In with the ‘new’: A leaner, fitter biosciences sector – 2010

pharmafile | October 18, 2010 | Feature | Sales and Marketing Kinapse, White paper 

The biosciences sector has witnessed numerous challenges during recent years, as the global economic downturn has adversely impacted sector liquidity and undermined investor confidence. But now, as the sector begins to show signs of recovery, emerging and developing companies with innovative platforms and products have unique opportunities to build sustainable growth over the long-term.

This article outlines the leaner and fitter sector that is set to emerge from the global recession, and suggests how developing companies can position themselves to exploit the changing competitive landscape of the life sciences industry and capture significant industry value.

The full article is available to download here.


The biosciences sector is undergoing fundamental change

The global economic downturn has adversely impacted liquidity within the biosciences sector and continues to undermine investor confidence. In 2009 there were 17 biotech bankruptcies and 23 NASDAQ delistings; in Q4 2009 around 28% of biotechs were operating with less than one year of cash reserves and in Q2 2009 >20% of biotech companies were trading below net cash values.

The market pressures brought about by the economic downturn continue to serve to cull weaker firms with fragile business models, however there remains a fundamental requirement for the sector’s strongest offerings – innovation and products. Meanwhile, development of R&D infrastructure in low-cost geographies is driving sector globalisation and spurring investment in innovation within established markets. And although traditional investors’ value perceptions of the biosciences sector are likely to have changed permanently, an influx of alternative financing is driving the emergence of a stronger, leaner and fitter sector.

In 2009 the biotech industry raised a record $56 billion, posting $3.7 billion profit compared with a $1.8 billion loss in 2008. Meanwhile biotech markets have made strong recoveries during the past 12 months, enjoying >50% growth since Q1 2009. As confidence returns to the sector, emerging and developing companies with innovative technologies and robust business models will have unprecedented opportunities to capture industry value. To succeed, companies must adopt a fastidious approach to cash management in the near term, whilst formulating business and operating strategies that leverage available capital sources to build and deliver sustainable long term growth.

This article highlights the key drivers of the leaner, fitter and fundamentally transformed sector that is set to emerge from the global recession, and suggests how companies can position themselves to exploit the changing competitive landscape of the life sciences industry.

The global economic downturn has severely impacted sector liquidity, forcing traditional sources of capital to rethink investment strategies

US VC investment in biotech during 2009 totalled $3.5 billion, down 19% on 2008. Although the life sciences industry fared better than most during the downturn – more VC investment has gone into biotech than in any other sector in the past year – global VC investment in the sector has fallen by around 22% from 20071, with fewer VC-backed deals. Meanwhile investors are becoming more selective, increasingly favouring later-stage deals as a means of mitigating exposure to risk2.

Public capital markets have become an unpredictable and increasingly expensive source of financing for the sector. At NASDAQ’s peak in October 2007, 59% of the 2003-2007 IPO cohort were trading below their IPO price; this increased to 79% at the height of the economic downturn in June 2009. Depressed trading volumes and poor liquidity has resulted in public capital markets becoming at least as expensive as many private capital sources. During the 2003-2007 IPO window the median step-up in valuation on private capital was only 1.9x, compared with 3.8x during the 3 previous IPO windows (2000-2001, 1995-1998, 1991-1994).

The economic downturn effectively closed the IPO window, with just 4 IPOs raising $122 million in the US and Europe in 2008 compared to 44 IPOs raising $2.3 billion in 2007. Although the IPO window opened slightly towards the end of 2009, the market is yet to witness a flood of companies rushing to go public. August 2009 saw Cumberland Pharma raise $85 million in the first successful ‘post-downturn’ biopharma IPO, triggering a mini-spate of IPOs during Q3-Q4 20093. However, although companies are beginning to look again towards public markets for capital, cautionary examples of IPOs during Q1 2010 at prices well below target valuations suggest that investors are still hesitant to invest in risky companies4.

Larger companies with the ability to generate cash flows from marketed products have been able to weather the recession better than most, albeit with a heightened focus on careful management working capital. However smaller companies and those predominantly or exclusively engaged in R&D have faced altogether more acute and severe liquidity difficulties – at the peak of the downturn it was estimated that 30-45% of publicly-listed companies were operating with <1 year of cash reserves5.

