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After a year of losses, the biologics sector got a big boost in profits in 2009. However, with companies holding back on R&D spending and venture capitalists becoming more frugal, can the industry possibly see further growth?
Ernst & Young, on Wednesday, reported that the global biotech industry saw its first net profit in 2009, speared by major restraints in R&D spending. Last year, Biotech companies realized a $3.7 billion increase in profits after suffering a $1.8 billion loss the previous year. However, revenue dropped 9 percent to $79 billion in the wake of Roche’s acquisition of bio-giant Genentech. E&Y reports that if you exclude Genetech’s earnings from 2008, revenues would be up 8 percent.
“On the surface, these are some very positive financial figures,” said Glen Giovannetti. “The US industry was quite profitable, and drove profitability on an aggregate level across all of the regions.”
The big driver of these figures is that, across the industry, companies were being far more conservative on their spending, particular in research and development. There was also a decrease in M&A activity. Excluding Genentech, there were only three other transactions where the purchase price was in excess of $1 billion.
“In years past, the increase in R&D expense, pretty much tracked with the increase in revenue,” Giovannetti said. This year-if you remove the purchase of Genentech by Roche from the equation-revenue in 2009 grew 10 percent, but R&D expense dropped 13 percent.
“One can’t help but think that there would have been more spending if capital wasn’t so scarce, and there might be an impact on innovation, or at least the pace of new drug development,” Giovannetti said. “My suspicion is that cuts in R&D spending today will have an impact on innovation down the road.”
Not surprisingly, the economic downturn is being blamed for the decrease in capital support. Investors chose to funnel their money into lower-risk investments, leaving some early stage drugs with little backing. Still, the aggregate amount of capital raised did increase in the second half of the year, signifying potential improvements in the market.
“There’s a bit of a have and have not story there, because 80 percent of the capital went to about 20 percent of the companies,” Giovannetti said. “Investors are looking for more de-risked investments, or drugs that are in the later stage of their development. Companies that have released positive Phase II or Phase III data had no problems accessing large amounts capital.”
E&Y noted that there’s been a systemic change in the amount of capital available, and industry should expect that there will be less money to go around in the coming years. Early signs might be cuts to R&D, but new financial models might be created in the coming years.
“While it was is a good year for money flowing into biotech companies, it was not a good year for money flowing into venture capital firms,” Giovannetti said. “As they have less total available capital, we see them being more selective in the kinds of investments they make.”