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other companies. Now more than ever we have to make sure
that the breakthrough drugs we will need for our growth are
developed from within.
Lange: We have spent much of the last five years ending in
late 2008 monetizing a decade-long US$1 billion investment
in R&D that resulted in three product approvals and two
partnerships. As a result, we were able to initiate new revenue
streams and pay down much of our debt. Of course, we didn’t
know that the financial markets were going to crater, but
in hindsight our timing was good. We are going forward in
2009 with a healthy amount of cash on the balance sheet and
enough money to get to profitability if things go well. We were
preparing to become a profitable biotech company regardless
of the economic picture. That strategy now provides us with
many different choices that are reasonably independent of
having to raise equity dollars. I’m incredibly optimistic about
CV Therapeutics. We had three products approved last year,
we raised money, we have a robust pipeline and a strong
regulatory track record. We have very good relationships and
credibility with both the Food and Drug Administration and the
European Medicines Agency. We have a bright future with a
lot of value that is only going to increase. [Editor’s note: in the
months after this interview, CV Therapeutics was acquired by
Gilead Sciences for US$1.4 billion.]
Ernst & Young: Challenging economic times produce new
risks as well as new opportunities. On balance, which is
greater for your company at the current time — emerging
opportunities or new risks? What specific challenges or
opportunities are you seeing?
Goddard: There’s much more opportunity than threat for
a company like ours, which is anchored around a solid and
growing product, because it allows us to look for strategically
enriching platform technologies or pipeline assets. We need
to do this in a thoughtful manner. First, we need to remember
that just because something is on sale doesn’t mean that it’s a
good buy.
Second, companies at our stage of evolution face more earnings
scrutiny, which implies that we need to appropriately balance
financial performance against reinvestment. While we’re all trying
to create value, there’s an inevitable dichotomy between the focus
of some shorter-term investors and the generally longer-term
view of companies. Investors have a job to do which can lead to a
shorter-term focus. But to create sustainable shareholder value,
we need to balance short-term financial performance against
the longer-term need to reinvest. One way to do this could be
through creative and thoughtful transactions that have less
income-statement impact. Over time, of course, with sustained
top-line growth comes credibility and more latitude from investors
to reinvest. We’re on that journey, but it does impact how we
respond to the opportunities in front of us today.
Those are the opportunities. In terms of risk, one of our
frustrations is around the volatility in interest rates and
currency exchange, since a significant proportion of our
revenues are earned outside the US. We are considering
hedging strategies, but the volatility is there at a level that is
quite unusual. It’s something for us to think about in terms of
managing the business as a whole.
Bienaimé: Interest rates have impacted us as well. Interest
rates have fallen with the onset of this recession, lowering the
interest income on our fairly sizeable cash balances and creating
more risk on this front. The most significant risk, though, is the
potential pressure on reimbursements. This hasn’t materialized
yet, but, if economic conditions around the world deteriorate,
I’m sure there will be some pushback from payors.
In terms of opportunities, as already mentioned, there are
several smaller biotech companies that have no revenues and
no cash. We are getting an increasing number of calls about
companies that are desperate, some of which have decent
assets but no ability to fund further development. That creates
buying opportunities for us.
Bigger companies may be less willing to buy some of these
struggling companies. Well, we’re not big pharma. We
are willing to take some risks with which they may be](https://image.slidesharecdn.com/e51925b5-87b1-4f14-99b1-c6a5d0296342-160709162519/85/2009-EY-Biotech-Report-45-320.jpg)
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2009 EY Biotech Report
- 1. Beyond borders Global biotechnologyreport 2009
- 2. “It is differentthis 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 asusual? 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 Europeansection 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
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- 8. 2 Beyond bordersGlobal 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 bordersGlobal 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 forbiotech 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 bordersGlobal 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 equityis 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 bordersGlobal 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 thanany 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 bordersGlobal 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 SymphonyCapital 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 bordersGlobal 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 globalfinancial 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 bordersGlobal 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 partialexits 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 bordersGlobal 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 asreadily 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 bordersGlobal 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 Chairmanand 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 bordersGlobal 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’sdifferent. 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 bordersGlobal 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 economyof 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 bordersGlobal 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 bordersGlobal 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.
- 33. 27 To help closethe valuation gap between the expectations of sellers and what the market is willing to pay at a time of distressed valuations, acquisitions with earn-outs became a fairly regular feature even in the purchases of public companies — an unprecedented development. Reflecting the considerable risks that companies now face even after launching products, due to increased post-marketing safety surveillance and a fast-changing pricing and reimbursement environment, a number of strategic alliances contained contingent payments linked to commercial milestones rather than R&D milestones. The most watched biotech deal of the year — the acquisition of Genentech by Roche — led to extensive negotiations but did not culminate in an agreement until March 2009. Meanwhile, other big pharmas undertook megamergers of their own, including Pfizer’s acquisition of Wyeth and the merger of Merck & Co. with Schering-Plough. Biotech companies will need to monitor these trends, since the integration following such large mergers can cause significant internal distractions which impact the companies’ existing and potential partners. Outlook The global biotech industry turned in a solid financial performance in 2008, and the US sector’s attainment of aggregate profitability is an encouraging, if largely symbolic and fleeting, achievement. Yet, financial growth was led by strong product sales at a handful of larger companies, underscoring that biotech remains an industry of haves and have-nots. In the current funding environment, of course, the realities facing those two sets of firms have diverged, and many small-cap firms will have a harder time raising capital, particularly in the public markets. Consolidation seems inevitable. For biotechs looking to raise funds, the good news is that deal activity remains strong. But here, consolidation of a different sort — among big pharma firms — has made the outlook more complicated. To survive and thrive in this market, biotech firms will need to be vigilant, remain focused and harness creativity. 2008 2007 % change Public company data Revenues 89,648 80,344 12% R&D expense 31,745 26,881 18% Net income (loss) (1,443) (3,055) -53% Number of employees 200,760 201,690 -0.5% Number of companies Public companies 776 815 -5% Public and private companies 4,717 4,799 -2% Growth in global biotechnology, 2007-08 (US$m) Source: Ernst & Young 2008 financials largely represent data from 1 January 2008 through 31 December 2008 2007 financials largely represent data from 1 January 2007 through 31 December 2007 Numbers may appear inconsistent because of rounding