Companies are therefore having to evaluate and re-focus business models in order to preserve existing capital and to demonstrate the ability to build value from new investment. In this regard, innovative rather than incremental technologies must be pursued in order to achieve the potential returns that VCs demand in the current economic climate. And with IPO opportunities remaining scarce, companies must seek alternative financing and exit opportunities such as alliances, acquisitions or other business combinations. As and when market conditions improve, companies must price future IPOs to encourage liquidity whilst retaining the capacity to yield required returns to investors through value inflections at key stages throughout corporate and product lifecycles.

The recent wave of big pharma consolidation has led to a reduced appetite for smaller acquisitions, whilst heightening the prospect of alliances

Blockbuster patent expiries are estimated to result in losses of $16.4 billion by 2013, with big pharma increasingly pursuing externally-oriented strategies to fill pipeline gaps. The recent spate of big pharma megamergers, as evidenced by Pfizer/Wyeth, Merck/Schering-Plough and Roche/Genentech, is forecast by many to continue, which has significant implications for biotech companies positioning themselves as acquisition targets for big pharma. Smaller companies will need an attractive valuation, low risk and the right fit to get on the radar of big pharma currently involved in post (mega)merger integrations. Today’s acquisition targets are likely to include later stage companies with positive cash flow and early stage companies with platforms that have multiple applications.

Global big pharma-biotech M&A activity fell by around 90% in 2009, whereas big pharma-biotech licensing deals raised a record $37 billion. This indicates that big pharma are purposefully moving towards more collaborative partnerships with smaller companies (e.g. GSK/OncoMed; Takeda/Alnylam). There has also been a significant shift towards earlier-stage partnering6, with preclinical assets representing around half of all big pharma-biotech deals and Phase I assets accounting for the largest proportion of clinical-stage deals (23% of all deals).

For biotech, earlier-stage collaborative deals with larger firms represent a means of obtaining financing whilst mitigating risk and capturing long term value. Big pharma are becoming increasingly amenable to creative and flexible deal structures that enable buyers to manage the risks associated with early-stage assets, whilst allowing sellers to maximise upside7. Smaller firms should also seek every opportunity to leverage non-financial value from alliances with big pharma. However, for early-stage partnerships to succeed all parties must adopt a long term view, and care must be taken not to sacrifice productive ongoing relationships for a near term gain.

Development of R&D infrastructure in low-cost geographies is driving sector globalisation and spurring investment in innovation within established markets

The impact of the increasing costs of R&D in many industries is driving a general increase in the level of offshoring and outsourcing to low-cost geographies, with many developing regions investing heavily in creation of bioscience infrastructure designed to attract foreign investment. Several top-ranking contract research organisations including Quintiles, Parexel, Kendle and Covance have set up operational units in India and China, with Charles River’s recent announcement of plans to acquire WuXi for $1.6 billion among the latest signals that emerging economies are rapidly moving towards global competitiveness in R&D.

It is widely anticipated that globalisation of the sector will ultimately impact the direction of product innovation as developing economies build expertise in cutting-edge technologies. This is placing pressure on developed economies to offer incentives designed to bolster existing infrastructure and dissuade bioscience companies from relocating to lower-cost geographies. Many developed regions are already investing in creation and strengthening of geographic clusters designed to promote competitive strengths through leveraging of common infrastructure. In the US for example, the Center for American Progress has called upon Congress to fund the development of regional innovation clusters similar to California’s Silicon Valley. Meanwhile the UK Government has recently released plans for a pioneering ‘Open Innovation’ cluster in conjunction with GSK and the Wellcome Trust that will create a hub for early stage biotech companies.

Although developing countries offer cost advantages in terms of R&D, in many cases legal, political and cultural variations can significantly increase exposure to risk, as well as presenting considerable barriers to conducting business which often incur additional costs in order to overcome. Therefore biotech companies seeking to exploit cost advantages by locating operations in low-cost geographies must carefully evaluate all potential drawbacks in view of the prospective economic benefits to be gained.

