Can European biotech stay afloat?
pharmafile | June 1, 2009 | Feature | Research and Development |Â Â biotech, economic climate, funding, investmentÂ
For the European biotech industry, the last few years have seen sustained growth across several fronts – much-needed progress after a prolonged period during which the sector struggled with a challenging financing environment and anemic growth. In 2008, the industry's success streak may have been brought to an abrupt halt by the global financial crisis. While Europe's leading mature firms continue to post strong financial results, the environment facing many smaller companies is much more challenging.
Financial performance
Revenues of publicly traded European biotechnology companies increased 17%, from €9.6 billion in 2007 to €11.2 billion in 2008. This compares favourably to the 6% decline in revenues the industry experienced in 2007. However, as noted in last year's Beyond borders, the 2007 numbers had been skewed by the acquisition of Serono by Merck KGaA, which had removed one of Europe's largest biotech companies from the industry. Adjusted for the Serono acquisition, the 2007 growth rate was 20% – roughly on par with the 2008 growth rate.
Not surprisingly, the vast majority of this increase in revenues came from a handful of mature European biotechs. In particular, the industry's performance was boosted by top-line growth in excess of 20% at Elan (based in Ireland), Eurofins Scientific (France), Meda (Sweden) and Qiagen (the Netherlands), while Switzerland-based Actelion and British specialty pharma Shire grew by 16% each. For the most part, these impressive increases are attributable to strong product sales at these firms.
The bottom line of publicly traded companies also improved significantly, from a net loss of €1.6 billion in 2007 to €478 million in 2008 – a 70% decline in net loss and a historic low of less than 4% of revenues. Over 40% of this improvement came from just two companies – Shire and Actelion. Actelion's 2007 bottom line had been impacted by a significant in-process research and development charge.
Financing
As in most markets, the global financial crisis hindered biotechnology companies' access to capital, and this was clearly visible in the European industry's financing totals. By amount of capital raised, 2008 was the third-worst year in the past decade, ahead of only 2002 and 1999. The European industry's fundraising fell from €5.4 billion ($7.4 billion) in 2007 to less than €2 billion ($2.9 billion) in 2008. The bulk of this reduction was in funding for public companies, which shrank from more than €4 billion ($5.5 billion) in 2007 to only €833 million ($1.2 billion) in 2008.
This is not surprising, given that the global turmoil in stock markets saw public company financing for biotechnology plummet in most major markets. The European industry was subject to the same trends – the industry's market capitalisation fell 34% as investors slashed a substantial €20 billion from the valuations of Europe's biotech firms. The market for IPOs, which had trickled along in the first half of the year – producing only three IPOs that generated a relatively small €75 million ($111 million) – evaporated entirely as the financial crisis set in.
But while the global financial crisis has certainly made matters worse, Europe's financing challenges pre-date the worst of the crisis. Indeed, the public markets have been cool to biotech investments since the second half of 2007, when what was then called the credit crunch prompted investors to abandon stocks with greater perceived risk. In the first two quarters of 2007, biotech companies raised €600 million ($822 million) through IPOs and more than €3.1 billion ($4.2 billion) through follow-on and other public offerings. In the six quarters since, the cumulative amount raised has been less than 40% of the total raised during the first six months of 2007.
A large part of this decline is in follow-on and other financings, which withered from €3.5 billion ($4.8 billion) in 2007 to less than €800 million ($1.2 billion) in 2008. In contrast with 2007, when there were eight transactions above the €100 million mark, there was only one such financing in 2008.
Venture financing held up better than the public markets in 2008. But even here, the amount raised was 20% lower than in 2007. Venture funding fell from €1.2 billion ($1.6 billion) in 2007 to €932 million ($1.4 billion) in 2008 – one of only two years since 2000 in which the amount of venture capital raised by the European industry has dipped below €1 billion ($1.5 billion). Venture investors have been demonstrating a lower appetite for risk, preferring companies with more advanced pipelines that offer relatively low-risk, short-term return horizons. Reflecting this trend, the year's three largest first-round financings were completed by companies with programmes in clinical development and with their origins in established pharmaceutical companies.
Deals
Deals are a perennial presence in the biotech industry, and the volume and potential value of transactions conducted by European biotech companies remained fairly strong in 2008, despite the financial crisis. In fact, the challenging times may have spurred deal activity in some cases, as distressed circumstances drove firms to find solutions through partnerships while private investors sought exits through acquisitions.
