Biotech companies face numerous challenges in 2009, led by dwindling cash reserves, a squeezed credit market and a poor IPO environment. However, recent events signal short- and long-term benefits for the biotech industry. A spate of mega-mergers of major pharmaceutical companies further underscores the growing need for pharmaceutical companies to diversify portfolios with targeted biologic drug products. Also, biotech will likely—in the long term—be buoyed by a strong push from the Obama administration to ramp up spending for basic biomedical research and development of personalized medicine.
As the so-called blockbuster drug “patent cliff” chips away at Big Pharma revenue, and inhouse R&D continues with diminished returns on productivity, biotech firms will increasingly be positioned to fill product pipeline gaps by sourcing new innovations and drug prospects— especially with diagnostic and therapeutic biologics.
At the same time, venture capitalists are weathering the storm, plowing rounds of funding into their most prized biotech firms in the hope of an exit through an acquisition or, eventually, through an IPO. Biologics, in particular, continue to shine as the bright spots—particularly therapeutic and diagnostic monoclonal antibodies (mAbs) and immune response effectors (including vaccines and interferons)—with VC investment soaring by 45 per cent and 90 per cent respectively in 2008 over 2007, according to the MoneyTree™ Report, a quarterly study of venture capital investment activity in the United States, produced by PricewaterhouseCoopers and the National Venture Capital Association (NVCA) based on data provided by Thomson Reuters.
Overall, VC investment in human biotech (excluding medical devices) fell by about 11 per cent in 2008 against 2007, yet drew some major deals in the $ 50-million to $ 100-million range. The survey also found that funding of biotech seed and start-ups rose sharply in 2008,while later-stage funding, though dropping slightly, was still relatively robust, demonstrating that VCs are still investing in promising areas and holding firm—and expensive—positions in biotech companies with the brightest exit prospects.
Biotech companies (that survive cash shortages) with drug platforms that can potentially feed Big Pharma’s pipelines with biologics are in a propitious spot, with competition among cash-rich pharmaceutical companies to diversify likely driving further acquisitions of biotech companies in the half-billion- to billion -dollar range through 2009. Biotech companies struggling with solvency issues will become increasingly more open to being acquired, even at lower-than expected valuations.
Biologics to drive drug innovation
Dried-up credit, an anemic IPO market and a reluctant investor pool have taken their toll on the biotech industry. According to the Biotechnology Industry Organization (BIO), about 45 per cent of all publicly listed biotech companies are operating with less than one year of cash remaining. Prospects for biotech IPOs will likely remain dim in 2009 on the heels of a very weak 2008, which produced just one IPO, raising $5.8 million, according to BioWorld. That compares to 41 IPOs raising $1.9 billion in 2007 and 32 IPOs raising $1.7 billion in 2006. With the IPO market effectively closed, cash-strapped biotech companies are looking to M&A exit possibilities such as partnerships, alliances or other business combinations.
It is the biologics sector which will likely drive such M&A activity. The global market for protein-based therapeutics (peptides, proteins, enzymes and antibodies), for example, is estimated to grow at 15 per cent per year over the next decade, according to Genetic Engineering & Biotechnology News. Among biologics, monoclonal antibodies have emerged as a particularly high-growth sector, with revenues estimated to grow at a CAGR of 16.9 per cent from 2006 to 2012 compared with 0.8 per cent from sales of small molecule drugs.
As a sub sector monoclonal antibodies are already estimated to comprise about 25 per cent of the broad biopharmaceutical market. In 2008, there were 20 New Molecular Entity (NME) FDA approvals and four new biologics, compared to 16 NMEs and two biologics in 2007. “There is a healthy market in developing biologics meeting unmet needs, such as Alzheimer’s, but they will probably need data that demonstrates efficacy and safety with clinical endpoints, not simply surrogate endpoints. If they do that, they’ll get welcoming [FDA] approval,” said John E. Calfee, resident scholar, American Enterprise Institute for Public Policy Research.
Additionally, generally depressed valuations come at a time when pharmaceutical companies are filling their drug development pipeline in the face of fast-approaching “patent cliffs”. However, biotech stocks jumped in late 2008 and early 2009, outperforming the S&P 500 and NASDAQ composite for the first time in about five years, which may provide biotech companies with some leverage when negotiating valuations with acquirers.
Courtesy : Pricewaterhouse Coopers study