1. Beyond borders
Global biotechnology report 2009

2. “It is different this time because this crisis
is deep-rooted, systemic and persistent.
But, in spite of that, the industry has been
here before, in that biotech companies
have overcome seemingly insurmountable
challenges in the past, bucking trends and
defying odds.“
Glen T. Giovannetti and Gautam Jaggi, Ernst & Young Global Biotechnology Center

3. Gautam Jaggi
Managing Editor, Beyond borders
Global Biotechnology Center
Ernst & Young
Glen T. Giovannetti
Global Biotechnology Leader
Global Biotechnology Center
Ernst & Young
As the shockwaves from the global financial crisis rippled across the
world economy in late 2008 and 2009, they left little untouched.
The reverberations leveled long-standing institutions, triggered
unprecedented policy responses and revealed new risks. For the
biotechnology industry, the impact of these turbulent times has
deepened the divide between the sector’s haves and have-nots.
Many small-cap companies are scrambling to raise capital and
contain spending, while a select few continue to attract favorable
valuations from investors and strategic partners.
A number of this year’s articles focus on the acute challenges
created by the funding crisis. When we interviewed John Martin
of Gilead Sciences seven years ago, in the midst of a different
funding crisis, he was confident that his company could make the
long journey to sustainability. He was vindicated, of course, and
his guest article in this year’s report offers advice to companies
facing similar challenges today. Meanwhile, a roundtable of CEOs
from four next-generation companies discusses the outlook for
their enterprises and for the industry as a whole.
Challenging times have always inspired biotech’s creativity. So
it’s not surprising that the search for creative models — both
to overcome immediate operational challenges in the
current environment and to foster the sector’s long-term
sustainability — is a core theme in this year’s Beyond borders.
James Cornelius of Bristol-Myers Squibb discusses his company’s
model for reinventing itself by focusing on R&D and partnering
with biotechs. Adelene Perkins of Infinity Pharmaceuticals
emphasizes the need for partnering models that allow companies
the flexibility to evolve, while Samantha Du of Hutchison
MediPharma discusses how China can offer firms advantages that
address weaknesses in the Western business model.
But turbulent times can make the unimaginable possible, and
sweeping disruptions have often redrawn maps, changed playing
fields and altered rules and regimes. In “Beyond business as
usual?” — our Global introduction article — we present four
paradigm-shifting trends that have the potential to reshape the
healthcare landscape and create new opportunities: high-quality
generics, fundamental healthcare reform, personalized medicine
and globalization. To create a more sustainable biotechnology
industry, companies will need to understand these trends, prepare
for them and help shape them.
As biotech faces the future, it’s worth considering the responses
of our venture capital panel. We asked a number of leading VCs
to tell us whether biotech has “been here before” or whether it’s
“different this time.” It turns out that both interpretations are
correct. It is different this time because this crisis is deep-rooted,
systemic and persistent. But, in spite of that, the industry has
been here before, in that biotech companies have overcome
seemingly insurmountable challenges in the past, bucking trends
and defying odds.
Ernst & Young’s global organization stands ready to help you as
the business of biotech goes beyond business as usual.
To our clients and friends

4. ii
Contents
Beyond business as usual? The global perspective
2 Global introduction
Beyond business as usual?
4 The interconnectedness of all things
How the housing markets sneezed and biotech caught a cold
9 A closer look
Enlightened competition
10 Necessity is the mother of all models
How unprecedented changes are driving new approaches
18 Survival of the focused
John Martin, Gilead Sciences, Inc.
19 Innovation from a string of pearls
James M. Cornelius, Bristol-Myers Squibb
20 Venture capitalists speak out
The more things change, the more they stay the same?
22 Valuing innovation: new approaches for new products and
changing expectations
Andrew Dillon and Sarah Garner, NICE
24 Global year in review
Turbulent times
A Darwinian moment? The Americas perspective
30 Americas introduction
A Darwinian moment?
37 A closer look
Compensation and benefits in turbulent times
38 CEO roundtable
Only the innovative survive: perspectives from biotech’s next generation
Jean-Jacques Bienaimé, BioMarin Pharmaceutical Inc.•
Jean-Paul Clozel, Actelion Pharmaceuticals, Ltd•
Colin Goddard, OSI•
Louis Lange, CV Therapeutics•
45 The Darwinian challenge: why evolution is vital for
building biotech
Adelene Q. Perkins, Infinity Pharmaceuticals, Inc.
47 Connecting the dots: the impact of the global financial crisis
on biotechnology
Peter Wirth, Genzyme Corporation
48 US financing
Collateral damage
52 A closer look
State capital: incentive programs
53 US deals
Buying biotech, being biotech
56 A closer look
New rules for the M&A road
59 US public policy
Will biotech get the change it needs?
60 A closer look
The FDA: transforming an agency in crisis
63 US products and technologies
Monitoring progress
66 Canada year in review
A time of reckoning
Americas section
p. 30
Global section
p. 2

5. iii
Resources
Asia-Pacific section
p. 106
European section
p. 74
Staying afloat? The European perspective
74 European introduction
Staying afloat?
77 Roundtable on deals
New deal structures for challenging times
Naseem Amin, Biogen Idec•
Jeffrey Elton, Novartis Institutes for BioMedical Research•
John Goddard, AstraZeneca PLC•
Mervyn Turner, Merck & Co., Inc.•
84 European financing
Down, but not out
90 European deals
Dealing by dealing
94 A closer look
Up-fronts and bottom lines: accounting for up-front payments under IFRS
95 European products and pipeline
A surging pipeline and a trickle of products
98 A closer look
Growing pains in the European biosimilars market
101 Roundtable on industrial biotechnology
Evolution, progress and sustainability
Karl-Heinz Maurer, Henkel AG & Co. KGaA•
Marcel Wubbolts, DSM Innovation Center•
Holger Zinke, BRAIN AG•
Seeds of change? The Asia-Pacific perspective
106 Asia-Pacific introduction
Seeds of change?
107 The dream of the sea turtles: can China offer a new model for
Western biotech companies?
Samantha Du, Hutchison MediPharma Limited
108 Changing realities
A conversation with M.K. Bhan
110 Australia year in review
Haves and have-nots
114 India year in review
Nurturing growth
115 A closer look
If you build it, will they come?
117 China year in review
On the road to innovation
120 Japan year in review
Seeking investors, seeking innovation
122 New Zealand year in review
Strong research and creative approaches
122 A closer look
Attracting new investment: New Zealand’s new LP structure
124 Singapore year in review
Looking beyond borders
125 Acknowledgements
126 Data exhibit index
128 Global biotechnology contacts

6. Beyond business
as usual?

7. 1
The global perspective

8. 2 Beyond borders Global biotechnology report 2009
In late 2008, the biotechnology industry,
like the rest of the global economy, was
blindsided by the tsunami that is the
global financial crisis. Biotech companies
now face a host of challenges as they
attempt to navigate through a systemic
financial meltdown and deep-rooted
uncertainty. In market after market,
valuations of precommercial biotechs
have plummeted, capital has dried up and
the landscape is littered with companies
struggling to survive. While the crisis will
almost certainly wipe out many of these
firms, it could also, at the extreme, have
implications for the sustainability of the
sector and the viability of its business
and financing model. Even by the
standards of an industry where “business
as usual” is a gauntlet of unpredictable
initial public offering (IPO) windows,
shifting investor sentiment, daunting
product-development odds and tightening
regulatory pressure, this feels different.
The question, of course, is whether it
truly is different. Certainly, biotechnology
companies are no strangers to financing
challenges. There have been biotech
funding droughts for almost as long
as there has been a biotech industry.
Through much of the sector’s history,
biotech funding has ebbed and flowed
as IPO windows opened wide and then
slammed shut with seeming inevitability.
Ernst & Young has been tracking the
biotech industry since its early days,
and by our count the current crisis is
at least the sector’s fifth major funding
drought. And while it is far from over,
it is not the longest — not yet, anyway.
Interestingly, when biotech veterans
are asked to compare the current
situation to prior downturns, most point
to the “nuclear winter” of the early
1990s that was precipitated by the
Clinton administration’s proposals for
Global introduction
Beyond business as usual?
2.5
Source: Ernst & Young
82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
0.0
2.0
1.5
1.0
0.5
This is neither the industry’s first IPO drought, nor (so far) its longest
Capital raised in US IPOs
25
0
20
15
10
5
Q2 84–Q3 85
6 quarters
Q4 88–Q3 89
4 quarters
Q2 01–Q3 01
2 quarters
Q3 02–Q3 03
5 quarters
Q2 08–present
4 quarters and ongoing
CapitalraisedinUSIPOs(US$b)
NumberofUSIPOs
Number of US IPOs

