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Thirty years after the first biotechnology company opened, the sector is reaching a new level of maturity and globalization.
Biotech companies once vied for strategic big pharma alliances; today Big Pharma looks to biotechnology for its future success. The current challenges that biotechs face include global issues, dramatically increasing drug development costs, and contentious regulatory issues. Meanwhile, biotechnology is driving a global transformation from the treatment of illness to the treatment of wellness. US capital markets remain the major sustenance for biotechs, but opportunities are arising abroad. Initial public offerings (IPOs) will continue, but the hot biotech IPO market of 2000 will probably never return. Partnering deals will also continue, as companies seek to gain early-stage technology access. Biotechs will become increasingly global as companies look to India and China for manufacturing and clinical trials.
By and large, the fledgling biotech industry of 1986 was highly dependent on the pharmaceutical industry; its success was measured, particularly by the capital markets, in terms of how many strategic alliances a biotechnology company had signed with Big Pharma. The biotechnology industry comprised approximately 700 companies (150 of them public) that were just beginning to fulfill their basic promise as commercial ventures. Those were the days when decision-making for a biotech company's senior management and its investors was relatively straightforward. A series of venture capital rounds would fuel product development until Phase 2, then the company would court a US-based Big Pharma and strike an alliance for late-stage testing and regulatory filing in return for low double-digit royalties. At that time, the list of pharmaceutical companies willing to work with a biotech company was long—about 40. Over the past 15 years, however, Big Pharma has progressively consolidated; now only about half as many pharmaceutical companies are willing to work with biotech companies, and the deal makers are likely to have European or Japanese addresses (based on an analysis of the top pharmaceutical deal makers over the past six years). These statistics are a clear indication of biotech's transformation into a global game—one that is fiercely competitive and has companies vying for leverage, technology leadership, and market share.
G. Steven Burrill
With in-house research and development productivity (R&D)less than stellar, and with healthcare cost-containment policies driving the need for differentiation in the flow of new products, establishing effective alliance networks to secure innovation is critical for the pharmaceutical sector. In addition, pharmaceutical and large-cap biotech companies are in a fierce competition to find best-of-breed drug candidates, and they are willing to pay a premium for these even though they may be only in the laboratory or at the preclinical stage. This trend is one of the most interesting to emerge over the past four years. Big pharmaceutical companies are increasingly seeking alliances with biotech companies. Multinational pharmaceutical companies must cope with a dwindling number of products in their pipelines and impending patent expirations of their blockbuster drugs. Not helping matters is the fact that the pharmaceutical industry is experiencing a productivity crisis. The number of new molecular entities (NMEs) and priority review drug approvals has remained relatively flat in the past decade, despite huge investments in research and development. The amount of money that pharmaceuticals have poured into R&D has increased year over year from about $15 billion in 1995 to $43 billion in 2006.
Therefore, the challenges that managers of drug-focused biotechs must address today are radically different than those they previously encountered. With the complex market for IPOs, biotech companies that are hungry for cash have faced some interesting decisions. Should they ride out a tough capital market environment and wait for conditions to improve, or sell out to Big Pharma, which has shown that it is just as willing to acquire biotech companies as it is to enter partnerships with them? Based on statistics from the past three years, the answer seems to be that when Big Pharma comes calling, biotech management are very happy to accommodate their overtures, regardless of whether Big Pharma is offering an acquisition or a partnership.
Table 1. Financial performance ($ billion)
In parallel with this evolving environment, the world of biotech itself has changed to reveal global challenges, dramatically increasing drug development costs, and contentious safety and regulatory issues. Success in this new environment requires substantial financial and human resources, and therefore the industry is witnessing a huge upswing in partnering, and in mergers and acquisitions (M&A). As in the year before, 2006 saw M&A and partnering transactions continue at a torrid pace. In fact, partnering deals in the US in 2006 set a new high mark in biotech's comparatively short history—more proof that the industry is entering a new phase.
Table 2. Top 10 biotech companies by market capitalization
The biotech story is always about its capital market progress—a great year, a good year, or a lousy year—and good capital markets are the key to biotech's success.