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- 36. 30 Beyond bordersGlobal biotechnology report 2009 In September 2008, economic conditions took a dramatic turn for the worse. In three tumultuous weeks, several leading financial institutions either failed, were acquired or were bailed out by the US government. Stock markets nosedived in waves of dizzying volatility. US regulators initiated a series of unprecedented measures to prop up ailing banks and boost a flagging economy. As a credit crunch quickly devolved into a deep global recession, the world economy — which had till then been limping along with a low-grade fever — suddenly seemed struck by a life-threatening infection. Not surprisingly, the economic turmoil has had a considerable impact on the US biotech industry. The aggregate market capitalization of the 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. While this showing handily outperformed broad market indices such as the Dow Jones Industrial Average, the Nasdaq Composite and the S&P 500, each of which fell 30% to 40% during 2008, the biotech sector’s numbers were boosted considerably by the strong performance of a handful of large mature companies such as Genentech, Amgen and Celgene. The fortunes of smaller companies were not quite as rosy, and the impact of the crisis fell disproportionately on the industry’s smallest firms. The aggregate market value of mid-cap biotech companies (defined as those with market valuations between US$2 billion and US$10 billion as of 1 January) fell 30% during 2008, while that of small-cap firms (those with market caps between US$200 million and US$2 billion) fell Americas introduction A Darwinian moment? In 2008, the biotech industry outperformed the market … Source: Ernst & Young, finance.yahoo.com EY biotech industry represents the aggregate market cap of all US public biotech companies as defined by Ernst & Young +40% -20% -40% -60% 0% +20% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan EY biotech industry Nasdaq Dow S&P 500 … but smaller companies fared considerably worse Source: Ernst & Young, finance.yahoo.com EY biotech industry represents the aggregate market cap of all US public biotech companies as defined by Ernst & Young +40% -20% -40% -60% 0% +20% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Largest cos (market cap > US$10b) Small cap (US$200m - 2b) EY biotech industry Micro cap (below US$200m) Mid cap (US$2b - 10b)
- 37. 31 33%. For micro-capcompanies (firms that started the year with market valuations below US$200 million), the decline was an astonishing 52%. By 31 December, about 85 biotech companies were trading at values below the cash on their balance sheets, as apprehensive investors implicitly assigned negative valuations to the intellectual property and other assets of these firms. For these unfortunate firms, the decline in market valuation over the course of the year was a breathtaking 80%. Financing As one would expect, the challenging capital markets environment has also taken its toll on fundraising by the US biotech sector, as the US industry’s financing fell to levels not seen since before 2003. The market for IPOs, which had started to soften in the fourth quarter of 2007, all but disappeared in 2008. The year’s only IPO, by Florida-based Bioheart, occurred in February and raised under US$6 million, a small fraction of the US$70 million the company had initially hoped to raise, and less than the typical proceeds of a seed round of venture financing. The public markets were not much more forthcoming for follow-on offerings, debt and private investments in public equity (PIPEs), all of which fell sharply. The only segment that fared well was venture capital, where — in spite of a 19% decrease relative to 2007 — the US industry achieved the second-highest totals in history. The pace of investments slowed significantly late in the year as the financial crisis deepened, and the bulk of the year’s decline in financing occurred in the fourth quarter. Capital raised by US biotech companies had averaged US$3.9 billion per quarter during the first three quarters, but fell to US$1.3 billion in the fourth quarter. While follow-on offerings had maintained a pace comparable to the prior year during the first three quarters, there were no financings in this category in the last quarter. Combined with the lack of IPOs, this means that public equity markets have effectively been shut for biotech companies. But even venture capital — the one positive element in the year’s financing data — fell notably in the fourth quarter. Ernst & Young survival index Source: Ernst & Young and company financial statement data Numbers may appear inconsistent because of rounding US Canada 2008 2007 2008 2007 Number of companies Percent of total Number of companies Percent of total Number of companies Percent of total Number of companies Percent of total More than 5 years of cash 76 20% 124 31% 14 19% 37 43% 3–5 years of cash 18 5% 53 13% 3 4% 1 1% 2–3 years of cash 41 11% 39 10% 0 0% 4 4% 1–2 years of cash 74 20% 81 21% 14 19% 10 12% Less than 1 year of cash 162 44% 98 25% 41 57% 32 39% Total public companies 371 395 72 84 Quarterly breakdown of Americas biotechnology financings (US$m) Source: Ernst & Young, BioCentury, BioWorld, Windhover and VentureSource Figures in parentheses are number of financings. Numbers may appear inconsistent because of rounding. First quarter 2008 Second quarter 2008 Third quarter 2008 Fourth quarter 2008 Total US Canada US Canada US Canada US Canada US Canada IPO $6 $0 $0 $0 $0 $0 $0 $0 $6 $0 (1) (0) (0) (0) (0) (0) (0) (0) (1) (0) Follow-on $606 $41 $278 $11 $831 $28 $0 $0 $1,715 $80 (8) (3) (4) (2) (8) (3) (0) (0) (20) (8) Venture $1,202 $22 $1,192 $48 $1,177 $120 $875 $17 $4,445 $207 (97) (8) (65) (5) (77) (6) (59) (6) (298) (25) Other $2,120 $41 $879 $48 $3,427 $55 $406 $0 $6,832 $191 (41) (12) (48) (15) (43) (10) (36) (12) (168) (49) Total $3,934 $104 $2,348 $107 $5,435 $203 $1,281 $64 $12,998 $478 (147) (23) (117) (22) (128) (19) (95) (18) (487) (82)
- 38. 32 Beyond bordersGlobal biotechnology report 2009 Selected 2008 US biotechnology public company financial highlights by geographic area (US$m, percent change over 2007) Region Number of public companies Market capitalization 31.12.08 Revenue R&D Net income (loss) Cash and equivalents Total assets San Francisco Bay Area 73 149,371 23,605 6,574 2,790 9,162 38,740 -4% 0% 10% 73% 9% 21% -2% New England 59 49,717 13,081 4,973 (49) 5,119 26,913 -8% -24% 15% 3% -92% 5% -5% San Diego 40 17,450 3,972 1,721 (945) 2,235 15,565 -9% -26% 24% -13% -21% -19% 57% New Jersey 28 31,952 3,962 1,637 (2,499) 1,702 8,971 -13% 7% 20% 42% 2705% -13% -5% Mid-Atlantic 22 4,978 771 894 (614) 490 3,145 -4% -33% 11% 5% 5% -13% -6% Southeast 23 1,867 234 258 (304) 406 940 5% -30% -9% -63% -46% -22% -22% New York State 24 5,708 1,070 3,441 73 747 2,895 -14% -53% -30% 268% -120% -53% -36% Midwest 11 598 16 113 (154) 135 212 0% -54% -61% -17% -23% -45% -46% Pacific Northwest 15 1,575 219 481 (635) 241 853 0% -45% 41% -19% 0% -28% -16% Los Angeles/ 18 65,021 15,513 3,544 3,413 2,299 38,557 Orange County -5% 17% 2% -19% 30% -31% 4% North Carolina 11 1,071 434 310 (206) 346 880 10% -40% -4% 11% 81% -22% -12% Pennsylvania/ 15 8,441 2,481 761 (88) 1,180 4,974 Delaware Valley 0% -1% 10% 3% -80% -12% -4% Texas 10 1,281 138 174 (141) 182 504 -17% -9% -16% -24% -46% 75% -20% Colorado 9 912 29 158 (242) 136 301 0% -22% -69% 18% 82% -25% -18% Utah 2 3,375 436 159 16 277 776 0% 52% 57% 16% -152% 34% 26% Other 11 522 167 71 1 46 263 -15% -89% -59% -49% -102% -25% -12% Total 371 343,837 66,127 25,270 417 24,704 144,489 -6% -7% 8% 20% -431% -5% 1% Source: Ernst & Young and company financial statement data Percent changes refer to change over December 2007 Numbers may appear inconsistent because of rounding New England: Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, Vermont Mid-Atlantic: Maryland, Virginia, District of Columbia Southeast: Alabama, Arkansas, Florida, Georgia, Kentucky, Louisiana, Tennessee, South Carolina Midwest: Illinois, Michigan, Ohio, Wisconsin Pacific Northwest: Oregon, Washington