9. 3
fundamental healthcare reform. But even
in the depths of that period’s uncertainty,
IPOs and follow-on offerings made it to
market with some regularity.
In the past, biotech companies survived
funding crises through a combination of
creativity and nimbleness. As investor
sentiment shifted, firms reinvented their
research focus and market orientation,
transforming themselves in short order
from vaccine companies to biodefense
firms or from bioinformatics providers to
drug developers. They opportunistically
formed strategic alliances, pared back
their already-lean operations and found
creative ways to go after untapped
sources of capital. In extreme periods,
they closed highly dilutive financings
that included warrants and other deal
“sweeteners” to bring investors on board.
But over the industry’s history, very few
companies actually ended up filing for
bankruptcy or being liquidated.
Several characteristics of the current
crisis make it unlike any previous funding
challenge faced by the biotech industry.
Each of these distinguishing features, as
we discuss in this article, has implications
for biotech companies trying to weather
the storm as well as for the industry’s
sustainability, approaches and models.
Pervasive uncertainty
There is much about the current crisis
that has taken practically everyone
by surprise: the speed with which it
unfolded, the sheer size of the financial
institutions it has leveled, and the extent
and nature of public policy responses it
has unleashed. There is now a consensus
that this, whatever this is (it has been
variously labeled a credit crunch, a
liquidity crisis, a recession and even
sometimes a depression), is huge. But just
how huge, no one really knows. We don’t
know how deep the crisis will run, how far
it will extend, or when it will all end.
This uncertainty is one thing we’re all sure
of — and as a result, cash has become
king. Companies and consumers are
cutting spending. Investors and bankers
have become increasingly conservative,
making it even more difficult for firms to
raise capital. While funding crises in the
past have typically lasted about 12–18
months, it is quite likely the current
downturn will run considerably longer.
The interconnectedness
of all things
In the past, biotech funding droughts
have largely been driven by investor
sentiment toward the biotech industry.
When investors were bullish about the
sector’s prospects — buoyed, for instance,
by product approvals in the industry’s
formative years or by media excitement
over the sequencing of the human genome
around the turn of the millennium — money
rushed into the sector, and companies
rushed out to conduct IPOs. Unfortunately,
the boom was inevitably followed by a bust
a few years later, when investors realized
that the path to commercialization was
considerably longer than they had initially
assumed or when business models failed to
live up to their promises. Funds withdrew,
bubbles burst, windows slammed shut.
The current funding crisis is different.
The bubble that burst was not in biotech,
but fueled by real estate, financial
instruments and an environment of easy
credit. This time, irrationally exuberant
investors were seduced by loose lending
practices, high-leverage models and
the assurances of complex financial
derivatives that promised to hedge and
reduce risk. And so, while biotech’s past
financing droughts were localized and
industry-specific, the present downturn
crosses national boundaries and impacts
industries across the economy. It is, in a
word, systemic.
As the impact of the crisis spreads
wide — infecting everything from investment
portfolios in remote Norwegian fishing
hamlets to the financial aid packages
of undergraduates at leading US
universities — it can produce unexpected
ripple effects. We have listed some
examples of these effects below, though
the list is by no means exhaustive. (For
a simplified graphical representation
of these connections, refer to “The
interconnectedness of all things” on page 4.)
Investment banks and hedge funds.•
The financial crisis has taken a
significant toll on investment banks,
as some of the most venerable names
on Wall Street have been humbled by
investments in subprime mortgages.
But these investment banks also
often acted as prime brokers to
hedge funds, and hedge funds have
in recent years served as a major
source of capital for publicly traded
biotech companies. Consequently,
while much has been made of those
now-infamous links between distressed
continued on page 6
Even by the standards of an
industry where “business
as usual” is a gauntlet of
unpredictable initial public
offering (IPO) windows, shifting
investor sentiment, daunting
product-development odds and
tightening regulatory pressure,
this feels different.

10. 4 Beyond borders Global biotechnology report 2009
The interconnectedness of all things
How the housing markets sneezed and biotech caught a cold
Current crisis
US property
values fall
Subprime
mortgage
default rates
increase
Public capital
for biotech
constrained
Less capital
for hedge
funds
Less capital
for venture
funds
Foreclosures
climb
Biotech IPOs
disappear
Biotech
stocks fall
Lower
valuations
in M&A and
alliances
Challenging
exits for
biotech
investors
Biotech venture
funding could
fall
Less debt
for biotech
Credit
crunch
Risk
aversion
Mortgage-backed
securities become
“toxic”
Lower valuationsLess capital New risks
Source: Ernst & Young

11. 5
Sector-specific
withdrawal from
biotech
Investors’ enthusiasm
for biotech stocks
declines
All prior crises
Banks
distressed,
fail
Less lending
to households
Corporate
earnings
decline
Tax revenues
drop
Layoffs
Household
spending
declines
Household
income
declines
Less lending
to businesses
University
endowments
down
Nonprofit and
foundation
endowments
down
Research
funding could
fall
Increased
counterparty
risk from suppliers
and partners
Pricing
pressure
could
increase
Ranks of
uninsured
swell
Drug usage
could fall
Institutional
investors’
portfolios
diminish
Stocks
plummet
Household
wealth shrinks
Increasing pricing pressure? Lower drug usage?

12. 6 Beyond borders Global biotechnology report 2009
mortgages in Las Vegas, Nevada,
and the investments of taxpayers in
Narvik, Norway, considerably less has
been written about the fact that those
same distressed mortgages are linked,
through the fortunes of highly leveraged
investment banks and hedge funds, to
the capital invested in scores of biotech
companies. A significant portion of the
capital available to the industry has been
decimated, not because of changes
in investors’ attitudes toward biotech
companies, but simply because of the
way the dominoes line up in the modern
financial system. (See Peter Wirth’s
article, “Connecting the dots,” for a more
detailed discussion.)
In addition, many of the investment
banks that have traditionally backed
the biotech industry are now focused
elsewhere, including on shoring up
their own balance sheets. It is unlikely
that the biotech industry will provide
enough fee potential in the near term
to grab significant mindshare at these
institutions. As a result, the industry
may see the return to prominence
of the boutique, early-stage-focused
investment bank.
Venture capital.• As the stock market has
tumbled, we have all become collectively
poorer. The separation between the real
economy and the financial economy
has become ever more blurred in recent
decades, as an increasing portion of
financial assets in the economy has come
to be invested in the stock market. So,
as plunging share prices dragged down
everything from the endowments of
large universities to the investments of
public pension plans, the portfolios of
many major institutional investors have
been diminished. Many of these investors
are, in turn, limited partners (LPs) in
the venture funds that invest in biotech
companies. Since these funds make
portfolio allocations by asset class, they
have less money to invest in the sector
simply because their overall portfolios
have shrunk — the pie is smaller, and
everyone gets a smaller slice.
This “denominator effect” raises the
risk that venture capitalists (VCs) may
not have as much “dry powder” in
their funds as they assume they do,
and that some LPs may not be able
to fulfill the capital calls when the
funds come knocking. So far, there is
no indication that this has happened
to any large degree, and anecdotal
evidence suggests that at least the
most substantial life sciences VCs will
have access to the funds they need to
continue investing. But the risk is out
there, and it is possible that there could
be a somewhat slower deployment
of capital in the future because of
these linkages. VCs needing to raise
new funds will likely find a much more
challenging environment. So the
bar for new company formation has
been raised and venture investors are
becoming very selective about the firms
they back.
Convertible debt.• The simultaneous
implosion of credit markets and stock
markets in the current crisis may create
a ticking time bomb in an industry where
convertible debt has been a significant
source of capital. Convertible debt
first became popular in a significant
way around the time of the genomics
bubble, when a combination of factors
made it an attractive way to raise
money. For many public companies that
expected their stock prices to rise over
time with the achievement of clinical
milestones, convertible debt offered
a way to raise capital in a less dilutive
manner. Meanwhile, it offered investors
relatively more security and a hedging
strategy — certain funds invested in
biotech companies by buying convertible
debt while simultaneously shorting
the companies’ stocks. The large debt
overhang became a potential problem
for many companies after the genomics
bubble burst in the early 2000s, but
the crisis was averted because markets
recovered and companies were able to
refinance the debt.
Today, a similar crisis looms, but
this time several factors are in play.
The plunging stock prices of biotech
companies have meant that converting

13. 7
debt to equity is improbable, while the
prospects for refinancing are bleak
because of the credit crisis. Meanwhile,
hedge funds, which provide much of the
capital for convertible debt, have seen
their portfolios diminished by the stock
market downturn and by a reduction in
their own borrowing power, and are also
constrained by new rules on shorting
stock. Already we are seeing companies
trying to negotiate new terms with debt
holders to forestall bankruptcy.
►• Patient behavior. Between December
2007, when the slowing US economy
officially entered a recession, and March
2009, the number of unemployed in the
US increased by 5.1 million — pushing
the official unemployment rate to a
26-year high of 8.5%. The US economy
is now shedding over 600,000 jobs
a month, and layoffs are becoming
increasingly visible in other countries
as the recession spreads globally. While
the uptick in European unemployment
has not been as sharp (in part
because many European countries had
higher unemployment rates to begin
with), China is concerned about the
potential fallout as large numbers of
manufacturing jobs are lost and migrant
workers return to their villages.
While health-related industries such
as biotech are generally regarded as
being fairly recession-resistant (people
fall sick and need healthcare regardless
of the state of the business cycle), the
conventional wisdom may not hold true
in a recession of this magnitude. In the
US economy, where health benefits are
largely provided through employers,
a significant swelling in the ranks of
the unemployed could bring the loss
of health insurance for large portions
of the population. Consequently,
we could see changes in patient
behavior such as reduced compliance
with drug regimens, lower levels of
preventive care, and selective seeking
of healthcare for non-life-threatening
conditions. Meanwhile, in many
emerging economies, where health
insurance is not as prevalent to start
with, job losses could leave significant
swaths of the nascent middle class
less able to afford drugs — which
could present a temporary setback for
Western companies that are counting
on emerging markets for future growth.
Government spending and•
reimbursement. The economic
slowdown has diminished tax revenues
and strained government budgets — a
situation that will only be heightened
in the months ahead, either because of
stimulus spending (such as in the US)
or because of increased spending on
social safety-net programs as citizens
lose jobs (as in many Western European
countries). In the US, where healthcare
reform is a top priority of the new
Obama administration, budgetary
pressures could be further exacerbated
by the high cost of expanding
healthcare access. As governments face
increasing pressure to rein in healthcare
costs, it seems almost inevitable that
the scrutiny of drug prices will grow.
Meanwhile, more people could become
dependent on governments for health
coverage, increasing the purchasing
power of the public sector and
strengthening its ability to drive down
prices in negotiations with industry.
The bottom line is that biotech
companies — in both pre- and
post-commercial stages — face a far more
complex environment than in previous
funding crises. This time, it’s not about
biotech, but about everything. And when
it seems that everything is impacted,
the impacts may not be everything they
seem. More than ever, companies may
find many unexpected sources of risk
beneath the surface.
The fact that the current crisis is driven
by larger economic forces rather than
a change in investor sentiment toward
biotech companies also has implications for
the length of the drought and the path to
recovery. In the past, conditions improved
when investor sentiment recovered, but
this time the global economy is undergoing
a significant deleveraging which could
constrain the flow of money into equity
markets for an extended period. Things will
only get better when the overall pie — the
global economy — grows. And that, by all
accounts, will take time.
Against the backdrop of an industry
where it can take well over a decade
to successfully take a product from
early research to regulatory approval,
a crisis that lasts several years may
appear short-lived. But, of course, for
companies with dwindling cash reserves
and few funding options, it could be an
insurmountably long period.
Contraction ahead
For most of the 23 years that Ernst & Young
has produced an annual biotechnology
report, we have included a “survival index”
comparing the rate at which companies
were spending to the amount of cash
on their balance sheets. And in each of
those years, there has always been a
sizeable cohort of firms — typically around
25% — with less than one year’s worth of
cash on hand. But even though about a
fourth of publicly traded biotech companies
have perennially been a few months
away from going out of business, the
survival index was never followed by the
mass extinctions its name appeared to
portend. Our chart, it would seem, had
been misnamed. It’s not a survival index if
everyone survives.
What was missing in those annual
charts — and the answer to the apparent
paradox — is that there was relatively little
overlap between the “at risk” companies
in any two consecutive years. Instead
of closing shop, most companies simply
As funding options have dried
up, many companies with little
cash may also have little in the
way of options. For many at the
low end of the survival index,
survival may truly be at stake.

