Biotech: the business and the lottery

The global biotechnology industry is having to tackle some major business issues, many of them pretty high risk, writes Richard Willsher

The latest overview of the biotech sector provided in research by Ernst & Young (1) shows an industry dominated by the United States. Out of a global universe of 4,362 public and private biotechnology companies 1,466 are based in the US as compared with 1,878 in Europe as a whole (Canada has 417 and Asia Pacific 601 to complete the picture). No other single country can compare by number of businesses active in the sector but, when it comes to publicly listed companies, American leadership is even more starkly visible. The US accounts for 318 of the 613 quoted companies, which employ 142,900 people out of a global total of 193,753, and earned revenues of $30.2bn out of a worldwide total of $41.4bn.

Perhaps even more telling is that, out of world research and development spend of $22bn in 2002, 74% was funded in the US, and, depending on who you speak to, people in the industry will tell you that American biotechnology is 10, 15 or even 20 years ahead of Europe.

Despite the economic downturn and stock market falls of the last three years, biotechnology investment in the US has continued unabated. Indeed, US biotechnology companies actually raised more money in 2002 via initial public offerings (IPOs), follow-on and other offerings and venture financing than in 2001, adding up to $8.7bn of new money while there were massive declines in Europe and in Canada. One reason for this, as Ernst & Young�s research notes, was that revenues among the sector�s leading public companies such as Amgen and Genentech in the US, Serono in Europe, Biovail in Canada and CSL in Australia, continue to increase. And this is the proof of the biotech pudding if the object of the exercise is to come up with solutions to biotechnological problems and to commercialise them.

Dr Adrian Reed, a biotech industry specialist at British investment bank Altium Capital, explains that in the US, the atmosphere in which biotech companies operate is characterised by the larger companies making money post-IPO and so attracting further funding - a virtuous upward spiral. In the rest of the world, and particularly in Europe, IPOs have virtually dried up.

Dr Reed goes on to say that as many as 85% of biotechnology firms in the UK are thought to have less than one year�s cash in the kitty to fund their activities and, therefore, are desperate for funding merely to survive. Added to which, even though some sector firms such as Alizyme, Oxford Biomedica and Cellech have seen massive increases in their share price over the last year, the vast bulk of firms cannot achieve public or private equity funding for love nor money. This is leading to consolidation in the market with companies looking to build not only alliances but be acquired by others as safe havens. In some cases this is under pressure from venture capital firms who see little scope for realising gains on their investments and are under pressure from their investors to offload them.

In the late 1990s, venture capitalists looked for good technologies with the skills to develop them. Now given the very long lead times required to bring drugs and other discoveries to market - i.e. pre-revenue - what they look for is the strength of alliances that they have to bring with any funding proposition. Typically those alliances must be with pharmaceutical companies that will be prepared to make investments in the research and to provide future investment as and when required.

Speaking with reference to the UK biotech sector, Mike Murray, Vice President of biopharmaceuticals at technology commercialisation specialist BTG, concludes: �The industry is emerging from a prolonged drought of risk capital investment due to a major change in the perceptions of risk on the part of venture capitalists and other investors. This has come with the realisation that generating business success against the backdrop of the high inherent risk in drug development, and the phenomenally fast rate of scientific advance in the life sciences results, is incredibly difficult. It has become clear that the timeframe for financial returns expected by investors either have to be longer or investors need to choose carefully those prospects which have the greatest chance of increasing in value over a short timeframe��

Yet governments see great prospects for those nations that can nurture a vibrant industry, harnessing the intellectual talent at their disposal and benefiting from employment growth, worldwide export sales, advances in medical science, tax revenues and kudos as a leading knowledge economy. The UK Prime Minister said as much in his foreword to the November 2003 report, Bioscience 2015, produced by the Bioscience and Growth Team. He also confirmed that the Government�s overall science budget is set to grow by 10% each year to £2.9bn by 2005-06. In line with the report�s recommendations, he writes that biotechnology �faces an exciting future� linking with the National Health Service as a test bed for clinical trials.

If this heralds commitment to biotechnology from the UK Government it is also worth reflecting that the massive Human Genome Project was sponsored in the United States by the Department of Energy and National Institutes of Health. Perhaps it is only right that governments should help with substantial funding programmes, if, as many argue, that the lengthy, bureaucratic and uncertain process of obtaining approval for new drugs from state regulatory authorities is one of the main obstacles to attracting capital investment to biotechnology. But governments have to tread much more carefully than private sector biotech companies.

Public controversy surrounds many key areas of bioscience research - animal testing, various cloning initiatives, stem cell research, genetic engineering of crops and maintaining and providing access to genetic records of private individuals are all open issues where the industry comes face-to-face with a range of strongly held views, many opposing further research.

The range of issues that bear upon the business of biotechnology industry as we advance through the first decade of the 21st century range from the restructuring of the industry as a whole, the problems of raising capital, obtaining government support and approvals to moral considerations. Yet, as the introduction to the Ernst & Young report says, many in the industry see themselves as being �at the beginning of a technology curve whose upside potential appears limitless. The best days of the industry are ahead of it not behind�. Realising some of that potential is not necessarily easy and there have been, and in all probability will be, business casualties along the way as the last few years have shown.

Reference
(1) Beyond Borders - The Global Technology Report 2003, Ernst & Young.