“While the biotech industry’s aggregate performance improved in 2010, there is now a widening gap between large, established companies and those at earlier stages for whom access to capital continues to be difficult.”Glen Giovannetti, Ernst & Young Global Biotechnology Leader

The 25th anniversary issue of Beyond borders highlights the growing funding divide between established players and early stage start ups.

The global biotech market

In 2010, you could find biotechnology growth by following the money. The industry delivered solid top- and bottom-line growth. It achieved aggregate profitability for the second year in a row.

Yet funding for research and development has grown increasingly scarce for the vast majority of firms in the sector. This has placed new pressure on the traditional biotech business model, and may reshape how companies pursue R&D in the future.

What you need to know

The results highlighted in the Beyond borders: global biotechnology report 2011 include:

• Record-breaking profitability: Companies in the industry’s established biotech centers of Australia, Canada, Europe and the US had a record-breaking aggregate net profit of US$4.7 billion, a 30% increase from the previous year.
• Aggregate funding rebounds: Companies in Canada, Europe and the US raised US$25 billion in 2010 — equaling the average for the four years before the global financial crisis.
• Funding for innovation declines: In the US, large debt financings by mature, profitable companies grew by 150% over 2009. Conversely, there was a 20% decline in the amount of “innovation capital” for the sector, defined as total funding minus large debt financings.
• More skewed funding: 82.6% of funding went to just 20% of US companies, up from 78.5% in 2009. The bottom 20% of companies raised 0.4% of funds, down from 0.6% in 2009.
• Alliances remain strong, but not up-fronts: The total potential value of strategic alliances remained strong, totaling more than US$40 billion. However, up-front payments from partners to biotech companies dropped 37 percent to US$3.1 billion.
• Deal-making slows: Merger and acquisitions (M&As) involving European or US biotech firms dropped sharply from 58 deals in 2009 to 45 deals in 2010, while the aggregate value of these transactions remained relatively flat (after normalizing the 2009 numbers to exclude the mega-acquisition of Genentech).

Sustaining innovation

The report identifies four complementary approaches for biotech companies to sustain innovation in this increasingly challenging environment:

1. Prove it or lose it. In an outcomes-driven ecosystem, companies will be under more pressure to prove that their products are truly differentiated. As a result, they will need to tailor their strategies from the early stages of development to demonstrate comparative effectiveness for regulators and be willing to engage in creative pricing approaches for payers including outcomes-based pricing approaches.
2. Do more with less. Companies will need to find new ways to conduct capital raising/deployment and R&D more efficiently. On the capital side, companies will need to be creative in raising, optimizing, preserving and investing scarce capital — from new ways of monetizing existing intellectual property to pursuing “virtual” company models to reduce fixed infrastructure. On the R&D side, targeted products for smaller populations can be more efficient, requiring smaller trials, less generic competition and fewer safety issues.
3. Build new competencies. To support the first two imperatives, managers will need different competencies: awareness of changing market dynamics (e.g., regulators, payers, pharma); project management discipline and performance measurement; the ability to measure value (e.g., analytical techniques) and communicate value; and the creativity to develop new models and approaches.
4. Collaborate for coordinated action. Sustaining innovation will also take changes that biotech companies cannot make alone, requiring coordinated action with other stakeholders. Examples include: encouraging a system of adaptive clinical trials and conditional drug approvals; realigning payment mechanisms around health outcomes; developing incentives to retain biotech investors; and working on transparency and access to build trust.

Coming soon

Check back in the coming weeks for more detailed analysis from us on the state of the biotech industry.

Download Beyond borders: global biotechnology report 2011 today.