14. 8 Beyond borders Global biotechnology report 2009
replenished their dwindling cash balances
by raising more capital.
In the current environment, of course, all
of that has changed. As funding options
have dried up, many companies with little
cash may also have little in the way of
options. For many at the low end of the
survival index, survival may truly be at
stake. While many firms are restructuring
their operations to stay alive, we are likely
to see a sizeable number of firms declare
bankruptcy or cease operations.
We are also likely to see increased merger
activity in this environment, as some
financially distressed biotechs combine
operations with similarly sized firms to
improve their odds. And while depressed
biotech valuations might seem to predict
increased pharma-biotech mergers, we
are unlikely to see a dramatic uptick.
Large companies will not start buying
assets en masse that do not fit their
strategic objectives simply because
they are relatively cheaper. Misallocated
resources and distracted energies are no
bargain at any price.
However, pharma companies are likely to
remain actively interested in more mature
firms. Over the last year or so, several of
the biotech sector’s bigger names have
attracted the eye of pharma buyers,
including Genentech, MedImmune,
Millennium and ImClone. In early 2009,
two big pharmas merged with each other,
and there is speculation that more could
follow. But here, too, the outlook could
become cloudy because of the financial
crisis. Large acquisitions will inevitably
need some degree of debt financing,
particularly as prospective buyers see
revenue-generating blockbusters go off
patent in the years ahead. And getting
credit has become more difficult, even for
entities with significant cash flows. While
huge sums have been raised to finance
the Pfizer, Merck and Roche transactions,
there is a limit to how much debt will be
available, and at a minimum, buyers will
confront a higher cost of capital from
borrowing than they faced in the past.
In spite of these difficulties, we can expect
considerable industry consolidation in the
months and years ahead, driven by big
pharma’s growing need to fill the pipeline
and achieve cost efficiencies and the
existential funding crisis faced by many
small biotech companies. Whether by
merger and acquisition (M&A), bankruptcy
or liquidation, the number of companies
in the industry will contract over the
remainder of 2009 and into 2010.
New models for new necessities
Some of the most sweeping implications
of today’s unprecedented challenges,
however, may be for the industry’s
long-standing models. Over the 33-year
history of the biotech industry, companies
have gravitated toward some enduring
operational models — approaches for
financing, partnering, conducting
research and development (R&D) and
bringing products to market. These
operational models, in turn, collectively
drive the overall business model — helping
determine, for instance, how vertically
integrated companies become and the
degree to which they specialize in specific
aspects of the value chain.
The world’s longest relay race
To understand why certain models have
evolved in this industry — and why we
think approaches that have largely
withstood the tests of time will become
increasingly unsustainable in the months
and years ahead — we need to start by
presenting an axiom: necessity is the
mother of all models. The models that
companies and investors adopt are, in
other words, not developed in a vacuum.
They are instead compromises shaped
by a number of constraints — resources,
funding options, bargaining power and
the inescapable reality that it takes
US$1–2 billion and upwards of a decade
for a biotech company to become a
mature, financially sustainable enterprise.
Few investors have the means and
patience to endure such a journey — after
all, they face constraints of their own on
investment horizons and rates of return.
Consequently, the business model that
has evolved in the biotech industry is akin
to a marathon relay race, in which biotech
companies work with a series of investors
and partners to raise capital and share
risk. From venture capitalists through
strategic-alliance partners and public and
other investors, each set of buyers carries
the baton for a few years.
Not surprisingly, these necessities move
biotech companies to behave in certain
ways. Their overwhelming objective is
often to survive long enough to reach
the next value-creating milestone,
where existing investors can pass the
baton and companies can raise more
capital. Consequently, firms often
keep R&D spending very lean and are
forced to choose short-term priorities
over long-term ones — focusing on the
most advanced pipeline candidate, for
instance, instead of a later-generation
one with more scientific and commercial
potential. And given the industry’s
sequential, pass-the-baton funding
The business model that has
evolved in the biotech industry
is akin to a marathon relay race,
in which biotech companies
work with a series of investors
and partners to raise capital and
share risk.
continued on page 12
Large companies will not
start buying assets en masse
that do not fit their strategic
objectives simply because
they are relatively cheaper.
Misallocated resources and
distracted energies are no
bargain at any price.

15. 9
Perhaps more than any other sector, the biopharmaceutical
industry depends on innovation for its very survival. While
the term “innovation” is usually applied to scientific or
technological advancement, financial and organizational
innovation has also played a critical role in shaping the industry,
especially during periods of constrained capital investment.
At such times, companies have sought to access capital,
reduce burn rates and share risk through a variety of creative
transactions and deal structures. In 2008, when pharmaceutical
companies represented the primary buyers of technology
assets and companies, the concept of “precompetitive”
collaborations surfaced at companies and venture firms.
The idea is that, as pharmaceutical companies face growing
pressures to find new ways to innovate, they could benefit
from arrangements where several firms collaborate on the
development of early-stage platforms or enabling technologies.
Enlight Biosciences, launched in 2008 by Boston-based
PureTech Ventures, has translated this vision into a reality,
in the process developing a novel collaboration and financial
structure. PureTech has assembled a number of big pharma
backers so far: Eli Lilly, Johnson & Johnson, Merck & Co.
and Pfizer. With venture investors seeking to mitigate risk by
investing in later-stage companies with clinical compounds,
Enlight’s founders and pharma members saw a risk of
underinvestment in platforms and enabling technologies. Yet
developing new platforms is critical — they could, for instance,
significantly enhance the drug discovery and development
process in areas such as molecular imaging, drug delivery,
personalized medicine and early prediction of safety.
The pharmas work closely with Enlight to identify the most
pressing needs in the industry and to help guide Enlight’s
search for, and development of, novel technologies that address
those needs. The goal is to form start-ups that will develop
and commercialize the most promising technologies. Via an
approach that the PureTech team applies across its portfolio,
Enlight adds an entrepreneurial component to the pharma
collaborative model: the company serves as an institutional
entrepreneur, pulling together transformational intellectual
property (often from multiple sources), assembling preeminent
scientific thought leaders and providing interim management
to its new companies. The pharma partners provide the initial
funding (they have committed to provide financing of up to a
combined US$65 million) with additional investment coming
from the partners, venture investors or other third parties.
Enlight’s model addresses a critical structural impediment
to funding innovation in the biopharma industry, namely the
fundamental tension between entrepreneurs and investors
around how to apportion financial returns. Enlight’s pharma
partners are focused primarily on the impact Enlight-supported
innovations make within their organizations. As such, they are
looking for not just financial returns but strategic returns, and
turning what was once a zero-sum game (dividing up financial
returns) into a symbiotic relationship where each party can
derive benefit in a different way.
Enlightened competition
A closer look
Enlight corporate structure Key activities/purpose Ownership
Identifying new technologies•
Forming new companies•
Investment vehicle for•
new companies
Operations•
Enlight leadership•
PureTech•
Pharma partners•
Enlight•
Holding companies•
Management•
Venture capitalists•
Enlight
Biosciences, LLC
Endra
Holdings, LLC
Endra, Inc.
Operating
company 2
Operating
company 3
Holding company 2
(LLC structure)
Holding company 3
(LLC structure)
Source: Enlight Biosciences

16. 10 Beyond borders Global biotechnology report 2009
Necessity is the mother of all models
How unprecedented changes are driving new approaches
Global
financial
crisis
(see “The interconnectedness
of all things”)
Patent expirations
and big pharma’s
reinvention
(see Beyond borders 2008)
Unprecedented changes New necessities
Source: Ernst & Young
Boost R&D productivity
Foster innovative cultures
Capture external breakthroughs
Cut costs, maintain earnings
Leverage globalization
Sustain ecosystem
More flexibility to retain rights, upside and independence
Exploit
choices
Top
innovatorsVCs
Sustain
returnsSurviveChange
Small-capcompaniesBigpharma
Small caps see further erosion of bargaining power
Raise capital
Retain some upside
Greater focus to contain costs and reduce burn
Find path to exits
Seek novel ways to enhance returns
Bargaining power shifts from big pharma to top innovators

17. 11
New models
Creative project
financing
Symphony Capital
License and leave alone
Purdue/Infinity
Option and
leave alone
Amgen/Cytokinetics
Cephalon/Ception
Early IP lockups
Pfizer/UCSF
Monetize
noncore assets
Paul Capital,
Royalty Pharma,
others
Larger up-fronts
for sustainability
Genzyme/PTC
Acquisitions with
earn-outs
Viropharma/Lev
Buy and leave alone
Takeda/Millennium
CRO/PE “at risk”
transactions
TPG-Axon/Lilly
Precompetitive cooperation
Enlight Biosciences
Rifle shots
(lean companies)
Later-stage
specialty
pharma
approaches
More options
around
geographic rights
VCs investing in
public companies
(VIPEs)
Consolidate to survive
(roll-ups)
The Medicines Company/
Targanta Therapeutics
Nonexclusive
licensing
Roche/Alnylam
Build it to slot it?
(medtech model)
VCs with
extended
fund lives?