A focus on long term sustainability is essential if the sector is to succeed and prosper as more than just a supply of projects for big pharma

Biological therapeutics and proprietary technology platforms are emerging as leading healthcare value drivers, comprising >25% of R&D pipelines. Therefore biosciences companies with the ability to progress in-house R&D programs into the later stages of development have significant opportunities to capture a greater share of industry value. The growth in availability of R&D infrastructure in low-cost geographies coupled with IT advances such electronic health records are reducing late stage development costs, which offers smaller companies the potential to progress projects further.

New business models that focus on innovation, diversification and risk sharing are the key to long term sustainability in this regard. Rather than building capabilities from scratch, companies should seek to exploit innovative networking technologies and infrastructure in order to access capabilities necessary to establish leading positions in niche markets. As the ‘new normal’ biosciences sector matures, the companies most likely to succeed are those who are integral members of strong and well-functioning networks that provide infrastructure support and also comprise the range of operational capabilities required to bring products to market.

Financing the ‘new normal’

With the continued decline of VC and private equity investment into the sector, bioscience companies are being forced to explore alternative sources of capital. Licensing partnerships and alliances now represent the biggest source of financing for the sector (partnerships accounted for almost $37 billion of the $56 billion raised by the biotech industry during 2009). However, although big pharma are moving towards earlier stage partnering, there remains a relative paucity of the seed-level investment that early stage companies need to generate the initial proof of principle that attracts serious interest from big pharma.

In an attempt to address this funding gap, many governments and charitable organisations are offering awards to biotech companies specifically for translation of promising laboratory science towards commercial viability. For example, in the US the Multiple Myeloma Research Foundation provides $1 million in Biotech Investment Awards to commercial entities, while, the UK’s Wellcome Trust recently led a €25 million 2nd funding round of the speciality pharma SME, Endotis.

Several governments have also introduced specific policies designed to bring stability to the biotech sector against the backdrop of the global economic downturn. The American Recovery and Reinvestment Act introduced by the US Government in February 2009 has set aside $19.2 billion dedicated to healthcare IT to build a national, interoperable health IT records system, and $10 billion for NIH biomedical funding to bolster commercialisation of basic research by biotech companies. Meanwhile, in June 2009 the UK Government announced the creation of the UK Innovation Investment Fund and a commitment of £150 million for investment in high-technology businesses, with the aim of leveraging enough private investment to build a £1 billion, 10-year VC fund-of-funds.

A word of caution. While many grants and awards are non-dilutive and do not require companies to forego equity, they may be associated with additional encumbrances such as reporting obligations or claw-back rights to arising IP. Therefore, while public sector and government grants and awards represent important new sources of finance for the sector, companies must carefully evaluate the terms and conditions associated with all potential sources of funding to ensure that they are fully aware of their duties and obligations to all relevant stakeholders. 

Access to capabilities

Biotech-biotech M&A remains a key strategy in terms of accessing skills and competencies. While pharma-biotech M&A activity fell dramatically in 2009, biotech-biotech sector consolidation remained strong as companies continued to seek critical mass and complementary capabilities. Over 90 biotech-biotech M&A deals were tracked by Thomson Reuters during 2009 compared with 84 deals during 20089. Academic collaborations also continue to represent important partnerships for biosciences companies, not only as a means of accessing new skills and competencies, but also as a source of new product ideas, IP and funding.

The increasing number and variety of service providers within the sector presents bioscience companies with an array of options to secure access to specific expertise on an as-needed basis. A range of professional services firms including law firms, technical and management consultancies, accountants and patent agents obviate the need for bioscience companies to develop these specialist resources in-house, while many, if not all product development and commercial activities can be outsourced to the numerous contract research-, manufacturing- or sales- organisations.

Although the availability of external capabilities offers smaller firms the opportunity to operate in a lean manner and conserve cash, it can be a significant challenge for companies to i) identify the service partners and vendors which are most appropriate for them, and ii) effectively manage the ensuing ongoing relationships with selected partners.

