Ernst & Young Report: Global biotechnology industry sees growth in 2010

Yet funding for research and development has grown increasingly scarce for the vast majority of firms in the sector, which tend to be pre-commercial stage companies that depend on years of funding to support drug development. This has placed new pressure on the traditional biotech business model, and may reshape how companies pursue R&D in the future, according to Beyond borders: global biotechnology report 2011, Ernst & Young's 25th annual report on the biotech industry.

'Biotech firms will need to adapt creatively to this environment by doing more with the funding that is available and by working from the earliest stages of development to demonstrate the potential value of their products to investors, payers and regulators', said Glen Giovannetti, Ernst & Young's Global Biotechnology Leader.

Bogdan Ţenu (photo), Senior Customer Support Manager in the Transaction Advisory at Ernst & Young Romania said: 'In general, the pharmaceutical industry in Romania faces the same major problems highlighted by the report released today by Ernst & Young. But there are specific issues that should be clarified better in the legislation, such as compensation mechanisms for innovative and generics drugs, the claw back system, and regulations applicable in this field. The pharmaceutical industry has a real potential for development in Romania, although the growth rate decreased slightly in the last quarter. In the next years we will see a further consolidation in the sector, but also an improvement in the supply of private medical services. '

Key results highlighted in the report 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.
• Alliances remain strong: 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 Beyond borders report notes a confluence of challenges that will make it difficult for the industry to sustain its historical level of innovation. In addition to less available 'innovation capital,' biotech companies face increased competition from other sectors for a smaller pool of venture capital.

Even with less capital available, companies are being asked to do more, as the process of discovering and developing drugs has become increasingly lengthy, expensive and risky. Drug approvals continue to be near historic lows and it is becoming increasingly common for regulators to request additional data for approval after a company has undertaken clinical studies, increasing the time, expense and risk of developing products.

Giovannetti also points out, 'health care systems across the globe are under increasing pressure to rein in costs, creating continued downward pressure and uncertainty on the prices that innovators can secure for their products. This lack of sustainability in health care is also leading to a sweeping movement under which companies will need to move from simply producing new medicines to demonstrating improvements in health outcomes.'

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: (1) awareness of changing market dynamics; (2) project management discipline and performance measurement; (3) the ability to measure value; (4) communicate value; (5) the creativity to develop new models.

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 to build trust.

Key highlights for Europe

• Revenues of European public biotech companies grew 12% to €13 billion, a significant increase from the 2% growth seen in 2009.
• The combined net loss for biotech companies in the region improved slightly, from €467 million in 2009 to €459 million in 2010.
• The value of M&A activity in Europe increased from €1.8 billion in 2009 to €3.5 billion in 2010.
• Total funding for the European industry was essentially unchanged from the previous year, with €2.9 billion raised.
• Venture capital raised in Europe totaled €1 billion, an increase from the €790 million raised in the previous year.

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Ernst & Young is one of the world's leading professional services firms with approximately 141,000 employees in 700 offices across 140 countries. With year 2010 revenues at approximately $21.3 billion, our globally integrated network and vast resources allow us to help our clients benefit from every opportunity. In Romania, Ernst & Young has been a leader on the professional services market since its set up in 1992. Our 450 employees in Romania and Moldova provide seamless assurance, tax, transactions, and advisory services to clients ranging from multinationals to local companies. Our offices are based in Bucharest, Cluj-Napoca, Timişoara and Chisinău. For more information, please visit www.ey.com.

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