18. 12 Beyond borders Global biotechnology report 2009
model and the inherent uncertainty
of investor sentiment over time, firms
attempt to strike a balance between
taking money when it’s available and not
raising capital in ways that overly dilute
existing investors or give away too much
potential upside.
Among the key constraints that biotech
companies have traditionally faced are
their limited resources and bargaining
power. As a result, the conventional
wisdom has been that biotech companies
“sell their first born” — licensing their
initial product candidate to big pharma
out of necessity — in order to sustain
operations with the hope of controlling,
or at least materially participating in,
the commercialization of subsequent
products themselves. In other words,
most biotechs aspire ultimately to
become fully integrated pharmaceutical
companies (FIPCOs) because of one
simple reason — that’s where the money
is. Companies with top-line revenue earn
higher returns than what is generally
possible by outlicensing to another
company and settling for a royalty.
Of course, not all companies can go the
distance, and successful biotech enterprises
often choose the ultimate baton pass — to
a strategic acquirer — after concluding
that such a move is in the best interest of
shareholders and other stakeholders.
Unprecedented challenges
If models are functions of necessity,
it follows that unprecedented
challenges — and the new necessities
they create — should be fertile ground for
seeding new models. This is, of course,
precisely the situation in which the
industry now finds itself. Companies of
all sizes are operating in a landscape that
is profoundly different from anything
they have seen before, because of some
historic shifts.
These trends create new necessities
with potential implications for the
biotech industry’s existing business and
operational models. (For a simplified
representation of some of these new
necessities, see “Necessity is the mother
of all models” on page 10.) The most
immediate changes will stem from the
issues that are confronting companies in
the near future: big pharma’s reinvention
and the global financial crisis.
New necessities:
big pharma’s reinvention
Biotech companies have already started
seeing the impact of big pharma’s
pipeline problems on biotech operational
models, since pharmaceutical firms
have been taking serious measures to
boost R&D productivity for some time
now. Not surprisingly, some of the initial
consequences have been for partnering
models. As pharma’s pipeline problems
became more acute, bargaining power
shifted toward biotech firms with highly
promising products and platforms. Big
pharma companies, many of which had
initially steered clear of the biologics
revolution, were determined not to
miss the “next big thing.” As a result,
competition for technologies such as RNAi
became heated in recent years. Biotech
companies developing these desirable
technologies benefited, commanding high
premiums in acquisitions and structuring
deals that gave them greater flexibility
while allowing them to retain more rights.
Yet the benefits of this power shift accrued
to a relatively small group of companies
developing assets that are widely regarded
as having tremendous commercial
potential. For these “top innovators,” even
the arrival of the global financial crisis did
not alter their power equation with big
pharma. Indeed, while other companies
were buffeted by roiling capital markets,
plummeting valuations and wary investors,
these firms have continued to structure
deals and access capital at favorable
terms. Examples include Alnylam’s
nonexclusive licensing deal with Takeda
and Infinity Pharmaceuticals’ innovative
alliance with Purdue Pharmaceuticals.
(These transactions, and other creative
deals involving top innovators, are
discussed in the US deals article, “Buying
biotech, being biotech.”)
Big pharma’s challenges are also
motivating it to cut costs and maintain
earnings. Once again, this is driving
creative approaches through deal-making.
In at least one prominent example, the
creation of Enlight Biosciences, we have
seen several big pharmas collaborate in
a precompetitive space. (See “A closer
look” on page 9 for details.) We’re likely
to see more structures along these
lines. The concept — bringing together
many big companies to jointly develop
a platform or address a scientific
quandary — could certainly be applied
more broadly at a time when big pharma
needs both scientific breakthroughs and
cost containment.

19. 13
New necessities:
the global financial crisis
While the global financial crisis may not
have had much impact on big pharma and
the top innovators, it has certainly taken a
toll on small-cap biotechs. This has always
been an industry of haves and have-nots,
but the disparity between those two
camps has probably never been greater.
As described above, small companies
are now struggling to survive, and these
firms have fewer funding options and
considerably less bargaining power than
they did even a few months ago.
The immediate response of many
small-cap companies has been to suspend
development of secondary products in
the pipeline, seek to sell noncore assets,
cut costs and focus resources on the
most promising pipeline candidate. While
this response is understandable, it is
also, ironically, more of the same. The
existing model — building “rifle shot”
companies around lean R&D operations
in order to reach the next value-creating
milestone — is now in overdrive as
companies pare back even further in
bare-bones approaches that can risk
everything on the fortunes of a single
clinical candidate.
Here, too, many companies are looking
at creative deal-making approaches
to address their challenges. We could
see deals where two or more small
single-product biotech firms “roll up”
their enterprises into a single franchise
to lower burn rate, take advantage of
scale efficiencies and attract investment.
To close the valuation gap between
sellers’ expectations and market realities,
acquisitions with earn-outs have become
increasingly regular even in purchases
of public companies — an unprecedented
development. Companies that choose
not to sell out will likely be pushed to
partner assets earlier than they would
have otherwise. To still retain rights and
flexibility for an attractive exit down the
road, these firms will seek deals with an
increased use of options or creative ways
to divide geographic rights.
Seeking sustainability
Clearly, big pharma’s reinvention and
the global financial crisis are driving
companies of all sizes to seek new
solutions to the quandaries confronting
them. Much of what we’ve discussed so
far has involved relatively minor changes
to long-standing transaction models.
This is not entirely surprising — after
all, deal-making has been an integral
part of the biotech business model
since the industry’s earliest days, and
the sweeping changes currently under
way are fundamentally realigning the
balance of power between different
groups of companies.
But there is also a much deeper question
at play in this crisis, and it strikes at the
very heart of the industry’s business
model. As we articulated earlier,
operational models can help companies
address challenges of funding, partnering,
developing and commercializing products,
but these approaches ultimately feed
into a larger business model. Is the
business model that biotech has always
known — built, as it is, on a lengthy
relay race — still sustainable? Will
various runners — investors, partners,
buyers — still enter their legs of the race if
they don’t know whether the next runner
will be there to take the baton? Will the
race be run by different sets of runners?
Will it be run at all?
What we’re talking about, in short, is
sustainability. At a time when many firms
are struggling to remain in business, the
real question is not whether individual
Is the business model
that biotech has always
known — built, as it is, on
a lengthy relay race — still
sustainable? Will various
runners — investors, partners,
buyers — still enter their legs
of the race if they don’t know
whether the next runner will be
there to take the baton? Will the
race be run by different sets of
runners? Will it be run at all?

20. 14 Beyond borders Global biotechnology report 2009
companies will survive (many won’t) but
whether biotech’s basic business model
is itself sustainable. As we articulate
below, several major trends in the current
market suggest that the biotech business
model will not be sustainable in the same
form as it has existed in the past. For the
model to survive, it needs to sustain both
its inputs and its outputs. In other words,
it needs steady supplies of the fuel that
keeps it going: funding. And it needs to
continue to deliver the results that justify
its existence: innovation.
Sustaining funding:
relay runners wanted
To sustain an adequate supply of funding
for the industry’s relay-race business
model, we need a constant supply of
willing runners. Over the next few years,
however, the runners that biotech
companies have come to rely on — venture
capitalists, public investors and big
pharma — will face constraints that could
limit their participation.
For VCs, the existing venture funding
model — which was already facing
considerable pressure in recent years
because of longer paths to exits,
increased regulatory uncertainty and
lower returns from IPOs — has come under
unprecedented pressure due to the global
financial crisis. Exits have become even
more difficult, thanks to an extended
IPO famine, depressed public-company
valuations and big pharma buyers that
may be distracted by their own internal
challenges and less able to use debt
for acquisitions. Bargaining power in
acquisitions has shifted toward buyers,
to the detriment of smaller companies
and their VC backers. Raising capital from
LPs is becoming more challenging as
LPs see their portfolios shrink — meaning
that there is now more competition for a
smaller pool of money and that LPs are
more likely to demand better performance
from their investments.
Meanwhile, public investors — who account
for the majority of the recent decline in
biotech funding — are not expected to
return in force any time soon. The era of
easy money and high leverage has come
to an end, and public biotech companies,
which had attracted significant funding
from highly leveraged hedge funds in
recent years, will simply have less capital.
Lastly, many pharma firms will likely find
their ability to invest in biotech increasingly
constrained, both because of the need to
focus on integrating mega-mergers and
because the pharma industry will spend
less on R&D (and, likely, R&D alliances with
biotechs) as its revenues decline.
Creative partnering models — including
deals with larger up-fronts or deals that
More effective
drug development?
Quicker
exits?
Better valuations?
New investors?
Relay runners wanted