- 39. 33 In the wakeof a sharp economic downturn and fewer exit options, venture capitalists (VCs) have become increasingly risk-averse and selective. While the year’s overall venture funding numbers look relatively strong, the totals mask the deterioration in the fourth quarter and the struggles of many smaller companies trying to raise capital. In addition, VCs themselves face the risk that their limited partners, who have often seen declines in their portfolios, will not be able to honor funding commitments. And VCs looking to raise new funds will face a more challenging environment, many likely finding they cannot raise targeted amounts. Meanwhile, investors in publicly traded biotech companies, which provided the bulk of the industry’s capital in recent years, are unlikely to return in force any time soon. The turmoil in the capital markets has ended the era of easy money and caused a massive deleveraging. There is now simply less capital to go around, leaving biotech companies with less funding for the foreseeable future. Deals While rapid changes have radically altered the environment for the biotech industry in recent months, some long-term drivers remain unchanged. In particular, the pipeline challenges confronting big pharma companies continue to become increasingly urgent. Many firms face significant patent expirations in the years ahead and do not have enough in the pipeline to fill the gap. Not surprisingly, big pharma companies remained active buyers of biotech assets in 2008, helping drive deal totals for the year to impressive heights. The total value of M&A during the year was more than US$28.5 billion — a record high not counting the megadeals of prior years, such as the 2007 acquisition of Medimmune by AstraZeneca. In 2008, although there were no megadeals, there were three large transactions valued at more than US$5 billion each: 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). Big pharma’s interest in successful mid-cap biotech companies remains high, and we could well see more such “mini-megadeals” in 2009. While no megadeals were completed during 2008, the back-and-forth negotiations for the mother of all megadeals kept the industry transfixed for much of the year. Roche offered in July to buy the minority stake in Genentech that it did not already own, and the two parties finally agreed in March 2009 to a US$46.8 billion purchase price, or US$95 per share. Deal activity was every bit as heated for strategic alliances, where the potential value of alliances reached an all-time high of almost US$30 billion. This was mostly due to significant growth in the potential value of biotech-biotech deals. Financial performance The US industry’s financial performance in 2008 was a mixed bag. The revenues of publicly traded US biotech companies grew by 8.4% in 2008, down from the 11.3%
- 40. 34 Beyond bordersGlobal biotechnology report 2009 growth seen in 2007 and significantly below the industry’s historical compound annual growth rate (CAGR) of about 15%. As in previous years, the revenues of the industry were diminished to some extent by the acquisitions of a number of larger successful biotechs by companies outside the biotech industry. In particular, the year’s three mini-megadeals had a palpable impact on the industry’s top line. The acquisitions of ImClone and Millennium by big pharma buyers removed two firms that together accounted for more than US$1 billion in revenues. The merger of Invitrogen and Applied Biosystems also dampened the industry’s total revenues in 2008, even though neither company was acquired by a big pharma firm. Instead, the merger resulted in the formation of Life Technologies. While we include the new company in our biotech industry numbers, one result of the accounting treatment of the merger under US Generally Accepted Accounting Principles (GAAP) is that for 2008, the new company reported the full-year revenues of Invitrogen and only those revenues from Applied Biosystems that were after the acquisition date. In its 2008 annual report, Life Technologies states (on a pro-forma basis) that had the merger occurred on 1 January 2007, the 2008 revenues of the combined entity would have been about US$1.5 billion higher. If these “lost” 2008 revenues are included in the industry’s numbers, the top-line growth rate would have been 12.7% instead of 8.4% — roughly comparable to the industry’s historic CAGR. Revenues were also diminished by slower growth at the industry’s largest revenue-generating company — Amgen. This is the second year of slowing revenue growth at the Thousand Oaks, California-based stalwart. Amgen’s revenues grew by a CAGR of 27% between 2002 and 2006, but growth slowed to 3.5% in 2007 and declined even further to 1.6% in 2008. For the most part, this slower rate of growth was driven by the negative impact of regulatory and reimbursement developments on sales of the company’s erythropoiesis-stimulating agents (ESA) products, including safety-related revisions to product labels and the loss of or significant restrictions on reimbursement. (For additional discussion, refer to the “US year in review: products” article in Beyond borders 2008.) As a result of these challenges, the company implemented a restructuring plan that included, among other things, worldwide staff reductions targeting 2,500 positions, a rationalization of its worldwide network of manufacturing facilities and the divestiture of some less significant marketed products. The most anticipated financial-performance news was somewhat anticlimactic. For several years, Ernst & Young has been forecasting that the US publicly traded biotech industry would reach aggregate profitability before the end of the decade. In 2007, the industry came within a hair’s breadth of reaching that milestone, and in last year’s Beyond borders we were fairly confident the industry would reach aggregate profitability in 2008. Indeed, the US biotech sector was profitable in 2008 — with aggregate net income of US$0.4 billion, a historic, if largely symbolic, accomplishment. It also turns out that the industry was considerably closer to aggregate profitability in 2007 than we had initially estimated. Our estimate of the industry’s net loss for that year included some extrapolation of fourth quarter results for companies that had not filed their quarterly financial reports before our publication was printed. In fact, the industry’s 2007 net loss was US$0.1 billion instead of US$0.3 billion. Biotech without DNA? If aggregate profitability is a largely symbolic accomplishment, it also turned out to be, in hindsight, a fleeting one. With the acquisition of Genentech by Roche in 2009, it is hard to see how the industry will be profitable in aggregate any time soon. The South San Francisco-based giant had a net profit of US$3.4 billion in 2008, and its departure leaves a sizeable hole that other companies will have to fill for the overall industry to become profitable again. US biotechnology at a glance (US$b) Source: Ernst & Young Data were generally derived from year-end information (31 December). 2008 data are estimates based on January–September quarterly filings and preliminary annual financial performance data for some companies. 2008 employee data are obtained from 10-Ks at time of publishing and include a combination of 2007 and 2008 employee data. The 2007 estimates have been revised for compatibility with 2008 data. Numbers may appear inconsistent because of rounding. Public companies Industry total 2008 2007 % change 2008 2007 % change Financial Product sales $54.1 $49.9 8.4% $57.0 $52.7 8.0% Revenues 66.1 61.0 8.4% 70.1 64.9 8.0% R&D expense 25.3 21.0 20.5% 30.4 26.1 16.8% Net income (loss) 0.4 (0.1) -430.7% (3.7) (4.2) -11.2% Industry Market capitalization $343.8 $369.2 -6.9% — — — Total financings 8.6 15.9 -46.3% 13.0 21.4 -39.2% Number of IPOs 1 22 -95.5% 1 22 -95.5% Number of companies 371 395 -6.1% 1,754 1,758 -0.2% Number of employees 128,200 131,300 -2.4% 190,400 192,600 -1.1%
