In this column, over the past several years, I have written about the transformation of the U.S. biotech industry from one dominated by development-stage companies, including public companies recording little revenues and substantial losses, to an industry still dominated by development-stage companies but with the public biotech sector reporting relatively substantial revenues and total annual net income for the very first time in 2008. In that year, according to Ernst & Young’s biotechnology survey, the U.S. public biotech sector’s total revenues and net income reached $65 billion and $400 million, respectively.
In 2009, 2010, and 2011, again from Ernst & Young’s biotechnology surveys, the corresponding revenues totaled $56 billion, $61 billion, and $59 billion, respectively, and the corresponding net income totaled $3.7 billion, $5.2 billion, and $3.3 billion, respectively. So at first glance it seems as if the biotech industry has now reached its maturity, but first glances can be deceiving. A quick trip through history may shed some light.
During the biotech industry’s early years, in the last three decades of the 20th century, less advanced technology and insufficient knowledge of the underlying science limited the opportunities to create new products. For example, recombinant DNA was initially utilized to enable the manufacture of a relatively small number of otherwise naturally occurring, well-characterized molecules such as human insulin, human growth hormone, and the interferons. Therefore, competition to create a similar product was considerably more prevalent than it is today.
What is almost unique about biotechnology today is that competition to provide a particular product does not necessarily result in winners and losers, because the potential marketplace for a wide variety of biotech solutions is so huge, and both the technology and the underlying science are advancing at an ever-accelerating pace.
As to how quickly the technology and the underlying science have evolved, one example should suffice. The culmination of the Human Genome Project was the sequencing of the human genome. The project cost $3 billion over a 13-year period ending in 2003. Service providers are now driving the cost and time required for sequencing a human genome down to $1,000 and one day.
Product development opportunities have become numerous. For example, there are thousands of currently untreatable hereditary diseases that someday may be effectively treated. Likewise, there is a vast multitude of potential applications of personalized medicine, which might result in more effective treatment of disorders that are currently less than adequately managed.
Today, the ability to raise capital, the inventiveness of a company’s scientists, and the leadership capabilities of management are more likely to determine the success or failure of the company, rather than whether or not some other company develops a similar product first.
Around 70 years ago, Austrian economist Joseph Schumpeter coined the term, “creative destruction”. In essence, entrepreneurial innovations disrupt the status quo. Up-and-coming companies overtake the former leaders, which then fade away. As I noted in the January 15, 2011, issue of GEN, “When one considers the vibrant pattern of financings, internal growth, acquisitions, and yes, closings in the biotech industry, it clearly fits Schumpeter’s model of creative destruction.”
However, that is not the whole story. While creative destruction certainly applies to the biotech industry, so does what one might call creative acquisition. In other words, successful firms do not necessarily lead to the failures of other firms but rather to their own acquisition by larger firms. Creative acquisition is a function of the ever-increasing growth potential of the biotech industry.
For example, of the 10 largest revenue-producing U.S. public biopharmaceutical companies for 2005, four were acquired between 2006 and the close of 2009, and two were acquired during 2011. Novartis acquired Chiron in 2006, AstraZeneca acquired MedImmune in 2007, Takeda acquired Millenium in 2008, Roche acquired Genentech in 2009, and during 2011, Sanofi-Aventis acquired Genzyme, and Teva acquired Cephalon.
In 2005, total revenues and total net income reported by the top 10 companies amounted to $32 billion and $6.2 billion, respectively, whereas in 2011, the corresponding figures were $39 billion and $9.4 billion, or 22% and 52% greater, respectively. The four companies that were among the top ten in both 2005 and 2011—Amgen, Gilead, Biogen Idec, and Celgene—reported total revenues and total net income of $17 billion and $4.7 billion, respectively, in 2005, which increased 100% and 91% to $34 billion and $9.0 billion, respectively, in 2011.
What is even more impressive from the standpoint of percentage growth is the performance of the six companies that were among the top ten for 2011 but not for 2005. Those six companies—Vertex, Alexion, Cubist, United Therapeutics, Amylin, and ViroPharma—reported total revenues of $0.67 billion for 2005, increasing around 630% to $4.9 billion for 2011, and a total net loss of $0.39 billion in 2005, converting to total net income of $0.35 billion in 2011.
The next three largest U.S. public biopharmaceutical companies—Regeneron, Onyx, and Dendreon—reported total revenues over $1.2 billion in 2011, increasing 1,700% from $67 million in 2005. Moreover, Regeneron reported $536 million of revenues for the first six months of 2012, more than double the $220 million of revenues reported for the first six months of 2011.
Clearly, the biotech industry is exploiting loads of opportunities, and big pharma is increasingly attracted to the highly creative technology platforms of the biotech sector.
Yet, despite the presence of creative acquisition, as well as creative destruction, the number of biotech companies remains relatively constant. According to Ernst & Young, the total number of public and private biotech companies in the U.S. was 1,699, 1,914, and 1,879 in 2009, 2010, and 2011, respectively.
Thus, successful biotech companies will continue to be acquired by big pharma, but those companies will be replaced by a new batch of up-and-comers, and new companies will continually be formed. It will be a long time before the biotech sector will have reached its maturity.