21. 15
give VCs partial exits now in exchange
for a sale at a prenegotiated price if the
product succeeds — could find ways around
some of these constraints. Such solutions
could help overcome immediate hurdles
and allow individual runners to remain in
the race. But they cannot entirely address
the larger sustainability issue: with the
industry’s existing business model, it
costs US$1–2 billion to build a sustainable
enterprise, and there will simply not be
enough capital to sustain a large number
of today’s companies at that level.
Sustaining innovation:
watch what you cut
This lack of funding will inevitably lead
to reduced R&D spending and slow
innovation. In addition, ultra-lean business
models are likely to put innovation at
risk. The use of these approaches is not
surprising, given the paucity of financing
alternatives. It is also not entirely
without precedent. Indeed, in dire times,
this industry is used to reverting to
cheerleader mode. Biotech companies
are exhorted to focus on innovation and
only pursue the targets that are most
likely to deliver true advancements in
meeting patients’ needs. While that’s an
understandable response, the unfortunate
reality — as we noted in our discussion
of the “drug development lottery” in last
year’s Beyond borders, and as Merv Turner
of Merck argues in this year’s Roundtable
on deals article — is that even the smartest
minds and best technologies are unable
to separate the winners and losers early
on. If drug development is still dependent
on a good deal of serendipity, the culling
of large numbers of “less promising” R&D
programs raises the very real prospect that
we might be killing the next big thing. It’s a
sobering thought.
What’s at stake?
Let’s take a minute to remind
ourselves about what’s at stake, and
what we stand to lose if innovation
slows down.
While we’ve made impressive progress
in treating scores of diseases in recent
decades, we still have a ways to go in
addressing unmet or underserved medical
needs. There is absolutely no doubt,
however, that the answers to those
needs — from curing cancers to fighting
new strains of treatment-resistant
infections and tackling neurodegenerative
diseases — will principally be found
through biotechnology.
As a society, we urgently need to
contain our rapidly growing healthcare
costs — a problem that will only get worse
in the decades ahead as populations age,
setting off demographic time bombs in
the West, China and Japan. Again, the
innovative power of biotechnology has
the potential to provide an important
part of the answer — through the promise
of more efficient drug development and
interventions that are safer, more timely
and more effective.
If we are to have any hope of improving
the quality of millions of lives through
better treatments and interventions — and
do so while containing healthcare
costs — then we need not just to sustain
biotech innovation, but to unleash its full
transformative potential.
Paradigm shifts
So how do we jump-start innovation?
If biotech’s existing business model is
becoming unsustainable, how do we
accelerate the transition to sustainability?
In last year’s Beyond borders, we talked
about big pharma’s “existential moment,”
referring to the fact that many large
pharmaceutical companies need to either
fundamentally reinvent themselves
or risk disappearing, at least in their
current form. This year, on the 100th
anniversary of Charles Darwin’s birth,
another analogy seems more fitting: the
“Darwinian moment.” At a time when the
biotech industry faces the prospect of
significant contraction and consolidation,
the question is whether this will be a
destructive process or an evolutionary
one. Clearly it’s an issue on the minds of
industry executives, since the metaphor
is used repeatedly by this year’s guest
contributors. From the titles of guest
articles (“Survival of the focused,” “The
Darwinian challenge”) to our roundtable
with four next-generation CEOs, much of
the discussion in this year’s book revolves
around a central question — how do we
create a Darwinian opportunity out of an
existential threat? How do we ensure that
this is not the start of a mass extinction
but rather a process of advancement in
which biotech’s best and fittest survive?
If we’re going to use the Darwinian
metaphor, then it’s worth remembering
that the process of evolution has been
neither linear nor smooth. Every now and
then it has been shaped by cataclysmic
events — a helpful meteor or two, a
mega-volcanic eruption — that completely
altered the environment and created
opportunities for new species to evolve.
And that is where we are today — on the
cusp of a world of change that could quite
possibly change the world.
Over the next few years, several trends
currently in play have the potential to
shift existing paradigms and, in doing
so, to create new, sustainable business
models. We highlight a few of these here:
Generics, generics, generics.• We have
written extensively, in this article as
well as in last year’s Beyond borders,
about the financial implications of big
pharma’s patent cliff. Pharma’s revenues
face a precipitous drop. The products
themselves, however, are not in peril.
To the contrary, they will probably serve
more patients than ever before, as
generic equivalents reach the market.
These are, it should be remembered,
some of the most successful blockbuster
The process of evolution has
been neither linear nor smooth.
Every now and then it has been
shaped by cataclysmic events …

22. 16 Beyond borders Global biotechnology report 2009
drugs in the world — meaning that
patients will have access to some of
the best generics the industry has
ever seen. Even as this creates new
competitive pressures — companies will
need truly innovative products to secure
reimbursement from payors — it could
remove some of the pricing demands
that the industry has faced in recent
years, as payors’ budgetary constraints
are loosened by lower-priced generics.
This, in turn, could allow for better
margins for innovative products and help
make the numbers work for sustainable
business models.
Healthcare reform.• The United States
may finally be on the verge of making
its much-delayed, long-anticipated,
often-feared transition to universal
healthcare coverage. Like the coming
wave of generics, this change would
be nothing short of momentous — a
dramatic expansion in the world’s
largest (and most laissez-faire)
drug market. Indeed, recognizing
healthcare’s paradigm-shifting
power, the Obama administration
is positioning healthcare reform
as one of three investments in the
future (energy and education are the
others) that will lay the foundation
for a more competitive 21st-century
economy. For drug companies,
expanded coverage will likely bring
new pricing regimes where buyers
have concentrated bargaining power.
Meanwhile, the push for electronic
medical records to increase efficiency
could produce vast volumes of data for
companies to mine in developing better
treatments — creating new winners
and losers, including perhaps from
competitors and collaborators that
emerge from outside the traditional
healthcare sector. Once again, there
are opportunities to build sustainable
business models in this uncertainty.
Healthcare reform will likely include
the adoption of pay-for-performance
metrics. The challenge for the drug
industry will be to make sure that these
metrics maintain the right incentives
for innovation rather than simply
aim to lower costs. The movement
to a system that measures and truly
rewards companies based on the
value their products deliver could give
investors the returns they need and
create the basis for a more sustainable
business model.
Personalized medicine.• Some of the
paradigm-shifting trends discussed
above, such as competition from a
new wave of generics and the move to
pay-for-performance under healthcare
reform, could also accelerate the
adoption of personalized medicine.
We discussed personalized medicine
in considerable detail in last year’s
Beyond borders and won’t cover the
same ground here, but this is another
development that promises to be truly
transformative, with implications for
the entire business model from early
research through commercialization
and marketing. Among other effects,
more targeted and efficient ways of
developing drugs should lower R&D
costs, reducing the length of biotech’s
marathon relay race. With the use
of biomarkers to identify promising
targets up front, personalized medicine
will also make early stages of the
value chain — research and early
development — more valuable. Since
these are precisely the activities that
have traditionally been biotech’s
strengths, the move to personalized
medicine should bring more bargaining
power to biotech companies, creating
opportunities for deals and business
models where biotech firms can make
the numbers work by capturing more of
the upside.
Globalization.• Last, but not least, is
globalization, another trend discussed
in some detail in last year’s Beyond
borders. Much of what we discussed
last year remains unchanged in the
current environment. The global
financial crisis has not fundamentally
altered the outlook for the burgeoning
biotech industries in many Asian
economies, where cost-cutting drives
by Western firms could lead to more
business for local companies. As overall
growth in emerging markets slows,
however, some Western companies
may start reconsidering the timing of
their strategies, which are based on
the assumption that rapidly growing
middle classes will give them access to
previously untapped markets. Beyond
these short-term impacts, however,
globalization promises to bring
sweeping changes to the drug industry,
with implications for the business
models of Western firms. As ex-US
and ex-European geographic rights
become more valuable, for instance, it
will become increasingly possible for
partners to divide up worldwide rights
in ways that provide value to each
participant. As companies in these
markets develop, they are partnering
with and acquiring assets from Western
companies — creating new sources of
capital and the potential for new ways
of collaborating that could become
increasingly significant with time.
More broadly, it is worth noting that
the biotech business model we have
discussed in this article is really the
Western biotech business model. In the
emerging biotechnology industries of
Asia, many of the factors that Western
companies have relied on — strong
university research, technology transfer
laws that support commercialization,
experienced venture capitalists — have
Sweeping changes that are
on the horizon — a wave
of high-quality generics,
fundamental healthcare
reform, personalized medicine
and globalization — could
dramatically shift existing
paradigms and generate
opportunities to build
sustainable business models.

23. 17
not been as readily available, and
companies have evolved different
models in response. As Western
companies look for alternatives in the
current climate, there may be Asian
examples to learn from.
The path ahead: beyond business
models as usual
Biotech’s existing business model has
never been under more strain, with
funding dramatically reduced and
considerable innovation at risk. The
question is whether the industry will find
new ways to reach a sustainable model. To
keep runners in the race (or attract entirely
new runners), companies will need ways to
improve returns on investment — through
better prices and valuations, quicker exits
or more efficient R&D. Alternatively, if they
can find ways to shorten the race itself, the
model could work with fewer runners.
Yes, this crisis is truly different. It’s
deep-rooted and systemic, and the
problems it has prompted are unlikely to
be mitigated any time soon. But times
of tremendous change — whether set off
by global recessions or meteors — can
reshape landscapes and create new
opportunities. There is good news in
that realization, because the sweeping
changes that are on the horizon — a wave
of high-quality generics, fundamental
healthcare reform, personalized
medicine and globalization — could
dramatically shift existing paradigms
and generate opportunities to build
sustainable business models.
For that to happen, biotech executives
will need to understand the potential
impact of these changes, prepare for
them, and wherever possible, help shape
them. The industry’s representatives will
need to be actively involved in the policy
debate on healthcare reform, to ensure
that the pay-for-performance metrics
developed align incentives with the needs
of innovation. And its scientists will need
to focus their R&D efforts to embrace
personalized medicine, since its adoption
offers some of the best hope for quicker
R&D and better returns on investment.
Necessity is the mother of all models,
and if history is any guide, today’s
tremendous challenges will unleash
tremendous creativity. So far, we’ve
seen that creativity applied in relatively
small ways to adjust partnering models
and navigate around immediate
roadblocks. As the industry’s creativity
is applied to the larger issue of
sustaining the entire relay race, and as
several paradigm-shifting trends unfold,
we could see the emergence of more
durable models that will carry biotech
through the next 30 years. The sooner
we can get there, the better.

