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Bio Companies Low on Venture Capital Cash


Pharmaceutical Executive

Pharmaceutical ExecutivePharmaceutical Executive-05-07-2009
Volume 0
Issue 0

As the economy continues to retract, fewer biotech companies are finding the funding they need to survive, driving more firms to sell or close shop.

Ernst & Young, on Tuesday, released its massive biotech report detailing changes in the industry over the past 12 months.

Alliance deals were the big news of 2008, with numerous transactions worth billions in "biobucks." More recently, though, the global economic crisis has hit home, with venture capital dollars slipping away and smaller cap companies forced to sell or go under.

Here are the top line data points:

  • Biotech revenues increased 12 percent to $89.7 billion in 2008.

  • Net loss dove 53%, from $3 billion in 2007 to $1.4 billion in 2008.

  • Companies raised only $16 billion in capital in 2008, down 46 percent from 2007.

  • Venture financing dropped 19 percent from $6 billion in 2008.

  • United States biotech M&As reached more than $28.5 billion.

    As in every other industry this year, the big story for biotech is the impact from the global financial crisis. The bio industry, in particular, depends on capital funding and equity investors to fuel its R&D.

"This has been one of the tougher years we've seen in biotech," said Glen Giovannetti, Ernst & Young’s global biotechnology leader. "Which raises the bigger question about the financing model for biotech and its sustainability. If you think about that $14 billion decrease in funding year over year, the industry has depended on a number that big to keep the 300-plus public companies cranking along doing R&D, but if you don't see that rapid return, we are going to have to see adaptation and companies cease operation because there isn't enough capital."

Venture capital fell 19 percent, a sizable decrease compared to the prior year, but still one of the biggest years for biotech investment. That said, 2008 was a record year for venture capital dollars flowing into biotech.

"On a relative basis, venture capital held in there fairly well. We've seen some softness in 2009, so it's not clear that we are out of the woods yet, but as compared to the public market, it wasn't as [much] of a drop off," Giovannetti told Pharm Exec on Tuesday.

Overall revenue was up 12 percent, which is consistent with the double-digit growth of prior years and the net loss improved by half (53 percent globally). In the US, for the first time in 35 years, the biotech industry was profitable—up $0.4 billion for the year.

"That is symbolic because it is driven by the fortunes of a couple of handfuls of larger, more profitable companies, while the vast majority of companies are losing money as they do R&D," Giovannetti said. Also, Genentech, which is still in the 2008 report and will disappear in 2009 when it becomes part of Roche, makes up a very large chunk of the industry's overall profitability.

"The overall goal is to create value for shareholders and patients, and if at some point the best reward is to sell out to a larger company, be it a larger biotech or pharma company, that is up for the individual boards to decide," Giovannetti said. "Its very hard to create a company with the prospect that it will only get sold. You can't know that someone will come around and just buy your company at the right price."

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