January 15, 2011 (Vol. 31, No. 2)
J. Leslie Glick Ph.D. Independent Corporate Management Advisor
Rising Net Income for U.S. Public Firms Just One Indicator that Industry Is Alive and Well
Just over a year ago, in the January 1, 2010, issue of GEN, I reported that biotech’s share of venture capital (VC) had increased percentage-wise during the recent recession. For the 12-month period ending September 30, 2009, the total dollar amount of all U.S. VC investments and the total number of such deals fell 41% and 32%, respectively, from the analogous period one year earlier. However, the corresponding amount of biotech investments and number of biotech deals dropped only 21% and 22%, respectively, when comparing the 12-month period ending September 30, 2009, with that ending one year earlier.
As I commented then, “This suggests that high-risk investments in biotech are preferentially being made because there is now a critical mass of well-managed development-stage biotech companies exploiting accelerating advances in enabling technologies. For knowledgeable investors the perceived rewards outweigh the perceived risks.”
The relatively impressive performance of biotech companies obtaining investment capital during the recession was in fact accompanied by the biotech industry contemporaneously achieving a huge milestone. Ernst & Young, which publishes annual surveys of the biotechnology industry, reported in its 2010 survey that for 2009, total net income of U.S. public biotech companies had grown to $3.67 billion, up from around $400 million in 2008. Every year previously, since the start of the biotech industry, the public biotech sector had reported annual losses.
Of particular interest is that Genentech, which alone accounted for net income of $3.43 billion in 2008, was not included in the 2009 statistics since it was acquired by Roche in 2009. Moreover, although the total revenues of U.S. public biotech companies in 2009 fell to $56.6 billion from $65.1 billion in 2008, the 2009 total revenues did not include Genentech’s revenues, which reached $13.4 billion in 2008.
Thus, excluding Genentech’s revenues, the total revenues of U.S. public biotech companies in 2009 increased 9.5% from $51.7 billion in 2008. Not too bad for the worst recession since the Great Depression. In fact, the prospects for biotech look even better if one probes further.
Revenues from Top Ten Firms
In the April 2008 issue of the Journal of Commercial Biotechnology, I reported on the growth of the top ten revenue-producing biopharmaceutical companies in the U.S. from 1990 to 2005. During this period, total revenues grew from $1.12 billion in 1990 to $4.94 billion in 1995, $10 billion in 2000, and $31.7 billion in 2005. In 1990 the top ten companies recorded a net loss of $281 million, but in 1995 they recorded total net income of $43 million.
In 2000 and 2005, total net income grew to $1.29 billion and $6.22 billion, respectively. What makes such growth even more impressive is that due to companies being acquired, of the original top ten in 1990, two were replaced in 1995, another two in 2000, and one more in 2005.
In 2009, the top ten companies reported total revenues of $37.5 billion and total net income of $9.66 billion, which represented 18% and 55% growth of revenues and net income, respectively, compared to what was reported by the top ten companies in 2005. Yet, since 2005, four of the top ten companies had been acquired, and four others had replaced them by 2009.
What is particularly interesting is to look at the growth of the six companies that were among the top ten in both 2005 and 2009, as well as the growth of the four companies among the top ten in 2009 but not in 2005.
The six companies that were among the top ten in 2005 and 2009—Amgen, Gilead, Genzyme, Biogen Idec, Celgene, and Cephalon—reported total revenues of $35.4 billion in 2009, which represented a 66% increase over their reported revenues of $21.3 billion in 2005. Even more impressively, their combined net income of $9.76 billion was 96% higher than their corresponding income of $4.98 billion for 2005.
With respect to the four companies not among the top ten in 2005 but who were on that list for 2009—Amylin, Cubist, OSI, and Regeneron—their total revenues of $2.13 billion in 2009 were 325% greater than their combined revenues of $501 million in 2005. These four companies reported combined losses in 2005 and 2009, but the total loss of $98 million in 2009 was 80% lower than the corresponding loss of $491 million in 2005. Indeed, two of these four companies—Cubist and OSI—were profitable in 2009, whereas all four companies reported losses for 2005.
In addition, there were ten other U.S. public biopharmaceutical companies in 2005 that, through the end of 2009, had not been acquired and had each exceeded $100 million in revenues either in 2005 and/or in 2009—Alkermes, Emergent Biosolutions, Enzon, InterMune, Ligand, Myriad Genetics, PDL Biopharma, United Therapeutics, Vertex, and VibroPharma.
The total revenues of this next tier of companies in 2009 reached $2.26 billion, representing a 77% increase over their total revenues of $1.28 billion in 2005. Moreover, in 2009, the combined net income for these ten companies amounted to $308 million, in contrast to a combined net loss of $649 million in 2005.
Regarding turnover of U.S. biotech companies during the recession, the recession obviously had some impact, but in the context of historical statistics, as reported by Ernst & Young, the impact was not as dire as it first seemed. At the end of 2009, there were 313 U.S. public biotech companies, or 21% fewer than the 395 such companies existing at the close of 2007.
This two-year decrease represented the largest such decrease since 1994 or perhaps ever. However, during 2007, the number of U.S. public biotech companies increased 18%, from 336 at the end of 2006. This one-year increase represented the largest such increase since 1994, if not earlier.
Overall, there was a 7% decrease in the number of U.S. public biotech companies from 2006 to 2009. However, there was a 24% increase in the number of privately held U.S. biotech companies, from 1,116 at year-end 2006 to 1,386 at year-end 2009. As a result, the total number of U.S. biotech companies, both public and privately held, increased 17%, from 1,452 at year-end 2006 to 1,699 at year-end 2009.
There are other indications that the biotech industry has weathered the recent economic storm better than some pundits might have anticipated. According to the Biotechnology Industry Organization’s statistics regarding the U.S. public biotech sector, 29% of companies comprising this sector had less than one year’s worth of cash on their balance sheets at year-end 2007 vs. 45% at year-end 2008.
However, by the end of the second quarter of 2010, this percentage fell back to 25%. Moreover, whereas 28 companies had been acquired and 36 others had closed their doors during 2008, over the subsequent year and a half 34 were acquired and only 16 shut down. Finally, there was only one IPO during 2008 but three in 2009 and 10 more during the first half of 2010.
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. At the end of the day, biotech is alive, well, and growing stronger.
J. Leslie Glick, Ph.D.([email protected]), is an independent corporate management advisor.