G. Steven Burrill
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The global financial crisis and subsequent slow economic recovery during the past two years has created an unprecedented time
for the biopharmaceutical industry. After enjoying more than 40 years of easy access to capital, the rules of the game have
changed forever. The capital markets have permanently restructured, making capital more difficult and expensive to secure.
The rules under which the industry has operated and the way it has evolved since its inception have largely been obliterated.
A confluence of powerful forces including global economic trends, policy changes, healthcare reform, and technological advances
have transformed the way in which companies need to operate to be successful.
Biotech executives are currently writing their new "play book" in response. It is clear that the business models that were
used to create current value are no longer going to be effective going forward. Companies have to adapt to a risk-averse environment
where capital, while still available, has become much more difficult to access.
During the past two years, we have seen investment banks fail, hedge funds and private equity investors closing their doors,
and the public equity markets spiral down, out of control. Venture investors, often the umbilical cord of food for the industry,
long provided the lifeblood for young biotechnology companies, but the model is more challenged today.
Companies have taken a variety of alternative approaches to access capital, such as turning to registered direct offerings,
selling future product royalty streams, and selling options to promising compounds. In addition, because biotech companies
are competing in an investment-constrained environment they often only have sufficient funds to complete one phase of a project
successfully before building the capabilities required to move their project through the next phase. This is why companies
are beginning to adapt their business models to a more virtually integrated one. This involves developing a network of third
parties that provide services such as contract development, manufacturing and sales, all supported and managed by lean, in-house
"coordinating" departments.
The successful companies of tomorrow will be virtually oriented and globally focused. The evolution of a more "virtual" business
model means that companies can piece together the resources they need as they go. As a result, venture investors are now looking
for alternative structures with which to build value (virtual companies, proof-of-concept (POC) financing of projects, building
companies post-POC, etc.).
With capital in short supply, many biotech companies have been showcasing their best assets and shelving others. We have seen
a huge surge in partnering deals during the past 12 months and product partnerships will continue, but in a buyer's market,
only those opportunities that are particularly strategic will be considered. The leverage recently gained by biotech firms
in negotiating advantageous deal terms will decline; Meanwhile option-based approaches that keep much of the program risk
with the originator will increase in popularity.
GLOBAL ARBITRAGE
Although financial markets and potential partners at home may be lukewarm about the potential value of technologies and products,
emerging markets could place on them a much greater value. Smart companies will look outside their borders. They also will
think strategically about the value their products may hold in different markets.