During the year, European biotechs announced M&A transactions worth a total of €3.4 billion ($5.0 billion), split somewhat evenly between biotech-biotech and pharma-biotech transactions. While this total is far lower than the €14.3 billion ($19.6 billion) of M&A transactions in 2007, the 2007 totals had been skewed by three deals (Merck KGaA/Serono, Qiagen/Digene and Shire/New River). After adjusting for these large deals, the 2008 numbers represent an 81% increase relative to 2007.
On the strategic alliance front, the total value of transactions decreased by twelve percent in 2008, to €8.8 billion ($13.1 billion). While novel clinical-stage product candidates continued to command impressive premiums in alliances, there was also strong deal-making activity around preclinical assets. Indeed, 11 of the 15 largest European deals in 2008 involved discovery programmes or assets in pre-clinical development.
Some deal trends were driven by larger challenges facing the industry. For instance, as big pharma companies attempt to reinvent themselves (see the "Reinvention and reinnovation" article in Beyond borders 2008 for details), several of these firms are seeking to rationalise operations and divest themselves of non-core assets – leading to a number of transactions in which smaller European firms in-licensed commercialised products from large companies. And as companies face increased risks even after product launch – from greater post-marketing safety surveillance and a changing pricing and reimbursement environment – this reality drove a number of deal structures in which contingent payments are linked to commercial milestones such as sales performance rather than R&D milestones.
Products and pipeline
The industry had a mixed performance with regard to product approvals and pipeline development. Building on the success of previous years, the pipelines of European companies grew across all phases of clinical development during 2008. The number of candidates in the aggregate pipeline of the industry increased by more than 10% relative to 2007, bringing the total number of candidates in clinical development to more than 1,000.
The news was not as strong on the products front. Only one new molecular entity received US Food and Drug Administration approval, while two received approval from the European Medicines Agency for marketing throughout the European Union. In addition, product-approval success was dominated by specialty pharmaceutical companies, while approvals secured by 'core' biotechnology companies were mainly new formulations of already-approved and marketed products.
Staying afloat?
For many privately held and small-cap European biotechnology firms, access to capital has become very difficult in the aftermath of the global financial crisis. With the waters from the market meltdown rising all around them, many are having to take urgent measures simply to stay afloat. Without funding options, many of those that are currently treading water will not be able to do so indefinitely, and will either have to sink or be 'rescued' by an acquirer. In 2008 and early 2009, a number of firms took measures to jettison non-core assets and operations as part of restructuring programmes. Companies terminated or froze pipeline projects, reduced headcount and spun off divisions. Those that had the means to do so sometimes acquired cash-generating assets, while several firms were able to raise capital from non-traditional sources such as government grants and royalty financing transactions. It is likely that many firms will survive through measures such as these, but it is also clear that others will not. Indeed, a number of companies have already gone into administration or liquidation in 2008, and more are expected to follow suit in 2009.
Beyond the sink-or-swim moment confronting many European biotechs, however, is the larger question of the sustainability of the industry itself. Late in 2008, fearing the long-term damage that might be caused by a prolonged funding drought, particularly to small, early-stage companies, national industry associations and other biotech interest groups began to encourage European governments to act.
In December, executives from the UK's biotechnology industry 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. The proposals envisage the creation of two funds – one to fund mergers and acquisitions between smaller biotechs, drive consolidation and generate critical mass, and the other to provide capital for "high-potential" candidates. The UK Government has announced the introduction of a £750 million Strategic Investment Fund for emerging technologies, including biotech, and is launching a review to consider whether and in what form further intervention is required.
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. The group called for a wide-ranging package of interventions, including boosting the budget of the state innovation agency OSEO; distributing R&D tax credits more equitably between small/ medium sized businesses and multinationals; refocusing the government's Strategic Investment Fund (FSI) toward innovative companies; and enacting tax breaks for investment in small innovation-led companies.
In January 2009, one European country did take positive action: the Norwegian government included a €318 million ($467 million) provision for life sciences research as part of a wider stimulus package. The government hopes that the intervention – the first such action in Europe this year – will help support companies through the funding crisis.
Looking ahead
The European industry's financial results showed sustained growth in 2008, but as always much of this success came from a few mature companies. While these leading firms will remain largely unaffected by the crisis, the reality facing many smaller European companies is vastly different. Many small-cap and private companies will continue to take urgent measures to raise capital and reduce cash burn, but the number of companies in the industry is still expected to decrease in 2009 and 2010 through M&As, bankruptcies and liquidations.
While government interventions such as those enacted by Norway could help struggling biotech companies, it is not clear that other national governments are ready to follow suit – after providing capital to shore up the banking sector, European leaders are being scrutinized by taxpayers, who generally do not favour 'bailouts.' If governments do act, however, they 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.
This is an extract from Ernst & Young's new Beyond Borders report. Visit www.ey.com for more information.
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