24. 18 Beyond borders Global biotechnology report 2009
John Martin, Ph.D.
Gilead Sciences, Inc.
Chairman and
Chief Executive Officer Survival of the focused
The question of how we sustain growth in
our industry is, ultimately, one of how we
sustain innovation in treatment advances
and ensure greater patient access to
those advances. The global financial crisis
has had a direct and immediate impact on
the biotechnology industry, most visibly
in the consolidation and downsizing of
many organizations. Without continued
investment, we face the real danger
that an entire generation of biotech
companies will be cut down.
This danger is not unprecedented. We
have been threatened by economic, legal
and policy changes over the history of
the industry. At Gilead Sciences, we have
endured challenging times, and faced the
question of whether it made more sense
for us to be acquired rather than remain
independent. We persevered and went on
to become one of the industry’s largest
and most successful fully integrated
companies. Our experience may offer
insights for companies that are similarly
challenged today.
Risks
Risk is inherent in both the financial
and research components of our industry.
Bringing novel therapeutics to market
is a lengthy, difficult and expensive
endeavor, particularly compared to
product development in other industries.
Only a small percentage of compounds
in development ever make it to
commercialization.
With investors already facing significant
R&D risk from biotech investments,
anything that substantially worsens
the odds can lead to precipitous
declines in funding. In the early 1990s,
proposed healthcare reforms were
initially undertaken without sufficient
transparency for investors to understand
and evaluate risk, which dampened
investment. In the current crisis, the
perceived risk is mostly systemic rather
than sector-specific, and biotech is one
of many sectors that public investors
have abandoned.
Responses
At Gilead, we survived past
periods of uncertainty through a
concerted emphasis on what is most
important — developing innovative
drugs. To this day, our approach is to
apply critical decision-making to advance
only those compounds that we believe
have the potential to truly address
unmet medical needs. In an environment
in which regulators and payors are
demanding more, it is more important
than ever that we all have this focus.
Drugs that offer significant advances in
treating patients are the ones that will
gain market acceptance — and deliver
the returns that investors require.
We have always believed in being
deeply connected with the healthcare
ecosystem. Our conversations and
collaborations with governments,
companies, physicians and patients
help us understand the needs of the
communities we serve. Through these
conversations, we have, for instance,
developed access and care programs for
patients who cannot otherwise obtain
our medications in the developing
world and industrialized nations. But
being connected also gives a company
valuable feedback to make its operations
more effective, allowing it to adapt
clinical development programs, make
manufacturing processes leaner or
simplify the logistics of a patient
assistance program. For companies
and their investors, this means more
predictability, fewer surprises — and
less risk.
We also recognize that our research
efforts represent a small percentage
of the overall R&D landscape. Our
expertise, however, allows us to
evaluate and identify opportunities
outside our organization, and affords
us the credibility to be a valued partner
for other companies and academic
collaborators. In areas where we do not
have an inherent efficiency advantage
or strategic rationale for conducting
certain activities, we rely on the
experience and capacity of partners.
For example, we have outsourced much
of our manufacturing to partners with
substantial knowledge in this area.
Rewards
Tough times, as the adage goes, don’t
last. The question is what the industry
will look like after this crisis is over. Will
a new generation of fully integrated
companies emerge? I hope so. It won’t
be easy, and many firms will perish, but
I am confident that many will make it
through — and be the tougher for it.
In summary: focus on what matters.
Innovation matters, because that’s what
drives value in this industry. Collaboration
matters for efficiency and strategic
advantage. Connectivity matters, because
success depends on understanding the
needs of the communities we serve.
And that, in the final reckoning, is
the real reward — the opportunity to
make a difference in curing diseases
and helping patients. I can think of no
greater motivation.

25. 19
James M.
Cornelius
Bristol-Myers Squibb
Chairman and
Chief Executive Officer Innovation from a string of pearls
A raft of challenges
Over the next few years, escalating
pressures will transform the
pharmaceutical industry as we know it.
The industry will face a host of patent
expirations on many of its most important
products, making innovation and R&D
productivity paramount. Meanwhile, access
to physicians is fleeting, and governments
and payors are bearing down on prices,
access and prescribing patterns.
These challenges are being compounded
by the global economic downturn,
which could reduce the uptake of novel
medicines as customers balance medical
care with other basic needs. For biotech
companies, access to capital has dried
up — with potentially dire consequences
for many innovators.
In the face of these challenges, old business
models are unsustainable, and companies
must reinvent themselves — or fail. While
it is clear that new models are needed,
there is no consensus around what shape
those models should take. So, while all
pharma companies are responding, they
are taking somewhat different approaches
to the problem. Some are betting that
large-scale consolidation will provide a
path forward. Others have cast their lot
with diversification, turning to generics or
non-pharma products.
Bristol-Myers Squibb’s strategy — adopted
in late 2007 — is focused on combining
the best of biotech (intensity,
entrepreneurialism and agility) and
pharma (global reach, vast experience
and rich resources) with one central
goal: driving innovation. If we can
succeed at being truly innovative, we
will all benefit — biotech, pharma and
the patients we serve.
A string of pearls
To achieve these goals, we have
restructured in two significant ways.
First, we are divesting assets to focus
intently on innovative medicines. We
have moved away from our non-pharma
assets — selling our wound care and
imaging businesses, for instance,
and completing a partial IPO for our
nutritionals group.
These measures have given us a
strong cash balance, allowing us to
pursue the second critical component
of our model: our “string of pearls,”
a series of interrelated acquisitions,
licensing agreements and partnerships
with biotech companies. We intend to
become the partner of choice for the
biotech industry.
We don’t have a one-size-fits-all approach
to these alliances. Instead, we aim for
transaction structures that can generate
the greatest innovation and value.
In some cases, we may engage in a
licensing agreement for a single asset
or a particular group of compounds. In
other cases, as with our 2007 acquisition
of Adnexus, the value of the purchase
stems from the innovation we generate
by working closely together; as a result,
this subsidiary has flourished as part of
the Bristol-Myers Squibb family.
The partnerships we’ve formed have
been mutually beneficial, as they
allow for the cross-pollination of ideas
and culture. While our company’s
investments have helped nurture the
biotech industry, we’ve also been able
to borrow lessons about how to operate
leaner and more productively. By
following the example of the biotechs,
we have managed to spend less on
general and administrative expenses and
rely more on the intensity of a “can-do”
culture. We are well on track to realize
a total of US$2.5 billion in cost savings
and avoidance by 2012.
The path ahead
The drug industry faces sizeable
challenges, and there will be no quick
fixes. Pharma companies will not be able
to instantaneously replace the billions
of dollars of revenue they are slated to
lose over the next few years. For many
biotech firms, funding is challenging, and
investment is unlikely to return to historic
levels anytime soon.
But we believe it is possible — and
necessary — for biotech and pharma
companies to come together to ensure
that innovative medicines continue to get
to those who need them. To do so, we
will need to partner, to complement each
other’s strengths and weaknesses.
This is the path we are pursuing at
Bristol-Myers Squibb. We are already a
vastly changed company — financially
more competitive, culturally more
innovative and better structured for
delivering novel medicines for serious
disease. In making these changes,
we’ve also positioned ourselves as a
much more attractive business partner.
We are confident that this model will
promote a sustainable future of medical
innovation and scientific cooperation,
bringing meaningful hope to patients
and physicians fighting to prevail against
serious disease.

26. 20 Beyond borders Global biotechnology report 2009
“We have been here before. The biotechnology industry’s
core strength is translating novel science into breakthrough
products. Thoughtful people never forget what this requires:
hard work on the science, patience, collaborative teams,
lots of capital and cooperative partners. Sometimes these
elements combine to produce spectacular drugs and
diagnostics. Sometimes good efforts fail. And sometimes
external factors such as economic cycles, confusing
regulations and slow reimbursement frustrate us. Visit with
doctors, hospitals and patient groups to remind yourself why
this intensely creative industry is needed. Focus on novel
approaches serving unmet medical needs. True innovation will
still get funded and rewarded.”
Venture capitalists speak out
The more things
change, the more
they stay the same?
We are in the midst of a global crisis that is buffeting industries from
airlines to wireless communications. But unlike most industries,
biotechnology is no stranger to financing droughts, and biotech companies
have become quite adept at surviving market slumps. This inevitably
raises a couple of interesting questions. Has the biotech industry been
here before, and will companies find creative ways to weather this difficult
environment as they have in the past? Or is this crisis truly different,
and what implications does that have for the industry? To address these
questions, we reached out to a number of seasoned venture capitalists
from across the US and Europe and asked for their insights.
— Rainer Strohmenger, Wellington Partners
“We have been here before. There have been many periods of
dramatic mismatch between capital supply and demand in
the history of the biotechnology industry. I am very confident
that these innovative, creative companies will once again
successfully adapt their business models to this challenging
environment. Over the last two decades, the biotech
industry has gained critical mass, and the demand for its
capabilities has never been greater — today, the industry is an
indispensable source of innovation for big pharma.“
“Don’t panic, we’ve been here before! Yes, this is a global
recession of unprecedented magnitude, but biotech
funding has always been cyclical, and the industry has
always recovered. Today, the fundamentals remain strong.
Patients still endure huge unmet medical needs — out of
600 ‘classified’ diseases, only 20–25% have effective cures,
and millions of patients still suffer from diabetes, cancer
and heart disease. Pharma still faces a colossal patent cliff,
and biotech is crucial for filling the pipeline — biotech’s
productive R&D has produced thousands of products
currently in the clinic. So biotech-pharma deals, which
tripled between 1999 and 2009, will continue. Yes, biotech
has real challenges, led by financing risk. Hundreds of
firms face capital shortfalls at a time when it is very hard to
refinance. No doubt there will be failures. But there will also
be survivors and there will be winners. Times are different,
but some things never change.”
“Biotech has gone through several bear markets before,
most notably following the burst of the tech bubble. What
is different this time is the underlying deep recession in the
world economy. However, compared with other industries,
biotech is faring quite well. Large- and medium-cap biotech
have been among the best-performing sectors during this
crisis. Fundamental drivers remain strong: patent expirations
in pharma necessitate an ongoing partnership with innovative
biotech companies. As a result, I expect biotech to be one of
the first sectors to attract new capital and recover.”
— Ansbert Gadicke, MPM Capital
“Biotech has been through many down cycles, and they are
always challenging times for entrepreneurship and venture
funding. But we also look at these times as an opportunity.
For portfolio companies, there is the opportunity to focus
and prioritize, return to capital efficiency, hire great talent
and differentiate themselves from their competitors. The
opportunity for VCs is to identify outstanding companies that
can prosper despite a difficult environment. Retrospectively,
we find that great companies and investments often emerge
from the toughest economic conditions.”
— Amir Nashat, Polaris Venture Partners
— Brook Byers, Kleiner Perkins Caufield & Byers
— Samuel Colella, Versant Ventures
Have we been here before?