Biotech's performance in the capital markets waxed and waned throughout 2006, at the mercy of prevailing macroeconomic forces, concern for Iraq, elections and politics, and healthcare cost increases. Overall, the general markets widely outperformed the Burrill Biotech Select Index, in stark contrast to biotech's stellar performance in 2005 and the years before. For biotech financings, 2006 set records as public and private companies garnered over $27 billion—a whopping 55% more than the industry raised in 2005.
Figure 1. Biotech's five cycles
Although the US capital markets are still the major sustenance for biotech companies, changes in the global financial markets have created additional opportunities for companies to look outside their borders for financing. Public markets, such as the alternative investment market (AIM), which is the London Stock Exchange's international market for smaller growing companies; Euronext, Europe's cross-border exchange; "Mothers," the section for high growth start-up companies in Tokyo; and the Swiss stock exchange (SWX)—were all robust in 2006, not just for foreign-based companies, but for US-based firms as well.
Although all forms of financing found willing takers at levels comparable to the past five years, the outliers in 2006 were a small number of exceptionally large debt deals, mainly completed in the first quarter of 2006, which brought the total amount of debt raised to an incredible $14 billion (comparable to the 2004 and 2005 total debt financings combined).
Snapshot of the Biotech industry
Venture capital investment remained healthy throughout 2006, and the approximately 170 deals completed that year set a record high for the US industry at $4.2 billion raised. The story surrounding IPOs was mixed. The public equity markets remained extremely cautious about new biotech offerings, much the same as in 2005. The year 2006 saw two more deals than in 2005, but the average amount raised per deal was approximately the same, at approximately $50 million. The challenging IPO market was one of the contributing factors to a banner year for mergers and acquisitions, and for partnership deals.
Following biotech's extraordinary financings of 2000, generating a record $32 billion, financings have been in a fairly steady state year after year since 2003. Even in 2006, removing the outlier debt financings of about $8 billion, the total raised was comparable to the previous three years. Given these data, the question has to be asked, Is $20 billion in financings annually now the industry standard? The answer is, "probably yes." All things being equal, it would take a significant change in sentiment toward biotech IPOs to raise the bar. Although the biotech IPO window has remained open since 2003 and continues to be active, there is no sign that the wild investor enthusiasm that characterized the white-hot biotech IPO market of 2000 will ever return.
Table 3. Selected significant mergers involving biotechs
Even a projected 30 IPOs for 2007 (this could be a conservative number because by June 2007, 20 biotech IPOs had been successfully completed), raising an average $40 million each, amounts only to about $1.2 billion—a far cry from the heady days of 2000, which saw $6.7 billion raised from 66 IPOs.
Thirty years after the first biotechnology company opened its doors, the sector is reaching a new level of maturity and globalization.
Biotechnology is driving a global transformation from the treatment of illness to the treatment of wellness; at the same time, the changing world is transforming biotechnology. The biotech industry is no longer centered in the United States and Europe: its maturity means that competition for resources (both human and technological) is increasing as the number of countries supporting viable life sciences industries grows. Nearly every part of the world is looking toward a future dramatically affected by biotechnology. The term "global transformation" refers not only to geography. The transformation is pan-industry, and it extends across technology and the innovations that result.
We have begun to understand disease "globally," i.e., from a systems point of view, from gene or single nucleotide polymorphism (SNP), to protein, to networks, to disease. In parallel and conversely, the notion of "one size fits all" is being replaced by medicine targeting the individual. The biopharmaceutical industry, which has been built on the foundation of "blockbusterology," is finding it hard to adjust to this new "personalized medicine" world. But we will, and indeed, we must! What our industry has is the brightest and best, and there is no shortage of innovation. The trick is to figure out how to bring twenty-first century medicines to a world that sees healthcare costs as rising out of control, to an aging and affluent population that demands the best, and to a pandemic that is potentially waiting in the wings—and to do all this while creating and capturing value for the industry.
