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Oct 1, 2011 (Vol. 31, No. 17)

Tracking Operational Financing Trends

Analyzing the Rapid Worldwide Growth of the Bioindusty Spanning 30 Years

  • Click Image To Enlarge +
    G.Steven Burrill

    Biotechnology is an extraordinary industry that is characterized by long timetables and high financial risk. As as we look back over its history, it is safe to say that ready access to capital is one of the main reasons why it has grown to the global enterprise we have today.

    Virtually all biotech companies in operation today owe their origins and ongoing development to the confidence that investors hold in their hopes, dreams, and aspirations.

    As a result, the biotechnology industry has shown remarkable resilience. Biotech companies have always found creative ways to survive during periods of adversity. The industry has endured and grown even though conventional business wisdom has periodically called into question its ability to survive.

    This has been particularly evident each time Wall Street has turned its back on biotechnology and the window for biotech IPOs has slammed shut. Confidence waned during those periods as capital became more expensive and difficult to obtain. As a result, the industry had to weather several severe market droughts (Figure 1).

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    Figure 1. Historical biotech market cap: Wall Street turned its back on biotech many times over the last 30 years. During those periods, capital was more expensive and difficult to obtain.

    Throughout this turmoil, biotechnology companies have evolved by leveraging the value of their technology, their entrepreneurial spirit, and management’s strength. Companies have also operated on the expectation that capital would be there to help them achieve their product-development milestones. Investors, for their part, have maintained their confidence in spite of the challenges and risks that need to be overcome.

    Although financing has remained a constant throughout biotech’s history, business models have changed dramatically. At the dawn of the biotechnology industry, the benchmark for success for any early-stage company was the nurturing of a biological discovery through to market approval. The value of any company achieving this goal increased significantly, and its investors were rewarded for providing the risk capital that allowed the company to operate and prove its product was efficacious and safe.

    By and large, the fledgling biotech industry was highly dependent on the pharmaceutical industry and its success measured, particularly by the capital markets, in terms of how many strategic alliances a biotechnology company had signed with big pharma.

    This business model has worked well. Along with access to capital, the ability to partner with pharmaceutical companies that were willing to accept a significant share of the risk of their lead drug’s development in return for a healthy up-front cash payment and generous milestone payments rapidly entered into the must-have column for any biotech company’s ultimate success.

  • New Way to Finance

    This traditional business model is fraught with challenges. The high cost and long timeline for drug development has challenged this mechanism for raising money. Venture investors don’t have the ability to provide round after round of financing and wait 10 to 15 years for a return.

    The rules under which the industry has operated since its inception have been washed away by a confluence of global economic, policy, marketplace, and technological forces that are transforming the way in which companies need to operate to succeed. The collapse of the global financial markets and financial systems was a major force in reshaping the landscape.

    The days of needing just a promising product past proof-of-concept trials in order to get an initial public offering complete are over. Companies need to have products on the market and predictable revenue before going public, thus eliminating technological, regulatory, and reimbursement risks.

    With escalating R&D expenditures, a paucity of new drug approvals, increasing safety demands by regulators, and the loss of revenue to generics, the pharmaceutical industry has turned its focus toward biotechnology.

    The business models that created value in the past are no longer effective in an increasingly risk-averse and competitive environment that includes governments focused on controlling healthcare costs, skittish investors, and demanding shareholders.

  • Massive Consolidation

    As pharma companies face a loss of tens of billions of dollars in revenue (35% of their revenue base comes off patent in the next several years), there will be a substantial consolidation in the pharma industry. Big pharma will not be able to replace disappearing sales from its top products with what it has moving through its pipeline. Instead, it will trigger unseen levels of M&A activity that will seek to not only bolster P&Ls with new sources of revenue but also much greater operating efficiencies. Tens of thousands of jobs will be lost and not return.

    A shift to partner-driven models—in which the pharmaceutical or biotechnology company relies on a potentially complex network of advisors, suppliers, service firms, academic centers, shared service relationships, and so on—is increasing as companies seek novel ways to trim operations down to the most profitable core.

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