Biotechnology companies boosted spending on research and development for a second year in a row in 2011 after a steep drop in 2009, Ernst & Young says in a new report.
The global industry cut research costs by 21 percent in 2009 as it navigated through the financial slowdown. Investment last year jumped 9 percent after a 2 percent increase in 2010, the London-based consulting firm said today in its annual biotechnology report.
In 2011, 62 percent of public companies in the U.S. increased R&D spending.
“Companies that were in deep cost-cutting mode in 2009 and cautiously optimistic in 2010 may have become somewhat more willing to loosen their purse strings in 2011,” wrote Glen Giovannetti and Gautam Jaggi, the report authors. “The financial performance of publicly traded companies is more robust than at any time since the onset of the global financial crisis.”
Revenue in the industry rose 10 percent in 2011, adjusted for the acquisitions of three of its largest companies, according to the report.
Smaller companies with less access to capital are struggling to find ways to finance drug development, the authors said. While companies in the biotech industry raised $33.4 billion in 2011, the most since 2000, it was primarily in the form of debt financings by the industry’s largest companies.
Some key points in the report as cited by E&Y:
- Revenue stabilizes: Companies in the industry’s established biotech centers (US, Europe, Canada and Australia) achieved revenues of US$83.4 billion in 2011, a 10% increase from 2010 on a normalized basis (after adjusting for the acquisition of three large US-based biotechs by non-biotech buyers).
- R&D rebounds: After slashing R&D spending in 2009 and increasing it modestly by 2% in 2010, the industry grew R&D by a healthy 9% (on a normalized basis) in 2011.
- Overall funding explodes, but “innovation capital” stays flat: Biotech companies raised a staggering US$33.4 billion in 2011, second only to 2000, when the genomics bubble was at its height. However, this increase was driven by a handful of commercial leaders with revenues in excess of US$500 million that took advantage of low interest rates to raise large sums of debt. Importantly, capital raised by the rest of the industry (innovation capital) remained largely unchanged from the previous four years at US$16.8 billion. IPO buyers remained selective, with only 16 IPOs and aggregate proceeds of US$857 million, compared to US$1.3 billion in 2010.
- M&As up, but big pharma largely absent: Mergers and acquisitions involving European or US biotechs increased from 49 deals in 2010 to 57 deals in 2011. However, big pharma was the buyer in only 7 of these 57 deals, a potentially troubling trend given pharma’s critical role in supporting biotech innovation. Ernst & Young estimates that the “firepower” of the top 28 drug companies to support biotech innovation declined by 30% between 2006 and 2011 — a situation that is not expected to improve with more patent expiries and investor pressure ahead.
“If you take away the money being raised by the biggest companies, the commercial leaders, what’s left – we’re titling ‘innovation capital’ – has been essentially flat,” Giovannetti said in a telephone interview. “At $16.8 billion, it’s not increasing and, in our view, it’s not going to increase materially in the near term.”
Those drugmakers will have to find ways to do less with more as they have for the last few years, Giovannetti said. Large pharmaceutical firms are trying to do the same as they work through the loss of patent protections for some top-selling medicines, such as Pfizer Inc.’s Lipitor last year and Sanofi and Bristol-Myers Squibb Co.’s Plavix this year.
The drugmakers have seen a decrease of 30 percent in the last five years in what Giovannetti and Jaggi call “firepower,” or the ability to invest in biotechnology companies through acquisitions and partnerships. While the number of biotech acquisitions increased in 2011 to 57 from 49 the year before, large pharmaceutical firms were buyers in just seven of the deals, according to the report.
State of the U.S. Market
Highlights from the U.S. market, as noted by E&Y:
- Revenues of publicly traded biotechs were US$58.8 billion, a 12% increase on a normalized basis — outpacing the 10% growth rate in 2010.
- R&D spending increased by 9% in 2011, building on the 3% increase in 2010.
- Net income fell 21% on a normalized basis from US$5.2 billion in 2010 to US$3.3 billion in 2011.
- M&As involving US-based biotech companies rebounded to 37 deals from a low of 26 in 2010.
- Total US funding reached US$29.8 billion in 2011, up an impressive 38% from 2010 but driven largely by debt raised by profitable companies to refinance existing debt and for stock buybacks and acquisitions.
Three of the biotech industry’s “commercial leaders,” defined by Ernst & Young as companies with more than $500 million in annual revenue, were purchased last year. Paris-based Sanofi bought Genzyme Corp. for $20.1 billion, while Petach Tikva, Israel-based Teva Pharmaceutical Industries Ltd., the world’s largest maker of generic drugs, bought Cephalon Inc. for $6.2 billion.
Talecris Biotherapeutics Holding Corp., which was based in Research Triangle Park, N.C., was bought by Grifols SA, based in Barcelona, Spain, and Europe’s largest maker of blood-plasma products, for about $3 billion.
Net income across the industry declined by 5 percent, adjusted for those acquisitions, as companies such as Thousand Oaks, California-based Amgen and Allschwil, Switzerland-based Actelion Ltd. paid legal charges and Amylin Pharmaceuticals Inc. of San Diego took a charge to end an alliance with Eli Lilly & Co., based in Indianapolis. The biotech industry turned its first profit in 2009 amid cost cuts.
“This is an industry that has been in the red for the vast majority of its history,” Giovannetti said. “It’s still net income, which is nice.”
(Bloomberg contributed to this report.)