A Mixed Review for Biotechnology Financing

Although the global biotechnology industry delivered top- and bottom-line growth in 2010 and achieved aggregate profitability in 2010 for the second year in a row, funding for R&D and early-stage companies and related activities was down. These are some of the major findings from a recent analysis by Ernst & Young in its report, Beyond Borders: Global Biotechnology Report.

Although aggregate performance improved in 2010, there is a widening gap between large, established companies and those at earlier stages for whom access to capital continues to be difficult. “Biotech firms will need to adapt creatively to this environment by doing more with the funding that is available and by working from the earliest stages of development to demonstrate the potential value of their products to investors, payers and regulators,” said Glen Giovannetti, Ernst & Young's global biotechnology leader, in a June 14, 2011, press release.

On the plus side, companies in the established biotechnology centers of Australia, Canada, Europe and the United States had a record-breaking aggregate net profit of $4.7 billion in 2010, a 30% increase from the previous year, according to the Ernst & Young analysis. Also, companies in Canada, Europe, and the US raised $25 billion in 2010, which equaled the average for the four years before the global financial crisis.

However, the distribution of that funding was oriented toward established, mature companies. In the US, large-debt financings by mature, profitable companies grew by 150% compared with levels in 2009. Conversely, there was a 20% decline in the amount of “innovation capital” for the sector, defined as total funding minus large-debt financings. Also, 82.6% of funding went to just 20% of US companies, up from 78.5% in 2009. The bottom 20% of companies raised 0.4% of the funds, down from 0.6% in 2009. The total potential value of strategic alliances remained strong, totaling more than $40 billion, according to the Ernst & Young analysis, but up-front payments from partners to biotechnology companies dropped 37% to $3.1 billion. In addition, deal-making slowed in 2010. Merger and acquisitions (M&A) involving European or US biotechnology firms dropped from 58 deals in 2009 to 45 deals in 2010 while the aggregate value of these transactions remained relatively flat (after normalizing the 2009 numbers to exclude the mega-acquisition of Genentech by Roche).

Regional analysis

Looking at the US, revenues of publicly traded biotechnology companies increased to $61.6 billion in 2010, a 10% increase and equal to the growth rate of 2009 when adjusting for the acquisition of Genentech by Roche. Net income increased from approximately $3.7 billion in 2009 to $4.9 billion in 2010. M&A transactions involving US-based biotechnology companies turned in the lowest aggregate value in the last five years, totaling $12.6 billion. Total US industry funding reached $20.7 billion in 2010, up from $18 billion the previous year but driven largely by dept raised by profitable companies to refinance existing debt and for stock buybacks and acquisitions, according to the Ernst & Young analysis. Venture capital raised in the US totaled $4.4 billion in 2010, down slightly from the $4.6 billion reached in 2009.

In Europe, revenues of European public biotechnology companies increased 12% to EUR 13 billion ($17 billion), a significant increase from the 2% growth seen in 2009.The combined net loss for biotechnology companies in the region improved slightly, from EUR 467 million ($622 million) in 2009 to EUR 459 million ($611 million) in 2010. The value of M&A activity in Europe increased from EUR 1.8 billion ($2.4 billion) in 2009 to EUR 3.5 billion ($4.7 billion) in 2010. Total funding for the European industry in 2010 was essentially unchanged from the previous year, with EUR 2.9 billion ($3.9 billion) raised. Venture capital raised in Europe totaled EUR 1 billion ($1.3 billion), an increase from the EUR 790 million ($1.1 billion) raised in the previous year.

In looking at other regions, the Canadian biotechnology industry raised more than $482 million in 2010, a decrease of $251 million compared to 2009. However, when removing the financing of $325 million from one company, the sector raised 18% more in 2010. Australian publicly traded biotechnology companies raised $129 million in 2010, less than half the amount raised in 2009.

A volatile 2011

The overall volatility in the stock market, caused by the fight of the raising of the debt ceiling in the US and the debt crisis in Europe, has had an effect on financing in the US biotechnology sector. Public financing in the third quarter of 2011 fell to just under $3.1 billion compared to $9.1 billion in the second quarter of 2011, according to data from Burrill & Company, a life-sciences financial services firm. The amount raised through initial public offerings fell 72% to $151 million in the third quarter of 2011 compared with $540 million in the second quarter of 2011. Follow-on offerings declined 79.8% from $2.2 billion in the second quarter of 2011 to $453 million in the third quarter. Private investment in public equity declined 53% from $450 million in the second quarter to $211 million in the third quarter. Venture-capital funding also declined for the US biotechnology industry from nearly $1.3 billion in the second quarter of 2011 to $832 million in the third quarter. Partnering financing also declined from nearly $3.7 billion in the second quarter of 2011 to nearly $2.9 billion in the third quarter of 2011, according to Burrill & Company.