Table 4. Financing in biotech (value in $)
The era of personalized medicine promises to be the catalyst for a major transition in healthcare. Factor in a greater understanding of disease on a systems level, and the promise for the future of healthcare is compelling: earlier and more precise diagnoses, treatments tailored to the individual, reduction of side effects and adverse reactions to drugs, breakthroughs in treatment, and ultimately, the prevention of major diseases such as cancer, diabetes, and Alzheimer's.
The industry is moving toward more personalized, predictive, and preventive (the three Ps) medicine that will revolutionize the healthcare system as we know it today. This movement is challenging pharmaceutical and biotechnology companies to adapt. Until recently, their focus has been on the discovery of blockbuster drugs. Now, with the convergence of information technology and genomics, smarter drug delivery and "labs" on a chip are leading us down an inevitable path away from concentrating solely on " and toward targeted personalized medicines and the spotting of early warning signs of impending health problems. We are closer than ever to understanding the genetic and molecular mechanisms of various diseases, and new diagnostic and prognostic tools will make it easier for clinicians to predict the outcomes of drug therapy.
The more we uncover about the human system—from the "omics" of genomics, proteomics, metabolomics, toxicogenomics, etc.—the more we can integrate this knowledge and build, piece by piece, the "networkeome," or full working knowledge of the body as a biologic system. In the meantime, new technologies for finding new drugs and drug targets, drug development, and genetic data are being used fruitfully to understand and correlate diet, disease, and health. As we move into the future, our toolbox will continue to expand and improve. We'll progress from treating sickness to truly treating wellness—that is, to the holy grail of medicine: preventing the emergence of disease.
For 30 years in the biotech business it has seemed, at least to outsiders, that the industry would be consumed by a wave of consolidations and mergers. The specter that biotech will see extensive consolidation has been raised as cash-rich companies, from both pharmaceutical and biotech, seek opportunities to broaden pipelines with product candidates that fit in-house expertise.
This scenario is unlikely to occur for two main reasons. First, individual deals happen for specific reasons, unique to each, and one combination doesn't necessary lead to large-scale industry consolidation. The second key reason why the industry is unlikely to see massive consolidation is corporate partnering, an activity that continues to build value for both pharma and biotech participants. The massive and record-breaking $20 billion in partnering deals during 2006 is certainly a testimony to this. With the exception of one or two mega-deals of the order of the 2005 Amgen-Abgenix deal and the 2006 Gilead Sciences –Myogen deals, partnering predominates.
Meanwhile, companies developing and commercializing therapeutics face tough choices; they must choose well in how they access technologies, capabilities, and human and financial resources. As the biopharmaceutical industry matures, the number of available options for accessing these resources has increased significantly; thus, entering into partnerships becomes an attractive option to outright acquisition or internal growth.
Overall, biotechnology will continue to fuel a major transformation in healthcare—one that emphasizes earlier disease detection, more targeted treatments, and adjunctive support through enhanced nutrition. Further progress will be made on the personalized, predictive, preventative medicine front, with new products targeting the individualization of medicine in the marketplace.
Despite the traditional obstacles that the industry constantly faces—the political and regulatory environment, the whims of an often fickle capital market, and world events beyond its control—the biotechnology industry has survived and prospered as a unique entity, distinct from allied industries but open to joint ventures with them.
The demise of the biotechnology industry has been predicted many times during its down cycles—but now, at well beyond the halfway point of 2007, the industry remains strong. The demise of the biotechnology industry was predicted in 2003, yet the biotech industry demonstrated not only its durability but also its ingenuity. Having survived the ravages of the bear market, the industry got back on track. Although technical and regulatory challenges abound and risks remain, biotech is no longer an industry of dreams—biotech products and revenue streams are real. But the most exciting news of all is that we've only just embarked on what is destined to be a very rewarding journey.
Challenges for growth and prosperity remain. Moreover, new challenges have arisen with the entry into the era of personalized medicine. The biotechnology journey has been an amazing one so far, and the coming decade will be even more exciting.
G. Steven Burrill is chief executive officer at Burrill & Company, San Francisco, CA, 415.591.5400, email@example.com.