantha Sims,
Morten Hussmann and Michelle
Wolf. The PR firm of Feinstein Kean
Healthcare served as an integral
partner, led by Dan Quinn, Greg Kelley
and Shelley Jazowski. Gautam Jaggi
conceptualized and composed the copy for
advertisements for the book.
125
Data exhibit index
126
This is neither the industry’s first IPO drought, nor (so far) its longest
2
Enlight corporate structure
9
The year in financing: US, Europe and Canada 2007 and 2008
24
Global biotechnology at a glance in 2008
25
Growth in global biotechnology, 2007-08
27
In 2008, the biotech industry outperformed the market …
30
… but smaller companies fared considerably worse
30
Ernst & Young survival index
31
Quarterly breakdown of Americas biotechnology financings
31
Selected 2008 US biotechnology public company financial
highlights by geographic area
32
US biotechnology at a glance
34
Genentech has accounted for an increasingly large share of US industry revenues …
35
… and the industry’s profitability will likely be very different
after Genentech’s acquisition
35
The number of biotechs trading below cash ballooned …
36
… as more and more companies restructure to survive
36
US yearly biotechnology financings
48
US IPOs essentially dried up in 2008 ...
49
… and follow-on offerings disappeared in the fourth quarter ...
49
… but venture capital has not declined dramatically
49
Capital raised by leading US regions, 2008
50
Increased selectivity: venture investors gravitated toward later rounds in Q4 2008
51
The potential value of strategic alliances set a new record
53
Adjusted for megadeals, M&As reached new highs in 2008
54
Selected 2008 US biotech M&As
54
Lowered expectations? 2008 US public company acquisition premiums
55
Selected 2008 US biotech alliances
57
Funding for scientific research in the stimulus package
61
Selected US product approvals, 2008
64
Canadian biotechnology at a glance 2008
66
In 2008, the Canadian biotech industry underperformed the market ...
67
... while Biovail did better than the rest of the industry
67
Canadian yearly biotechnology financings
68
Capital raised by Canadian province, 2008
68
Capital raised by leading Canadian biotech clusters, 2008
69
Beyond borders Global biotechnology report 2009
4.19.09
European exchange rate
(Euros per national currency)
2008
2007
0.1341
0.1342
—
0.0114
Israel
0.1890
0.1777
Norway
0.1216
Poland
Sweden
Denmark
Iceland
Canadian biotech industry indicators, 2000-08
70
Canadian biotech companies by province, 2008
71
European biotechnology at a glance
74
Ernst & Young survival index: Europe
75
European yearly biotech financings
84
Public investors have been cool to biotech since the second half of 2007 ...
85
… while there has been no significant decline in venture funding
85
Quarterly breakdown of European biotechnology financings 2008
86
0.1247
European venture funding by round class
86
0.2847
0.2643
Top European venture funding in 2008
87
0.1040
0.1081
European venture capital by country, 2007 and 2008
87
88
Switzerland
0.6300
0.6088
UK
1.2558
1.4613
Select restructuring programs announced by European biotech companies
in 2008 and early 2009
US
0.6799
0.7297
European M&A activity remains strong
90
European alliances by year
90
Top 10 M&As involving European companies
91
Leading alliances involving European companies
92
European alliances by country, 2008
93
European product pipeline by phase, 2006–08
95
European clinical pipeline by country, 2008
96
The Phase III share of the top five countries has shrunk, while other countries
have advanced rapidly
96
European Phase III pipeline by indication, 2008
97
Selected European products approved, 2008
99
Australian biotechnology at a glance
110
Australian biotech public equity raised, 2002–08
111
Indian biotechnology venture and private-equity funding, 2006–08
116
In 2008, overseas-listed Chinese biotech companies fell along with broader
market indices
117
Scope of this report
Biotechnology firms are defined as companies that use modern biological
techniques to develop products or services for human healthcare or animal
healthcare, agricultural productivity, food processing, renewable resources,
industrial manufacturing or environmental management. Medical devices, large
pharmaceutical, large agribusinesses and large manufacturing companies are
outside the scope of this project.
127
Global biotechnology contacts
Global
Glen Giovannetti
glen.giovannetti@ey.com
+1 617 585 1998
Biotechnology
Richard Ramko
richard.ramko@ey.com
+1 617 585 1805
Center
Scott Sarazen
scott.sarazen@ey.com
+1 617 585 3524
Gautam Jaggi
gautam.jaggi@ey.com
+1 617 585 3509
Erich Lehner
erich.lehner@at.ey.com
+43 1 21170 1152
Brisbane
Winna Brown
winna.brown@au.ey.com
+61 7 3011 3343
Melbourne
Don Brumley
don.brumley@au.ey.com
+61 3 9288 8340
Sydney
Gamini Martinus
gamini.martinus@au.ey.com
+61 2 9248 4702
São Paulo
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128
Beyond borders Global biotechnology report 2009
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