- 41. 35 Biotech without DNA? Genentechhas accounted for an increasingly large share of US industry revenues … 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: Ernst & Young and company financial statement data 40 30 20 10 0 Revenues (US$b) 50 60 70 Biotech without DNA Genentech … and the industry’s profitability will likely be very different after Genentech’s acquisition 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: Ernst & Young and company financial statement data -4 -6 -8 -10 -12 Net income (US$b) -2 0 6 2 4 Biotech without DNAUS biotech industry Genentech
- 42. 36 Beyond bordersGlobal biotechnology report 2009 Indeed, Genentech has had an enormous impact on the biotech industry, and it is hard to imagine what today’s biotech sector would look like otherwise. We referred to the Roche/Genentech deal as the mother of megadeals — that’s so in more ways than one, since Genentech gave birth to the modern biotechnology industry. It was the world’s first biotech company — created in 1976 by the legendary venture capitalist Robert Swanson and the pioneering scientist Herb Boyer. Over the years, Genentech never lost its pioneering and innovative spirit. The company was responsible for a series of firsts. It was the first to bring biologic products to market, one of the first biotech companies to go public (it has long owned the iconic “DNA” ticker on the New York Stock Exchange) and was one half of the most successful partnership in the industry’s history. Most of all, Genentech’s ability to remain innovative even as it grew into a mature organization, and its remarkable success at developing numerous successful products, demonstrated what was possible to new generations of start-ups. A Darwinian moment? The landscape for US biotech will continue to be challenging in 2009 and 2010. For many smaller companies, raising capital has become quite difficult, and the results are already appearing in restructurings, layoffs, bankruptcies and delistings. The number of restructuring announcements by US publicly traded biotechs, which had held steady at about 10 per quarter during the first nine months of the year, jumped dramatically to 35 in the fourth quarter of 2008 and 31 in the first quarter of 2009. At the other end of the spectrum, several mature, successful biotechs were acquired by big pharma companies during 2008, and others will probably follow suit in 2009. Consolidation seems inevitable. The question is whether this will be a destructive culling of companies or an evolutionary process that leaves us with a smaller, but stronger, biotech industry. This question is posed repeatedly in this year’s Beyond borders, not least in the Global introduction article, where we argue that the industry’s general business model is becoming increasingly unsustainable because of the sharp drop in funding and corresponding reduction in R&D and innovation. The implications of that article — that companies will need to understand, embrace and help shape four key trends that promise to shift existing paradigms and provide some of the best hope for reaching a sustainable business model — apply in spades to US biotech firms. The number of biotechs trading below cash ballooned … 31.3. 30.6. 30.9. 31.12. 31.3. 30.6. 30.9. 15.10. 31.10. 15.11. 30.11. 15.12. 31.12. Source: Ernst & Young and CapIQ Number of companies trading below cash calculated based on the ratio of market capitalization on representative dates to the sum of cash and equivalents and short-term investments on the same date or most recent date available 90 60 30 20 10 0 Numberofcompanies 40 50 70 80 2007 2007 2007 2007 2008 2008 2008 2008 2008 2008 2008 2008 2008 … as more and more companies restructure to survive Q1 2008 Q2 2008 Q3 2008 Q4 2008 Q1 2009 Source: Ernst & Young, company press releases and Fierce Biotech 40 30 15 10 5 0 Numberofrestructuringannouncements 20 25 35
- 43. 37 It is alsoworth remembering that not everyone shrinks in a downturn. Indeed, recessions — and yes, even the Great Depression — have often been periods of tremendous innovation. For individuals and companies willing and able to take bold action, tough times can present opportunities, including lower costs of business inputs, undervalued assets to acquire and cautious competitors. Companies can also draw from an expanded pool of available talent (though competition for the best performers remains high as it becomes more complex in turbulent economic times — see “A closer look” on this page for more details). Even as the ranks of investors and industry supporters shrink as some decide they don’t have the stomach for it, others will double down and position themselves competitively for the industry’s return. In the past, acquisitions of biotech firms by big pharma companies have often inspired employees of acquired firms to form new start-ups. The acquisition of Genentech by Roche could lead to a groundswell of new start-ups in the San Francisco Bay Area as talented scientists and executives decide to forge their own paths. In the “Global introduction” article, we mention that the process of evolution is neither linear nor smooth. Often it has been reshaped suddenly by cataclysmic events such as meteor strikes or volcanic eruptions. In 1980, scientists were given the opportunity to witness first-hand the impact of a (somewhat smaller) cataclysmic event, the eruption of Mount Saint Helens. The devastation — 230 square miles of charred wasteland — led scientists to anticipate that it would take many decades for the region’s ecosphere to flourish again. But they were surprised to find that the flora and fauna emerged much sooner than expected. Life, it turns out, is resilient. And if history is any guide, so are the life sciences. Not too long ago, companies were waging a war for talent as they tried to attract and retain the best employees with compelling compensation and benefit programs. Today, the landscape is different, with many firms having to implement hiring freezes, workforce reductions and cutbacks to compensation and benefits programs. Companies, both public and private, rely on short- and long-term incentive plans to link compensation with performance and delivery of shareholder value. But with sudden and dramatic declines in economic circumstances, many are wrestling with a very real dilemma: how do they appropriately reward and retain their best performers while at the same time respecting that shareholders have not prospered with their investment in the underlying stock? Some investors might argue that if performance targets are not met, companies should not override previously established pay-for-performance programs. On the other hand, companies face the reality that proven performers are often courted by competitors even in downturns. Addressing “underwater” stock options is often a challenge. There is no one-size-fits-all approach, and companies need to consider several important financial, regulatory and shareholder factors. Firms have used various approaches, including exchanging existing underwater options with new options and/or restricted stock; buying out underwater options with cash; doing nothing with existing grants but making new option and/or restricted stock grants early; and creating special one-time retention plans. Each approach has advantages, disadvantages and unique considerations. While modifying compensation strategies is a strategic business matter, companies will need to assess cost effectiveness, taxes and financial efficiency; be sensitive to investor issues; align with corporate and individual performance; and evaluate the effectiveness of program structures in foreign jurisdictions. Meanwhile, monitoring competitive pay practices with up-to-date data is challenging during times of tremendous change. While some firms are taking a wait-and-see approach on these issues, others are moving ahead. Regardless of how the rest of 2009 plays out in the executive-compensation arena, though, companies face a delicate balancing act that requires thoughtful action. Compensation and benefits in turbulent times A closer look
