Time running out for biotech
pharmafile | June 5, 2009 | News story | Research and Development | biotech
The funding crisis which is paralysing the global biotech sector sees no sign of abating, and more and more companies look set to go bankrupt this year.
The sector is still suffering from a lack of venture capital funding, and national industries around the world are calling for government intervention to keep them afloat.
But time is running out for many companies. One consultant at Ernst & Young says one or two early stage companies have gone bust every month since the end of 2008, and the number is expected to rise.
Talking to Pharmafocus on the release of Ernst & Young's annual report of the sector, "Beyond Borders," Ian Oliver warned that more companies would go under in the second half of 2009, when the full effect of the financial crisis would hit.
While the sector has always battled for funding, analysts say things are more serious now. Ernst & Young say it is different this time because this crisis is "deep-rooted, systemic and persistent."
The global economic downturn means an IPO (initial public offering) or other share offers are currently not a viable prospect, and venture capitalists are more cautious with their investments, and lack the capital to invest.
US and European biotech raised only $16 million capital last year – a 46% decline compared to 2007, according to Ernst & Young's report.
This means an alarming number of companies do not have sufficient cash to survive. At the end of 2008, 37% of companies in Europe had less than one year of cash left, more than twice the number in 2007.
Even worse was the US, where 44% of publicly listed biotechnology companies had less than a year's worth of cash available by the end of 2008 – an increase of 25% on the previous year.
Not all companies will suffer, as it can depend on their size, quality of research, and if they are publicly traded or privately owned.
But according to Oliver, all of those that failed to raise their next round of financing, be it public or private, before September 2008 when Lehman Brothers went under and the crisis really hit, will suffer most.
He added: "Companies had either raised funding by that point or they hadn't. Those that had have probably got 12-18 months or more of cash and are in reasonable shape to focus on business and develop products. Those that didn't are really going to struggle."
Mergers & Acquisitions
The crisis has seen a record boost in merger and acquisition activity, as small firms with depressed share prices are snapped up by big pharma looking to boost flagging pipelines. The potential value of strategic alliances involving US biotech companies reached an all-time high of almost $30 billion last year, while the potential value of alliances involving European companies was $13 billion (£8.8 billion), according to the report.
Many companies are now being bought out by a pharma company as their only escape route, but some remain unattractive purchases, even at rock bottom prices.
But big pharma won't rescue every struggling company. Giovanetti said: "Large companies will not start buying assets en masse that do not fit their strategic objectives simply because they are relatively cheaper. Misallocated resources and distracted energies are no bargain at any price."
Government aid
In Europe some companies wanting to struggle on alone have as a last resort turned to their governments for rescue in the funding drought, through national industry associations and other interest groups.
In December 2008, executives from the UK's biotech sector sent a dossier to the UK government proposing a national £1 billion ($1.85 billion) biomedical public-private partnership with half coming from public funds and half from private investors.
In February 2009, France Biotech called on the French government to enact a stimulus plan to rescue smaller companies following a collapse in biotech funding.
Norway's national sector is so far the only one to be successful in receiving government funds, and Ernst & Young says other national governments are not certain to follow suit. The report says governments should not just provide lifelines for companies in danger of going under, but rather look for measures that will promote the long-term viability of the industry.
In the UK, the biotech sector is fighting for a share of government money set aside to help struggling industries through the recession.
UK industry association the BIA has asked for a central pool of funding, but has not received any guarantees so far. A £750m Strategic Investment Fund has been created, but this must be shared out between a range of industries.
Recovery
Whether by merger and acquisition or liquidation E&Y predicts the number of biotech companies will contract in 2009 and 2010.
"Beyond Borders" does not predict "mass extinction" but the Darwinian principal of "survival of the fittest" to prevail.
It says the biotech industry must change its model to survive, or a mass of early stage companies and high quality innovation will disappear.
Many analysts say the well-established biotech model has run its course. The traditional model involves a start-up being spun out of academia, and then supported by venture capitalists until the company can be bought out or floated on the stockmarket.
Ian Oliver suggests biotech entrepreneurs within academia should wait longer to spin-out their companies, allowing their science to progress further with guaranteed state funding. He also foresees more creative methods of deal-making and alliances with big pharma coming about earlier in research development.
Related articles:
Can European biotech stay afloat?
The credit crunch and the economic downturn have created a funding crisis for many European biotech companies, who now face a sink or swim moment, say Ernst & Young
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