Financing Outlook for the US Biotechnology Industry

Last year was certainly a year of change for the US biotechnology industry. Although financing from venture capital declined slightly in 2009, hurting smaller and emerging companies, financing from initial public offerings (IPOs) and partnering deals were up compared with 2008 levels. In fact, private and public financing reached a record high in 2009. Analysts say some of these positive trends will continue in 2010, but caution that investors will remain selective and risk-adverse in their financing strategies.

2009: A mixed bag
The performance of the US biotechnology industry in 2009 mirrored in large measure the trends seen in broader capital markets, according to a recent analysis by Burrill & Company, a San Francisco-based private merchant banking and venture-capital firm. The industry’s stock values declined dramatically in the first quarter of 2009, and then improved beginning in the second quarter. Although not reaching the same percentage gains as the broader capital markets, the biotechnology industry did show overall positive stock valuations for 2009.

As of the end of 2009, The Dow Jones Industrial was up 19%. The Nasdaq increased 45%, and the S&P 500 index was up 24%, the strongest showing by the S&P since 2003, according to Burrill & Company. The Burrill Biotech Select Index, a price-weighted index tracking 20 blue-chip biotechnology companies, was up 4% in value in 2009.

"We have to thank a strong closing month for the Burrill Biotech Select Index, posting a strong 5% gain, as the reason for it finishing in the black at year end," said G. Steven Burrill, CEO of Burrill & Company, in a Jan. 4, 2010, press release. "The index's fourth quarter performance, by contrast, was lackluster as a consequence of residual investor nervousness about the relative strength of the economic recovery, fears over healthcare reform, and continuing concerns about a mounting backlog of drug approvals at the Food and Drug Administration,” he said. Also weighing down on the industry was the performance of some of the biotechnology majors in 2009, noted Burrill. The share values of Amgen (Thousand Oaks, CA) and Genzyme (Cambridge, MA) declined 1.7% and 26%, respectively for the year. According to Burrill, Amgen's shares declined in the fourth quarter of 2009 following FDA’s request for more information on the company’s potential osteoporosis treatment Prolia. Genzyme’s shares were affected as manufacturing problems slowed sales of Cerezyme, a drug to treat Gaucher disease.

Overall financing for the US biotechnology industry increased 85% in 2009 compared with 2008 levels. In 2009, public and private financing for the US biotechnology industry totaled $55.8 billion, a record high, and well above the $30.1 billion in 2008, according to Burrill & Company. "Partnering was on a tear through much of the year with the industry raising almost $37 billion in total deal value, a record for the industry. With $55 billion raised, this will go down in history as our industry's largest financing year, albeit during one of the most difficult financing environments ever," explained Burrill. "The message—when companies have to raise capital, companies do, even when the cost of capital is unfavorable. It also reflects the urgency that Big Pharma places on accessing biotech innovation as its patent cliff gets ever closer. The number of deals inked in the year is unprecedented. What did come as a surprise to many was that they did not acquire biotech companies at the rate that was predicted,” he said in the release.

Financing raised from partnering deals increased 84% in 2009, from $20.0 billion in 2008 to $36.9 billion in 2009, according to Burrill and Company. Capital raised from IPOs also increased in 2009, from a near nonexistent level of only $6 million in 2008 to $1.1 billion in 2009. The main contributor was Talecris Biotherapeutics (Research Triangle Park, NC), which raised $850 million. Cumberland Pharmaceuticals (Nashville, TN) also raised $85 million in its IPO.

Money raised from follow-on offerings also increased significantly in 2009, up from $1.7 billion in 2008 to $5.6 billion in 2009. Funding raised through debt also increased from $2.8 billion in 2008 to $6.3 billion in 2009. Private investment in public equity modestly increased, from nearly $1.1 billion in 2008 to $1.6 billion in 2009. Meanwhile, private-venture capital declined slightly in 2009, by 2.6%, from nearly $4.2 billion in 2008 to approximately $4.1 billion in 2009.

Outlook for 2010
The outlook for 2010 is measured with a degree of uncertainty as it will be reflected by the extent of the economic recovery and the performance of the broader capital markets. “The worldwide financing environment in 2010 will be more robust but choppy and selective at times,” according to the Burrill & Company release. “This environment favors risk-mitigated companies rather than earlier-stage development companies,” says the release.

Burrill & Company also expects IPOs to continue in 2010, with a least five companies holding IPOs in the first half of 2010 and up to 15 biotechnology companies completing IPOs in the US by the end of 2010. However, the firm cautions that capital markets will continue to be selective, thereby potentially affecting valuations.

The firm also expects that consolidation among small and emerging biotechnology companies will continue in 2010 as these firms will continue to find a more challenging financing environment. Burrill says that consolidation will continue in 2010 but at a slower pace than in 2009.

Burrill projects that more than $15 billion will be raised by US biotechnology companies, and that financing from partnering and mergers and acquisitions will be $35 billion. The firm also projects an increase in the market capitalization of US biotechnology companies from a current level of $350 billion to $400 billion.

“Overall, 2010 will be a productive year for the industry as companies learn to adapt to their new environment,” according to the Burrill & Company release. “The past 12 months has exacted a significant toll on the biotech industry (through bankruptcies, downsizing, and cost-cutting), and we have a very different industry today than previously existed. The companies that have survived the difficult financial conditions will have to adapt to this new environment.”