- 44. 38 Beyond bordersGlobal biotechnology report 2009 While the global financial crisis has had a palpable impact on the biotech industry, that impact has been far from uniform. In many ways, the crisis has heightened the divisions between the industry’s haves and have-nots — between organizations that have the resources and financial strength to weather the crisis and those that are struggling to survive. For the most part, identifying which companies fall into which camp is fairly straightforward. As one might expect, there has been little fallout for the top tier of global, mature large-cap biotech companies, while at the other end of the spectrum, hundreds of emerging, privately held or small-cap biotechs are having difficulty. But what about the firms that lie between these two extremes? How is the potential “next generation” of mature firms faring, and how do their prospects affect the sustainability of the biotech industry? We sat down with the CEOs of four mid-cap commercial-stage firms in early 2009 to get their perspectives on the crisis and its implications. The companies have similar profiles. Each of them is publicly traded and has been public for about a decade. They have marketed products and sustained revenues from product sales. While none of them has yet reached the global scale of biotech industry leaders, they are all either profitable or cash-flow-positive. Interestingly, they also have some similar perspectives on the crisis. They view this environment as having created more opportunities than risks for their companies. They see an inevitable wave of consolidation ahead and worry about the implications for funding, innovation and new company formation. But at the end of the day, they believe fervently that it is innovation that creates value in this industry. With that guiding principle, they are optimistic about biotech’s long-term potential and the ability of the industry at large — and their companies in particular — to deliver meaningful value for investors, shareholders and patients. CEO roundtable Only the innovative survive: perspectives from biotech’s next generation Ernst & Young: What impact has the current financial crisis had on your company? How are you responding? Bienaimé: We are in a very enviable position. We raised close to US$560 million when the markets were healthier, and we haven’t spent it. As a result, we are cushioned from the immediate impact of the financial crisis. Of course, if the crisis deepens, our revenues could be impacted, but we have not seen much of that so far. We have tried to conserve cash by staging some of the R&D expenses and reducing or delaying some of our projects. We remain well positioned, and 2008 was our first profitable year. Clozel: Our revenue has also not been hurt by the crisis. When you sell, as we do, an effective drug for a severe, life-threatening disease, product sales remain strong regardless of market conditions. We haven’t been completely immune, of course — our share price has not moved much, even though our product sales grew by about 40–50% over the last two years. How are we responding? Well, so much of what is happening in the markets is being driven by factors beyond our control that the best thing is simply to focus on what we do best: work even harder at finding new drugs. In this market, it’s much more difficult to get debt financing for acquisitions, so no one should count on the fallback solution of buying products and pipeline from Jean-Jacques Bienaimé BioMarin Pharmaceutical Inc. CEO Jean-Paul Clozel, M.D. Actelion Pharmaceuticals Ltd CEO Colin Goddard, Ph.D. OSI Pharmaceuticals CEO Louis Lange, M.D., Ph.D. CV Therapeutics CEO
- 45. 39 other companies. Nowmore than ever we have to make sure that the breakthrough drugs we will need for our growth are developed from within. Lange: We have spent much of the last five years ending in late 2008 monetizing a decade-long US$1 billion investment in R&D that resulted in three product approvals and two partnerships. As a result, we were able to initiate new revenue streams and pay down much of our debt. Of course, we didn’t know that the financial markets were going to crater, but in hindsight our timing was good. We are going forward in 2009 with a healthy amount of cash on the balance sheet and enough money to get to profitability if things go well. We were preparing to become a profitable biotech company regardless of the economic picture. That strategy now provides us with many different choices that are reasonably independent of having to raise equity dollars. I’m incredibly optimistic about CV Therapeutics. We had three products approved last year, we raised money, we have a robust pipeline and a strong regulatory track record. We have very good relationships and credibility with both the Food and Drug Administration and the European Medicines Agency. We have a bright future with a lot of value that is only going to increase. [Editor’s note: in the months after this interview, CV Therapeutics was acquired by Gilead Sciences for US$1.4 billion.] Ernst & Young: Challenging economic times produce new risks as well as new opportunities. On balance, which is greater for your company at the current time — emerging opportunities or new risks? What specific challenges or opportunities are you seeing? Goddard: There’s much more opportunity than threat for a company like ours, which is anchored around a solid and growing product, because it allows us to look for strategically enriching platform technologies or pipeline assets. We need to do this in a thoughtful manner. First, we need to remember that just because something is on sale doesn’t mean that it’s a good buy. Second, companies at our stage of evolution face more earnings scrutiny, which implies that we need to appropriately balance financial performance against reinvestment. While we’re all trying to create value, there’s an inevitable dichotomy between the focus of some shorter-term investors and the generally longer-term view of companies. Investors have a job to do which can lead to a shorter-term focus. But to create sustainable shareholder value, we need to balance short-term financial performance against the longer-term need to reinvest. One way to do this could be through creative and thoughtful transactions that have less income-statement impact. Over time, of course, with sustained top-line growth comes credibility and more latitude from investors to reinvest. We’re on that journey, but it does impact how we respond to the opportunities in front of us today. Those are the opportunities. In terms of risk, one of our frustrations is around the volatility in interest rates and currency exchange, since a significant proportion of our revenues are earned outside the US. We are considering hedging strategies, but the volatility is there at a level that is quite unusual. It’s something for us to think about in terms of managing the business as a whole. Bienaimé: Interest rates have impacted us as well. Interest rates have fallen with the onset of this recession, lowering the interest income on our fairly sizeable cash balances and creating more risk on this front. The most significant risk, though, is the potential pressure on reimbursements. This hasn’t materialized yet, but, if economic conditions around the world deteriorate, I’m sure there will be some pushback from payors. In terms of opportunities, as already mentioned, there are several smaller biotech companies that have no revenues and no cash. We are getting an increasing number of calls about companies that are desperate, some of which have decent assets but no ability to fund further development. That creates buying opportunities for us. Bigger companies may be less willing to buy some of these struggling companies. Well, we’re not big pharma. We are willing to take some risks with which they may be
