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Volume 24, Issue 1
Business models that were used to create current value are no longer going to be effective going forward.
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.
G. Steven Burrill
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.
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.
We predicted at the beginning of 2010 that the general markets would be choppy and that biotech companies would begin to perform well in the second half of the year.It appears that this scenario has played out now that 2010 is over.
After surging 6% in October, the biotech industry came down to earth in November with the Burrill Biotech Select Index dropping 1.5%. The capital markets faired no better with Dow Jones Industrial Average closing the month down 1% and the Nasdaq Composite Index down 0.37% (Table 1). Dragging on the markets was a concern that Europe's debt crisis will continue to spread and much of the world's economy continues to sputter.
Table 1. The Burrill Biotech Select index almost 11% gain in 2010 has come mainly in the second half of the year.
The Burrill Biotech Select index's almost 11% gain in 2010 has come mainly in the second half of the year. The biotech industry has certainly benefited from a return of investor confidence. However, that confidence has not been distributed evenly across the board. It has been linked to the stellar stock performances of companies such as Genzyme, Dendreon, Illumina, and Pharmasset. Many of biotech's blue-chip companies, in fact, have had sub-par years with Amgen, for example, down 7% year-to-date and Vertex Pharmaceuticals down almost 23% for the same period.
The unevenness in the capital markets also can be seen in biotech's newly minted public companies. This year, 16 new biotech issues have debuted on the US market, but most of them have been plagued by lackluster receptions (selling fewer shares well below the pricing range) and their average market performance at the end of November was down 13.2%.
Analysis in the Burrill Report shows that the US biotech industry was on track to raise more than $20 billion by the end of 2010, not bad in a year that had its ups and downs. Follow-on financing and IPOs were down quarter-over-quarter and venture capital financing continued to flow with $1.3 billion raised from about 90 deals announced in the third quarter.
Of the partnership deals that disclosed their financial terms, a whopping $9.6 billion was collectively raised in the third quarter of 2010 by U.S. biotech companies–up 8% on the $8.9 billion raised through partnership deals in Q2 of 2010.
We are on pace to equal last year's record-setting total for partnership dollars, an incredible amount given the uncertain economic environment. Big Pharma's appetite for biotech innovation continues unabated.
Going forward, we will see a much stronger industry evolve as companies implement their business strategies in response to the new economic realities.
G. Steven Burrill is chief executive officer at Burrill & Company, San Francisco, CA, 415.591.5400, email@example.com