27. 21
“This time it’s different. The 2001–02 biotech bust was
contained and self-inflicted from our industry’s perspective,
but the current downturn is far-reaching and externally driven.
Last time, the promise of genomics engendered early-stage
companies with valuations that proved unsustainable when the
timelines to product launch became clear — but much of the
industry remained robust. This time, a persistent funding gap
will dramatically cull investors and companies. Biotechs with
novel products will flourish, even if they have to endure a down
round. But many lesser companies that might have survived
prior crises face a much harsher climate today, leading to
shotgun marriages and even insolvencies.”
— Bryan Roberts, Venrock
“This time it’s different because the public investors have been
burned too many times and pharma growth has ground to a
halt. We must now finance companies developing products
and technologies that look very different from the types of
things that have come before.”
— Douglas Fambrough, Oxford Bioscience Partners
“We are living the tale of two cities. Biotech companies with
cash and exciting pipelines, versus those that lack either — or
both. Venture investors that closed their funds before the
downturn, versus those trying to raise funds now. Pharma
companies that have late-stage products to get them through
the patent cliff of 2012, and the ones that do not. And
products that offer true advances for patients, versus those
that are merely incremental. The contrast between haves and
have-nots has never been starker. Our industry will survive
and emerge stronger because smart people are working hard
to fill real unmet medical needs. But over the next few years,
its resilience will be tested as never before.”
— Nicholas Galakatos, Clarus Ventures
Or is it different this time?
— David Leathers, Abingworth
“Historically, few biotechs have gone under. This will change in
2009, amid a record downturn. High-quality companies — both
early- and late-stage — will still raise money, but will need to
rework business plans, seek capital efficiency and extend
runways. For the first time, many VCs are focusing on public
companies — and uncovering remarkable values. But while
much in today’s market is unprecedented, one truth endures:
the best investments are often made in difficult times.”
“It’s always different in biotech because we have no stable
business model. The industry has become more responsive to
investors than big pharma buyers. As new money flows to the
largest funds, they can dictate valuations. This transfers value
from early to late investors. As a result, we have abandoned
early-stage investing when pharma is asking for innovation. If
politicians eliminate the problem of ‘excess’ capital, we might
see a ‘pharma-centric’ bioventure industry emerge to seek a
sustainable business model.”
— Standish Fleming, Forward Ventures
— Andreas Wicki, HBM BioVentures
“This time it’s different. The model of investing US$50 million
or more for proof-of-concept has grown too risky for most
investors. With unpredictable public markets, projects will
need to be financed longer — even to approval or market
launch — requiring much larger investments and/or greater
R&D efficiency. Breakthrough science and proven teams
can still produce strong returns, but frequent failures have
hurt overall VC returns. With further fund declines ahead,
the biotech VC industry will shrink. We will need new models
to boost success rates and returns on investment, but the
current crisis will still form the basis for new winners.”

28. 22 Beyond borders Global biotechnology report 2009
Andrew Dillon
NICE
Chief Executive
Sarah Garner, Ph.D.
NICE
Associate Director for R&D
Valuing innovation: new
approaches for new products
and changing expectations
The global financial crisis is straining
the budgets and spending priorities of
individuals, businesses and governments.
These days, many are being asked to
do more with less. Since long before
this crisis, however, healthcare systems
around the world have struggled to
meet patients’ expectations and seize
health-technology opportunities within
the constraints of available financial
resources. At the National Institute for
Health and Clinical Excellence (NICE)
in the United Kingdom, we have been
dealing with these issues since 1999,
and our methodologies have evolved to
address some of the challenges facing
evaluators of new health technologies.
Costs and benefits
The fundamental question is this: how
should a society allocate its healthcare
expenditures to best meet the needs of
patients? This is not very different from
the resource allocation decisions made
by other economic agents — households
choosing to save or spend, or companies
deploying capital across different
investments. One way to address the
problem, therefore, is to use the same
methodology implicit in those other
economic decisions — weighing relative
costs and benefits.
This is precisely what NICE does.
The agency uses an approach called
“cost-utility analysis” to compare the costs
and health benefits of new interventions
to those already provided by the UK’s
National Health Service (NHS). While this
may sound straightforward, in practice it
has been somewhat controversial. NICE
surveys show that while most NHS users
support the efficient and equitable use of
healthcare resources, they dislike the idea
that costs are taken into account when
deciding what treatments should be made
available. It’s a very human contradiction.
And as always, details matter, so the
specific approaches to measuring costs
and benefits generate controversy.
To quantify benefit, NICE considers the
impact of different treatments using a
common yardstick, the quality-adjusted
life year (QALY). The QALY measures
not just the length of life under an
intervention, but also the quality of
that life — whether patients are able
to undertake their usual activities,
for instance, or how much pain they
experience. On the cost side of the
ledger, NICE considers expenditures
incurred by the NHS and personal
social services (PSS) provided by
local governments. NICE appoints
independent advisory committees to
make decisions based not only on this
economic analysis, but also on clinical
effectiveness evidence, submissions
from stakeholders and testimony from
patient and clinical experts.
Because the NHS has a fixed budget,
any money spent on a new intervention
is not available for other things. To be
considered cost-effective, therefore,
a new intervention should provide at
least as much benefit (in QALY terms) as
other interventions that could have been
purchased using the same money.
Of course, we can’t measure the
cost-effectiveness of every alternative
intervention across all of the NHS,
so we have had to make assumptions
about cost-per-QALY thresholds at
which interventions may be deemed
cost-effective. We weren’t given a
threshold by the UK’s Department of
Health, so we’ve had to work one out
for ourselves, based on what we believe
represents good value for money for the
NHS. To guide us in setting a threshold,
we took advice on the threshold which
had been used by NHS organizations
before NICE was established. Over time,
it became apparent that the advisory
committees generally approved at a
cost per QALY below around £30,000
(US$43,600) and were generally more
cautious in doing so above this figure.
This experience was subsequently
translated into a decision framework
which guides committees to routinely
approve treatments falling below
£20,000 (US$29,200) per QALY and
to normally approve those costing
between £20,000 and £30,000. Above
this level, committees would rarely
approve treatments, although they can
and do. Some argue that this range is
too high, displacing more cost-effective
interventions, and others argue it is
too low, preventing novel interventions
from being available. We are bringing
stakeholders together in 2009 to hear
arguments on both sides.
New approaches: measuring “benefit”
As discussed above, NICE considers
impacts within the healthcare
system — benefits for patients and
caregivers relative to costs incurred by
NHS and PSS. However, this approach
raises the possibility that we may miss
costs and benefits that ultimately
matter to patients by not taking a
wider economic perspective. If we
were to broaden our perspective — as
some have argued we should — by, for
example, taking account of the impact

29. 23
on the economy of returning someone
to full employment, we would be using
resources allocated for health to pursue
nonhealthcare objectives.
Certainly there could be circumstances
where much of the cost (or cost saving)
is incurred outside the NHS and PSS, or
where the majority of the “benefit” is not
health-related. In a number of exceptional
circumstances, the Department of Health
has agreed that NICE can consider a
wider perspective for costs and benefits.
This has to be agreed at the start of the
appraisal since it will affect the results of
the economic analysis and may involve
making recommendations about resource
allocation beyond the health system.
The Department of Health is taking the
lead in researching and engaging with
stakeholders on this issue in 2009.
New approaches: pricing and access
The UK’s voluntary Pharmaceutical
Price Regulation Scheme (PPRS), which
modulates the pricing of pharmaceuticals
manufactured by participating companies,
including new biologics, has been revised
in 2009 with a broader agenda and two
new elements that better reflect value in
the price of drugs. The first new element,
flexible pricing, allows a company to
increase or decrease its original list price
when new evidence emerges concerning
the drug’s efficacy or risks, or a different
indication is developed. The second
element, patient access schemes, can
facilitate patient access for medicines
that were not initially found to be cost or
clinically effective by NICE.
Even before the revised PPRS was agreed,
patient access schemes have allowed
us to give patients access to new drugs,
sometimes by collaborating creatively with
drug companies. Velcade, for instance,
was approved for relapsed multiple
myeloma under an arrangement where
the company reimburses NHS for patients
who make a less-than-partial response
to treatment, based on a predetermined
measure. More recently, Sutent was
approved for advanced and/or metastatic
renal cancer; an arrangement where
the company pays for the first cycle of
treatment contributed to the agreement.
New approaches: life-extending
treatments
Shepherding new products through
regulatory approval is, of course, a long
and expensive process. In recent years,
new biologics have increasingly been
targeted at small subpopulations of
patients. These drugs sometimes come
with relatively high price tags. At these
prices, NICE’s current methodology
sometimes does not find the drugs
cost-effective compared to existing
interventions, even given the incremental
benefit they can offer.
This has, on occasion, spurred heated
debate, particularly when the drugs
in question are treatments that could
extend life for patients with terminal
diseases. How much are additional
months of life worth to patients and
their families compared to an equivalent
healthcare impact for people with other
conditions? How much more should the
healthcare system be willing to pay in
these circumstances? Some argue that
our existing analytical methods cannot
fully account for this value.
But we are working on new approaches.
In January 2009, NICE provided its
advisory committees with supplementary
methodological advice on the issue of
valuing extensions to life for terminal
patients. The advice applies in a defined
set of circumstances — while recognizing
exceptional situations, we also need to
maintain a consistent overall approach to
equitably allocating the fixed resources of
the NHS.
Valuing innovation
These are not easy issues. Our work
at NICE attempts to strike a balance
between the expectations of patients and
families, the need to provide commercial
incentives for healthcare investors and
innovators, and the ultimately finite
resources of the healthcare system.
With aging populations and increasingly
constrained budgets, these pressures are
only going to grow.
Our methods have sometimes generated
controversy. Perhaps that is to be
expected — after all, those methods do
require putting monetary values on health.
But one way or another, all health systems
make such choices — NICE’s methodologies
simply enable us to make them in a more
rigorous and explicit manner.
The challenge we are discussing here
can be summarized in two words: valuing
innovation. What approach should
be adopted by NICE to ensure that
innovation is properly taken into account
when establishing the value of new health
technologies? Should particular forms
of value be considered more important
than others? In 2009, we have asked
Professor Sir Ian Kennedy of University
College London to lead a study and chair
a series of workshops to discuss these
issues with industry representatives, the
NHS, patients and the general public. We
don’t claim to have all the answers, but
we’re certainly open to asking questions
and launching a dialog.
We would encourage others to do the
same. Our experiences at NICE may
provide lessons for policy-makers
in other countries as they seek new
solutions. Companies need to be
actively engaged as well. They can
approach NICE for scientific advice
about issues such as clinical-trial design
and selecting appropriate outcome
measures, and they should contribute
to their local comparative-effectiveness
policy debate. Balancing the needs of
patients, payors and innovators is not
easy. For the health of our industry and
the health of patients everywhere, we
will need healthy dialog.