- 46. 40 Beyond bordersGlobal biotechnology report 2009 uncomfortable. Regardless of what they might say, I suspect that big pharma is still uncomfortable with expensive biologics. They worry about the impact to their public image from products with price tags exceeding US$75,000 or US$100,000. Clozel: The global financial crisis creates two significant challenges. The first is the impact on drug pricing and the potential for downward pressure on prices. The second challenge is the lack of credit, which could impinge on our ability to make an external expansion. Though we have over CHF1 billion (US$0.9 billion) in cash and short-term deposits, we will need to deploy those funds carefully. I also think the crisis creates some big opportunities. Many companies that are strapped for capital are having to resort to layoffs and turning to licensing deals, which increases the number of experienced specialists and attractive products available to us. We are looking to grow our organization, and I intend to hire an additional 300–500 people globally over the next 12–18 months. So this is a great opportunity for us. Lange: We seized an opportunity when the credit markets froze. Many of the hedge funds holding our convertible debt were in a liquidity crisis, so we repurchased some of our debt at extremely favorable terms. We are now well positioned to go out and fill our pipeline. Many biotechs are unable to raise money today, and their assets are selling at deep discounts. With cash in hand, we have been looking for commercial products and development-stage candidates, and we see tremendous value out there. We can bring a lot to any program through our proven track record of executing and securing regulatory approval. Ernst & Young: The conventional wisdom is that health-related industries such as biotech are fairly recession-proof — people fall sick and need healthcare regardless of the business cycle. Is that principle still true? Benaimé: It’s still true, but with a caveat. Biotech remains somewhat independent from economic cycles because the valuations of specific companies are dependent upon product development cycles more than economic cycles. I don’t think that’s going to change. However, if the recession continues to deepen for several years, we will inevitably see some impact on reimbursement and pricing. Clozel: In many ways, biotech remains one of the better-positioned industries in this crisis. That doesn’t guarantee that we will remain completely immune to its effects over time, but it does mean that we will need to deliver even better drugs. Governments will come under tremendous fiscal pressure as budget deficits balloon and unemployment soars. So only the When the drought is over, will we seed real replacement companies? “Bigger companies may be less willing to buy some of these struggling companies. Well, we’re not big pharma. We are willing to take some risks with which they may be uncomfortable. Regardless of what they might say, I suspect that big pharma is still uncomfortable with expensive biologics.”
- 47. 41 best drugs aregoing to be reimbursed — not the “me-too” products. Whether it’s automobile companies or biotech firms, innovation is the answer. Ernst & Young: How do you see the current downturn? Is it similar to crises past, or is this truly different from previous funding droughts? What are the implications for the future of biotechnology? Clozel: The last crisis, at the end of the genomics bubble, was really different. Then, the crunch was in one sector which had been hyped and then came crashing back to reality. Now, it’s a global crisis, which makes it a much more profound and worrisome condition. Lange: I do think it’s different. The worst period that I can remember before this was the nuclear blizzard from the proposed US healthcare reform in 1993 and 1994, when it was very difficult to raise money. We were fortunate then as well. We raised money just before that and got through it fine. This time, it’s much worse because of the overall asset deflation across all asset classes. There’s no credit around. I think the venture community is seeing forced withdrawals, forced liquidations, and pension funds and endowments that are unable to honor their commitments, so their funds are evaporating. Having cash is critical to surviving for the next year or two. There are too many biotech companies, and the days of funding 2,000 biotech companies are numbered. This asset deflation crisis will drive large numbers of sales and bankruptcies, and venture funding to start new companies in classic biotech is going to be extremely limited. There likely are opportunities in services, diagnostics, electronics, personalized medicine and very late-stage, highly novel therapeutics. But the era of the classic biotech company is over. Goddard: This crisis is fundamentally different from others that we have seen. In my view, the model that has been the engine of company formation in this industry has completely broken down. Access to capital has become very difficult, and lots of biotech companies — in the absence of available financing choices — are looking at their options for being acquired by pharma or mid-cap or large-cap biotech companies. The question is how we will replenish the sector after these acquisitions. When the drought is over, will we seed real replacement companies? In recent years, in response to the pressures they have faced, VCs have changed their funding approach — they have placed many more bets, yet we have fewer real companies being built in terms of platforms, technologies and pipelines. What they are funding, instead, are often no more than project teams disguised as companies. The investment is around a specific product with the goal of finding a buyer at a certain stage of development, typically clinical proof of concept. That’s a very different model from what we’ve had historically. As the current situation is sorted out through acquisitions by pharma and mergers of public companies, I worry that we may not build the true replacement companies that have always been there in the past. I fear the entire company formation model has broken down and we’re going to see a different industry emerge over the next three to five years. Benaimé: Yes, there is something truly different about this crisis. This one is going to be much longer in duration and I think valuations will be reset at new levels for quite a while. For a long time, we’ve anticipated consolidation and it never happened. Well, I think we are finally going to see significant consolidation in the industry over the next eighteen months to two years. There were too many companies founded on very narrow technology or a single product, and I don’t think that model is going to be very viable anymore. Ernst & Young: Will this consolidation be a positive or negative development? Will the winnowing of firms produce more sustainable, robust companies, or will it prune innovative technologies and products that might otherwise have come to market? Clozel: Like most things, it’s a bit of both. There will be some Darwinian selection, which may not be entirely bad, because natural selection implies that the fittest will survive. Many of “In recent years ... VCs have changed their funding approach — they have placed many more bets, yet we have fewer real companies being built in terms of platforms, technologies and pipelines. What they are funding, instead, are often no more than project teams disguised as companies.” “There will be some Darwinian selection, which may not be entirely bad, because natural selection implies that the fittest will survive ... money is going to be more concentrated in better companies, which could be a good thing ... The real danger is that we may fail to fund the ideas that appear completely crazy — and therefore high-risk — to us today, but which may prove to be real breakthroughs over time. We can’t let all the funding go to low-risk R&D.”
