While the market for small-capitalization biotech companies has improved over the course of 2009, only a select few companies who have demonstrated commercial or late-stage development success have had ready access to capital, and the IPO market has remained virtually closed.

In January 2009, Ernst & Young published Opportunities in adversity, a study that provided insights into the issues executives were facing as they grappled with the implications of the economic downturn.

We suggested that every company falls somewhere on a stress pendulum between cash burn and cash earn, and for every business there is an appropriate course of action. By executing that course of action quickly and effectively, management teams can seize a potential source of competitive advantage.

But we wanted to know more. So we went back to our life sciences professionals to gain their insights. In total, life sciences partners from our member firms around the world conducted more than 1,500 client meetings.

These conversations revealed a series of strategic actions the industry is taking to position itself for success. Not all of their lessons from change may be new, but they are taking on new importance as life sciences companies strive not only to survive but to thrive in the new economic environment.

• Focus on forecasting, capital needs and speed to market

  Emerging life sciences companies are focused on access to capital to sustain operations, whereas mature companies are focused on best practices in forecasting. In particular, you should:

  • Maintain tight management on liquidity and costs. Active management of costs and working capital is now key to the industry’s ongoing transformation. Steps that can spell the difference between making and missing your numbers include:
  • Establishing incentives, metrics and accountability for cost-reduction initiatives, acquisition synergies, and demand and sourcing management
  • Developing measures to improve payables, receivables and inventory performance to achieve more efficient working capital management
  • Actively seeking out the best practices of other industries, especially those industries with different levels of operating margins and cash generation, but with much lower working capital requirements
  • Look for creative sources of financing and risk-sharing. Royalty-stream financing, project-based financing, joint or minority ownership in a partnership with sources of private capital for discrete businesses, reverse mergers and government grants or incentives are all attractive and emerging alternatives to traditional financing options. Corporate collaborations in which companies license off global marketing rights, while maintaining the rights to the US or other major markets are also becoming increasingly common.
  • Combine for strength. Single-product firms that combine with similar firms may be more attractive to investors by lowering the cash burn rate, taking advantage of scale efficiencies and increasing the number of potential “shots on goal.” Emerging companies might also look to share facilities and infrastructure to offset costs.
• Manage your overall risk profile

  Companies need to build more visibility and controls into the risks they are incurring from an increasingly complex network of third-party suppliers and partners. You should:

  • Deploy comprehensive risk management. To stay on top of the evolving regulatory landscape and also ensure product safety remains a primary focus, companies are adopting processes to check risk management practices and related key performance indicators against a balanced scorecard.
  • Plan ahead. Given all the changes in the business model with new strategic directions taken around the science, the customer, the markets, the product and the partners, risk management has to be predictive and anticipatory, not just formed through a rear-view mirror.
  • Realize that effective risk management doesn’t have to cost more. Many life sciences organizations have unintentionally, over time, built duplicative risk-management responsibilities and practices. Using approaches such as ERM can help a company monitor today’s cascading risks without multiplying its cost base.
  • Recognize supplier risk as an evolving threat. As many suppliers and other counterparties struggle amid the financial crisis, quality of supplier output is more vulnerable. It is imperative for companies to develop and execute processes that manage third-party relationships.
  • Take an extraprise-wide view of the risk management arena. Companies need to create a controls environment that maps risk beyond the enterprise to the ever-growing “extraprise” of companies and organizations that now make up and create new vulnerabilities in the value chain.
• Do more with less

  Reduced growth, lower margins and less-productive pipelines are driving life sciences companies to take a hard look at how to reduce costs across their value chains and capture sustainable efficiency gains. You should:

  • Push for better terms from suppliers. Companies that use significant outsourcing report using the current environment to exact better terms on existing contracts through renegotiation.
  • Prioritize the pipeline. The end goal of a firm’s clinical development efforts is no longer regulatory approval, but reimbursement. In addition to the probability of R&D success, companies should consider cost benefits and expected payor adoption when deciding which product candidates to prioritize, continue or discontinue.
  • License, collaborate and share the risk. Under better conditions, companies may have sought to retain exclusive rights to their lead product candidates for longer periods of time. Now, depending on a life sciences company’s stage of development, new strategies are being explored.
  • Large, established life sciences companies can leverage their development budgets and share development and commercialization risk through codevelopment or copromotion arrangements — and even selective out-licensing — for certain therapeutic categories.
  • For emerging companies, where the emphasis is more on securing the present, collaborations provide an opportunity to secure fi nancing, while retaining some economic upside.
  • Turn finance into a strategic function. As a result of steady revenue growth from blockbuster medicines, many large companies have not invested in finance processes that adequately measure performance. CFOs and their teams should work elbow-to-elbow with management on product development and commercialization decisions, acquisitions and cost-containment initiatives.
• Look to new business models to drive growth

  With blockbuster drugs losing exclusivity and not enough in the development pipelines to replace them, the industry’s traditional business model is expiring along with its patent protections. You should:

  • Plan ahead for regulatory changes. As industry regulation continues to rapidly change on both global and local country levels, companies need to continue to adjust their business model to anticipate the impact of global healthcare reforms on their financial performance. Increasing legislative advocacy activities will help give the industry a seat at the table and may help shape the final outcome of reform initiatives.
  • Outsource and leverage networks. Large and emerging companies have turned to outsourcing in recent years. But there are still plenty of opportunities to offload inefficient business operations in which third parties can offer a specialized, lower-cost focus.
  • Plan carefully for new partnerships. Companies need to be creative in exploring relationships with nontraditional players that could help them address specific market opportunities. They must also evaluate the processes, roles and skills in place to manage such ventures.
  • Identify your optimal product portfolio strategy. Big pharma companies may be well served by bringing a portfolio approach to creating new business models — experimenting with different models and innovative partnerships for particular problems and adopting those that are most successful.
• Structure for growth

  The financial crisis has hastened the life sciences industry’s pursuit of new business models, new partnerships, new customers and new business leaders, which are all viewed as necessary precursors to creating the organizational flexibility these companies will need to adjust to the quickly evolving regulatory landscape. You should:

  • Reinvest in the talent pipeline. Innovation starts with people, not products. Companies should conduct a rigorous analysis of their people pipeline. They should reach outside their organizations and industries to attract a diverse pool of skills and perspectives recently made available by the global economic downturn.
  • Know the transaction landscape. Emerging companies and other sellers have seen negotiating power shift toward buyers in the current market, but it is important to remember that many buyers are still desperate to fill their pipeline and meet their R&D productivity challenges. Small companies need to be aware of the differences in strategic needs among potential buyers so they can increase their chances of securing a robust valuation for their IP or business unit.
  • Team up for success in emerging markets. Given the enormity of the challenge in expanding access in developing countries and the multitude of players involved, life sciences companies should continue to explore partnerships to combine strengths and fill gaps in their capabilities. Partnering with local companies can help provide specialized knowledge of local market conditions and regulatory regimes.
  • Build organization flexibility. In order to fully exploit new product and market opportunities, companies should build in flexibility to reallocate resources in pursuit of expansion, acquisitions and divestitures.