Exploitation of physical and virtual infrastructure provided by clusters and networks represents an increasingly important means of exploring business opportunities, forging collaborations and leveraging competitive advantages. Companies located in and around existing geographic bioscience clusters such as Cambridge MA, Europe’s Medicon Valley and the UK’s Golden Triangle can benefit from access to well-developed infrastructure and services provided from within the cluster, and have the opportunity to seek opinions and recommendations from neighbouring firms who have previous experiences of working with individual service providers. For companies based remotely from such clusters, trade associations and virtual networks can be invaluable in this regard.

Effective delivery of R&D projects from networked business models requires efficient and productive interactions between service and development partners over the long-term. Therefore as the biosciences sector moves towards integrated networked models, companies must build core competencies in project management in order to ensure long-term sustainability. Successful companies will be those with the ability to attract and retain experienced and talented scientists, entrepreneurs and project managers who can ensure the delivery of innovative, multi-stakeholder and globally resourced R&D projects.

In the near term companies must continue to manage the downturn while positioning for future growth

As confidence returns to the biosciences sector, developing companies must adopt a fastidious approach to cash management while formulating business strategies for long term growth.

In the near term companies must strive to lower overheads and optimise capital expenditure. Practical measures that companies can adopt to conserve working capital include:

  • Reduce fixed costs and increase use of external resources (e.g. networking, outsourcing etc.)
  • Review portfolios and focus operations on core value-generating projects
  • Identify and develop short term service provision to generate cash
  • Seek to realise value from non-core assets
  • Identify and eliminate non-critical activities.

Meanwhile future business models must be built on sound value propositions for long term sustainability. In this regard companies should be seeking to:

  • Identify and capitalise on defined business and market opportunities with unmet need
  • Develop a business plan and value proposition that is readily understood by investors 
  • Pursue innovative rather than incremental technologies to achieve greatest growth
  • Exploit networking infrastructure to achieve critical mass and access new capabilities
  • Attract and retain experienced scientists, entrepreneurs and project managers.

Finally, with VC funding unlikely to be sufficient to sustain the sector new financing models must be sought. Here companies need to:

  • Explore alternative financing options such as alliances, acquisitions and other deals
  • Evaluate collaborative deals as a means of mitigating risk and capturing long term value
  • Structure financing around material milestones to capture value and minimise dilution
  • Recognise any new obligations or encumbrances associated with new funding
  • Leverage maximum non-financial value from alliances with larger companies.

By adopting a considered and flexible approach to capital expenditure as the ‘new normal’ sector emerges, companies with innovative platforms and products have unique opportunities to build sustainable growth and capture significant industry value.



1.     Yang, W (2010) 2009: Turning the Corner. Nature Biotechnology 28, 116.

2.     Robbins-Roth, C (2010) First Quarter Shows Biotech Flailing into New Decade. BioWorld Today

3.     Martino, M (2009) Analysts predict next biotech IPOs. FierceBiotech

4.     Timmerman, L (2010) Aveo Pharmaceuticals Goes Public at $9, Falls Short of Hoped-For Range. Xconomy

5.     Tansey, B (2008) Biotechs Claw For Their Lifeblood – Financing. The San Francisco Chronicle

6.     Mayhew, S (2010) Trends in Discovery Externalization. Nature Reviews Drug Discovery 9, 183.

7.     Osborne, R (2010) The Lengthening Handshake. Nature Biotechnology 28, 197-199.

8.     Weisman, R (2009) Biotechs Continue Merger Moves. The Boston Globe

About the Authors

Stephen Mayhew is a Manager in the Consulting Practice at Kinapse Ltd. He consults to the life sciences industry in valuation, deal-making and asset and portfolio management.

Akshat Narain is a Senior Analyst in the Consulting Practice at Kinapse India. He consults to life sciences clients in areas clinical development, medical affairs and market access.


About Kinapse

Kinapse provides consulting and outsourcing services to the life sciences industries, globally.

Our mission statement is: ‘Collaborating with our clients to innovate for exceptional results’. Kinapse clients include many of the world’s leading pharmaceutical, biotechnology, medical device and specialty pharmaceutical companies, government organisations and life sciences service providers.

For more information please visit

Other Kinapse thought articles can be found at



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