- 48. 42 Beyond bordersGlobal biotechnology report 2009 these companies were never really sustainable anyway. As a result, money is going to be more concentrated in better companies, which could be a good thing. But we also risk curbing potentially breakthrough research. A decade from now, when companies that might have been formed today would have delivered new products, we could feel the impact of today’s crisis. If you are a young scientist with a major discovery who wants to start a company, you are probably going to have a hard time raising funds in today’s market. That’s very unfortunate, and quite worrying. The real danger is that we may fail to fund the ideas that appear completely crazy — and therefore high-risk — to us today, but which may prove to be real breakthroughs over time. We can’t let all the funding go to low-risk R&D, because more than ever, we need groundbreaking studies. We need fundamental research. We need breakthrough technologies. Lange: I think investors will become more selective, but the problem is that it’s very difficult to pick winners and losers. Few could have predicted back in 1980 that a start-up named Applied Molecular Genetics would go on to become today’s Amgen. So if we become more picky, we might fail to create some good companies. Bienaimé: It’s inevitable that we will see significant consolidation. With regulatory, reporting and accounting requirements, the fixed costs of being a public company are high. I look at some valuations — there are companies with market caps of US$5 million or US$6 million — where the officers’ compensation is more than the market cap. How long can that last? The consolidation will be driven more by biotechs merging to survive rather than by pharma acquisitions. There are not many biotech companies that can create noticeable value for big pharma. What does buying a company with even US$400 million in revenues do for Pfizer? Nothing. It would barely impact their top line. So we will see some companies go under, but most of them will probably just morph into something else. I hope most of the good assets will not be lost, but rather still be financed somehow within a smaller number of structures. While this will be painful for some, it’s going to produce a more sustainable business model with more robust companies and a better allocation of resources. Goddard: Cycles of consolidation and regeneration are quite normal and healthy in most industries, and we have always had some of that in biotech. What’s worrying is the depth and scale of this consolidation cycle. You have to ask whether we will be able to build enterprises for the creation of long-term value in the future. There are certainly brilliant private and public long-term investors out there, but most investors are working in a different time frame nowadays. Today, companies have less flexibility to adopt longer-term strategies for building multibillion dollar enterprises. As a result, their approaches are inevitably skewed more toward near-term M&A. That’s not to say that an early M&A exit — at Phase II, for example — can’t be a way to realize shareholder value. Of course it can. But we need an environment where companies can also build longer-term strategic value so that being acquired is a major success rather than a defensive outcome and a suboptimal, near-term exit. Ernst & Young: What do these trends imply for the next round of companies? Will new generations of companies go the distance and become fully integrated pharmaceutical companies (FIPCOs)? If not, would that have implications for the sustainability of the industry? Lange: The FIPCO model is largely over. When we went public in 1996, nobody thought a FIPCO was possible; most of the models then were partnerships going through Phase II. I think the industry is going to return to models that involve a more efficient use of capital, early de-risking and smart exits. CV Therapeutics was founded in 1992, and I think we faced market conditions that were very different from what today’s emerging companies are likely to encounter. Investors will not be as patient as they were with the companies founded in the early to mid-1990s. And I don’t think the bull market for small-cap growth as in the late 1990s and early 2000s is going to return any time soon. Over time, we raised about US$2 billion. The good news is that we could. The bad news is, as we started buying back our convertible debt, it turned out we needed US$1.95 billion of it! So, we might see FIPCOs created through spin-outs from large companies, where the new company already has revenue or is in very late-stage clinical development. But if someone is looking “There are fantastic opportunities for innovator companies like ours to go the distance if they manage well, make brutally disciplined choices on where they spend R&D funds, and ensure that they are differentiated and innovative.” “The FIPCO model is largely over ... I think the industry is going to return to models that involve a more efficient use of capital, early de-risking and smart exits.”
- 49. 43 to build anR&D-based product company in biotech from scratch, that is going to be extremely difficult. Bienaimé: Biotech has been a tough environment for many years, and it’s not going to get any easier. There are so many hurdles. Still, I think it remains possible for companies to become FIPCOs, and I think the industry will defy the odds. It’s good news that big pharmas cannot buy the top fifteen biotech companies because once they go below the top ten, those companies don’t have a major impact on their operations. They are going to have to let some of those second-tier companies mature. Goddard: There are fantastic opportunities for innovator companies like ours to go the distance if they manage well, make brutally disciplined choices on where they spend R&D funds, and ensure that they are differentiated and innovative. You can still make the journey with your first product if you can get revenues to sustain you till you are financially viable — through royalty financing, for instance. But at the end of the day, the question is whether the right exit for shareholders and for the industry at large is being acquired or becoming a premium-valued independent — the next Genentech or Gilead — in five years. The job is still about building real strategic value so that everybody wins. So, while M&A is always a viable option for value creation, I hope cooler heads will prevail in this crisis and we won’t engage exclusively in a level of pessimism that leads to widespread, premature transactions. Ernst & Young: How do you see the relative merits of remaining independent versus being acquired for your company? Goddard: Planning to sell your company is not a strategy. Regardless of whether you believe the company can become a successful FIPCO or whether you believe it shouldn’t remain independent in the long term, there is only one strategy to follow: manage the organization well and create long-term value. If you do that, you will command an appropriate strategic premium in an acquisition, or you will become a Gilead or a Genentech, and you will create value for shareholders either way. It’s as simple as that. Bienaimé: I can’t imagine why it would make sense for us to be acquired at this time. We’re in a position of strength. In 2008, we became profitable for the first time. We have nearly US$560 million in cash, a growing pipeline and double-digit revenue growth. We can remain independent even if there is no financing opportunity for the next few years. In addition, I can’t think of any other company — biotech or big pharma — that would manage our assets better than we do. We’ve been very successful at commercializing Naglazyme ourselves around the world. We went from investigational new drug to approval for three products in three years, which is very, very fast. If we were out of cash and had no revenue, that would be a different situation, but that’s not where we are. And with valuations depressed right now because of market conditions, being acquired wouldn’t make any sense for our shareholders. Clozel: Big pharma is certainly looking to acquire companies, and is even making hostile bids in many cases. But the record clearly shows that size is not the answer. These big companies did scores of mergers in the past, and those mergers did not create value for their shareholders. They are now pursuing short-term financial gains — cutting costs and boosting margins. But the long-term solution is only through innovation. Acquisitions don’t create innovation. They may allow you to extract more profits from the results of prior innovation, but they don’t create new innovation. If we were to be acquired by a large pharma, we would get integrated into the larger organization and essentially disappear. That kills the smaller company’s innovative spirit, and essentially destroys the thing pharma was hoping to buy. To remain innovative, biotech companies should instead grow organically, by discovering and developing new drugs. Ernst & Young: What advice would you give small-cap biotech companies in the current environment? Lange: The world has changed before our eyes, so discard your previous assumptions and old ways of doing business. This is probably not a short-lived market decline, so you need to think “I can’t imagine why it would make sense for us to be acquired at this time. We’re in a position of strength ... We can remain independent even if there is no financing opportunity for the next few years. In addition, I can’t think of any other company — biotech or big pharma — that would manage our assets better than we do.” “The world has changed before our eyes, so discard your previous assumptions ... The assumption that you will achieve a significant jump in valuation with a positive Phase II study just isn’t true. If you are a company in Phase I or Phase II, focus on just how long the road ahead still is.”