30. 24 Beyond borders Global biotechnology report 2009
For the global biotechnology industry,
as for the rest of the world economy,
the biggest developments of 2008
were in the capital markets. The market
meltdown, born in increasing defaults
on US subprime mortgages, rapidly
spread beyond borders, sending stock
markets plummeting and fueling a credit
crisis. In the US, the aggregate market
capitalization of the biotech sector, which
rose 21% between 1 January and
15 August, fell sharply in the fourth
quarter, closing 2008 down slightly
relative to the beginning of the year.
The impact of the stock market crash
fell disproportionately on the industry’s
smallest firms, which saw their valuations
fall precipitously. A significant cohort of
firms was even trading at values below
the cash on their balance sheets, as wary
investors implicitly assigned negative
valuations to the intellectual property
and other assets of these firms. Similar
declines were seen in other major
markets during the year, as the industry’s
market capitalization fell by 35% in
Europe and by 61% in Canada.
Financing
The market turmoil led to significant
declines in funding in 2008. Overall,
capital raised by biotech companies fell
by 46%, from US$30 billion in 2007 to
US$16 billion in 2008. Not surprisingly,
the most dramatic falloff was in funds
raised from public investors. The amount
of capital raised in IPOs fell by a dramatic
95%, from US$2.3 billion in 2007 to
US$116 million in 2008. The bulk of this
funding came from Europe, where three
companies went public and raised about
US$111 million. In the North American
market, IPOs all but disappeared. There
was just one listing in the US, for a
relatively meager US$6 million, and none
at all in Canada. Some Asian companies
did manage to go public in spite of the
market conditions, with three IPOs on
Japanese stock exchanges and two
listings by Chinese firms.
In recent years, follow-on and other
offerings have accounted for the majority
of the biotech industry’s financing. For
instance, these financings — which consist
primarily of follow-on equity transactions,
debt offerings and private investments in
public equity (PIPEs) — accounted for 68%
of the industry’s fundraising in 2007. In
2008, money raised from such financings
totaled US$9.9 billion — less than half the
US$20.3 billion raised in 2007.
Venture capital held up relatively well
during the year, falling by only 19%. As a
result of the steeper decline in financing
for public companies, venture funding
accounted for 37% of total biotech
financing in 2008, up from 25% in 2007.
Venture financing remained relatively
strong in the US and Europe, but fell
more sharply in Canada, where there was
a 41% decrease.
Across the world, biotech companies
can expect a more challenging funding
environment in 2009. Investors in
publicly traded biotech companies,
which provided the majority of the
industry’s capital in recent years, are
unlikely to return in a big way. Many
of these investors have seen their
portfolios decline with the overall stock
market. The era of easy money and
high leverage has ended, and there is
simply less capital to go around, leaving
biotech companies with less funding
in the months ahead. And while VCs
have not abandoned the sector entirely,
they are being more selective in an
environment of challenging exits and
reduced valuations.
Financial performance
The revenues of the publicly traded global
biotechnology industry increased by 12%,
from US$80.3 billion in 2007 to US$89.7
billion in 2008. However, this growth was
unevenly distributed across regions.
Global year in review
Turbulent times
2008 2007 Percent change
Type US Europe Canada US Europe Canada US Europe Canada
IPO 6 111 0 1,238 1,010 5 -99.5% -89% -100%
Follow-on and other offerings 8,547 1,115 271 14,689 4,880 703 -42% -77% -61%
Venture financing 4,445 1,369 207 5,464 1,604 352 -19% -15% -41%
Total $12,998 $2,595 $478 $21,391 $7,494 $1,060 -39% -66% -55%
The year in financing: US, Europe and Canada 2007 and 2008 (US$m)
Source: Ernst & Young, BioCentury, BioWorld, VentureSource and Windhover
Numbers may appear inconsistent because of rounding
Percentage changes for Europe and Canada based on conversion of currency to US dollars

31. 25
In the US, top-line growth fell into
single-digit territory as the sector’s
revenues increased by only 8.4%.
However, US revenue was trimmed
by the acquisitions of several mature
biotechs. After adjusting for the impact
of three large deals — Millennium
Pharmaceuticals’ acquisition by Japan’s
Takeda Pharmaceuticals, ImClone Systems’
purchase by Eli Lilly, and the acquisition
of Applied Biosystems by Invitrogen
(since renamed Life Technologies) — the
sector’s revenues would have grown by
12.7% instead of 8.4%. Revenues were
also diminished by slower growth at the
industry’s largest revenue-generating
company — Amgen. While Amgen’s
revenues grew by a compound annual
growth rate of 27% between 2002 and
2006, they grew by only 1.6% in 2008,
largely as a result of regulatory and
reimbursement developments that hurt
sales of some of its products.
In Europe, the revenues of publicly
traded companies increased by 26%.
This growth rate was boosted by the
impact of fluctuations in the exchange
rate — when stated in euros, revenues
grew by 17%. The vast majority of this
increase is attributable to strong product
sales at a handful of mature European
biotechs, including Actelion, Elan, Eurofins
Scientific, Meda, Qiagen and Shire.
In Canada, revenues of publicly traded
biotech companies decreased 9%, from
US$2.2 billion in 2007 to US$2 billion in
2008, mainly due to the acquisitions of
four significant Canadian firms — Arius,
Aspreva, Axcan and Draxis — by foreign
companies. If 2007 revenues were
adjusted to exclude those four companies,
the industry’s revenues would have
increased by 26% instead of falling.
In the Asia-Pacific region, revenues grew
by an impressive 25%, led by strong
growth in Australia, where the sector
benefited from strong sales of CSL’s
Gardasil. Indeed, in each region, a few
mature companies had a disproportionate
impact on top-line growth, highlighting
that biotech remains an industry of haves
and have-nots.
Sustained investments in R&D are
critical to the future success of biotech
companies, and it is encouraging that
global R&D expenditures grew by 18% in
2008 — outpacing growth on the top line.
While the growth in R&D differed across
regions, it grew by strong double-digit
rates everywhere except Canada, where
R&D expenditures were negatively
affected by the four large acquisitions
mentioned above.
There was some exciting news with regard
to one long-anticipated development: the
profitability of the US biotech industry.
As detailed in prior editions of Beyond
borders, the US publicly traded biotech
industry has never been profitable in
aggregate, because the profits of a
relatively small group of successful
companies have always been outweighed
by the losses of large numbers of smaller,
pre-revenue firms. For several years,
Ernst & Young has forecast that the US
publicly traded biotech industry would
reach aggregate profitability before the
end of the decade. The industry inched
closer to that benchmark in recent
years — including coming within a hair’s
breadth in 2007 — but never quite made
it. In 2008, the sector finally reached
aggregate profitability with aggregate
net income of US$0.4 billion. Alas, this
accomplishment will likely turn out to be
short-lived, given Roche’s acquisition of
Genentech in 2009.
Boosted by this positive development
in the US and by a strong showing in
Europe, where net loss declined by a
very significant US$1.5 billion, the global
industry’s bottom line improved by an
impressive 53%, from a net loss of about
US$3.1 billion in 2007 to a net loss of
US$1.4 billion in 2008. In the absence
of the Genentech acquisition, it was
quite conceivable that the net profit of
the US sector could have soon become
large enough to make the global industry
profitable in aggregate. With the loss of
Global US Europe Canada
Asia-
Pacific
Public company data
Revenues 89,648 66,127 16,515 2,041 4,965
R&D expense 31,745 25,270 5,171 703 601
Net income (loss) (1,443) 417 (702) (1,143) (14)
Number of employees 200,760 128,200 49,060 7,970 15,530
Number of companies
Public companies 776 371 178 72 155
Public and private companies 4,717 1,754 1,836 358 769
Global biotechnology at a glance in 2008 (US$m)
Source: Ernst & Young
Numbers may appear inconsistent because of rounding
Employment totals are rounded to the nearest hundred in the US and to the nearest ten in other regions

32. 26 Beyond borders Global biotechnology report 2009
Genentech, of course, it will be a lot longer
before the US or the global industry sees
aggregate profitability again.
The number of companies and number
of employees fell in 2008 — a sign of the
times and a harbinger of things to come
as the industry is poised for significant
consolidation in 2009.
Deals and creativity
Deal activity remained strong in 2008,
driven both by long-term trends such
as big pharma’s need to reinvent itself
because of looming patent expirations
and by the immediate challenges created
by the current funding environment.
M&A activity was robust in both the
US and Europe. The total value of M&A
transactions involving US biotechs was
more than US$28.5 billion — a record
high not counting megadeals in prior
years, such as the 2007 acquisition of
MedImmune by AstraZeneca. Though
absent any megadeals in 2008, the
US totals were boosted by three large
transactions valued at more than US$5
billion each: Millennium Pharmaceuticals’
acquisition by Takeda Pharmaceuticals,
ImClone Systems’ purchase by Eli
Lilly, and the acquisition of Applied
Biosystems by Invitrogen (since renamed
Life Technologies). In Europe, M&A
transactions totaled US$5.0 billion
(€3.4 billion).
Deal activity was also brisk on the
strategic-alliance front. The potential
value of strategic alliances involving US
biotech companies reached an all-time
high of almost US$30 billion, while the
potential value of alliances involving
European companies was US$13 billion
(€8.8 billion).
Reflecting the unprecedented challenges
facing large and small companies, there
were a number of creative deals in 2008.
Many of these transactions involved a small
group of biotech companies that are widely
regarded for their innovative platforms
and drugs. These companies were able to
structure deals that often included options
and allowed them to retain more upside.