- 50. 44 Beyond bordersGlobal biotechnology report 2009 Will new generations of companies go the distance? of innovative ways to raise money and keep going. Adapt your spend rate, your focus and your business model to survive. The assumption that you will achieve a significant jump in valuation with a positive Phase II study just isn’t true. If you are a company in Phase I or Phase II, focus on just how long the road ahead still is. We got our first Phase III result in 1999 — a decade ago. And here’s the rub: the bulk of the money we had to raise and spend came after that Phase III success. Bienaimé: Conserve cash. If you have less than six to nine months of cash on hand, try to merge with someone else as soon as possible. Encourage your boards to be realistic about valuations. As time goes by, this is likely to only get worse, but some boards are being unrealistic about valuations and waiting too long to enter a strategic transaction. Overall, I still believe in the long-term value of biotech. The biotech revolution is still in its infancy. Clozel: Biotech is difficult and complicated, and there are many disappointments along the way, but don’t get discouraged. Instead, immerse yourself in your work. You won’t create value for your company by going to investor meetings. You won’t discover drugs by selling yourself to the financial world. The best way to create value is by working hard in your company labs. This crisis will pass. And when the good times return, the results of your work will be even more valuable, because it’s going to be more rare. Goddard: Both as an individual and as a company, we’ve had some high highs and some low lows. At times, I’ve been viewed as something of a hero, and in others, I’ve been seen as anything but. So I can tell you that the journey is a hard one, made more difficult in this environment. Be thick-skinned, bring honest objectivity, and apply disciplined, bold management to your business. It may have been difficult, but I would do it again in a heartbeat. Where else do you get the chance to really pursue a passion and have this sort of impact? I went into biotech because I wanted to study cancer and have the fun and challenge of participating in building a great business, and I’ve had the opportunity to do all that and more. The tragedy — for budding entrepreneurs, emerging companies and society at large — will be if those opportunities to build great, innovative companies are diminished for the long term by the current crisis and its widespread ramifications. “You won’t create value for your company by going to investor meetings. You won’t discover drugs by selling yourself to the financial world. The best way to create value is by working hard in your company labs.”
- 51. 45 Adelene Q. Perkins InfinityPharmaceuticals, Inc. President The Darwinian challenge: why evolution is vital for building biotech In biology and business, in natural selection and economic Darwinism, it is the fittest that survive. So companies, like species, need to evolve by monitoring and adapting to changes in their environment. Not surprisingly, each of the successful and sustainable businesses with which I have been associated evolved over time. General Electric expanded from lighting and appliances into financial services, Bain & Company changed from an information technology firm to a global strategy consultancy, and Genetics Institute morphed from an agricultural to a health-focused biotech. Experience has shown that building a successful business is more about adapting to changes than about picking the right strategy, technology or products from the outset. You don’t always have to be right, but you need to be nimble. Unfortunately, applying these principles to biotechnology is problematic. Since developing drugs is slow, expensive and risky, financial and strategic investors often invest based on what is needed to achieve specific product-development milestones. This can put extraordinary pressure on companies to stay the course and pursue original milestones regardless of whether the data continue to support them. Furthermore, as additional capital is needed, the lag between when investments are made and when value is recognized makes further equity financings too dilutive. Rifle shots and multiple partners To reduce dilution, some companies extend their initial capital by keeping themselves on a very short leash, focusing limited resources on pursuing single-product opportunities. They attempt to determine quickly whether a product works, using a highly focused — and hence less expensive — approach, and don’t spend money on infrastructure or pipeline building. If the product succeeds, attractive M&A exits are available; if it fails, investors’ losses are limited and balanced by other portfolio investments. But this “rifle shot” approach has its drawbacks. The industry has a full graveyard of single-product companies, and this approach does not build sustainable enterprises that can attract and develop talented employees. In search of better alternatives, companies outlicense their technologies and products. Biotechs typically delay partnering their assets for as long as possible, hoping that their values will increase over time. Companies search for the highest bidder for each subsequent program and end up with multiple partners. This reduces risk by ensuring that funding is not dependent on a single collaborator and diminishes the potential effect of the souring of any individual relationship. And having multiple partners increases the possibility of buyers competing in an acquisition — helping to bid up premiums. An obvious problem with multiple partners, however, is that each collaborator cares only about the fate of its inlicensed product and not about other products in the pipeline or the fate of the entire organization. Consequently, this prevents companies from seamlessly reallocating investment dollars across products in response to new information. Yet the ability to change course and evolve — and maybe even stumble a few times — is vital for success in this industry. Witness the most successful biotechnology company of our era. In 1990, Genentech was a human-growth-hormone company with enough capital from its initial deal with Roche to conduct a large trial for tissue plasminogen activator. By 1995, after several clinical setbacks, Genentech was forced to renegotiate the Roche deal on terms that brought in no immediate money while giving away significant ex-US product rights. But critics of that restructured deal failed to recognize its one saving feature: a stock put, at an attractive price, that prevented a stock-price free fall if Roche decided to let its call option expire. Genentech got the one thing it needed: the ability to evolve. Over the next few years, the company adapted its way through a number of additional setbacks, and by the turn of the century, a star had been born. Of course, the ability to evolve does not guarantee success. There are many examples of companies that never delivered even after being given numerous opportunities by increasingly weary investors. This simply highlights that success still requires good science, good decisions and an element of luck. But good decisions can only come from decisions that one has the ability to make. All too often, companies end up in the untenable position of having no choice but to bet everything on products that no longer merit the bet. The company may want to change course, but their funding structures preclude evolutionary possibilities. Successful marriages To build sustainable companies, we need a sustainable source of funding that allows for evolution. Since having multiple, competing partners creates an obstacle to portfolio reprioritization and
- 52. 46 Beyond bordersGlobal biotechnology report 2009 evolution, we must find ways to make partner concentration a strength rather than a liability. As with any marriage, this should start with finding the right partner — someone with whom strategic interests are aligned and with whom you are willing to align your future. The structure must recognize the challenges that can test even the best of relationships and include ways to preserve what is special to each partner while capitalizing on what the parties can contribute. The best structures embrace three key elements: dependence, interdependence and independence. Relationships must be carefully defined to optimize what is done together and what is done independently — balancing speed and flexibility with access to capital and infrastructure. Infinity Pharmaceuticals’ recent partnership with Purdue Pharma and Mundipharma (associated companies) provides an example of how these dimensions can contribute to a mutually transformative relationship. This partnership replicates several characteristics of the relationship between Genentech and Roche, which is credited with driving the companies to the number one oncology positions in the US and non-US markets, respectively — not a bad role model! • Dependence: At the core of Infinity’s recent partnership is a shared vision: the global development and commercialization of a rich pipeline of oncology products. It is a vision better achieved together and to which each partner makes unique contributions. Infinity brings novel product candidates, discovery and development teams and the investigator relationships needed for global product development. Mundipharma brings a commercial presence in oncology outside the US and a commitment to building the business, but no discovery or US development capability in oncology. Finally, Purdue/ Mundipharma brings capital for global product development. • Interdependence: It is essential that the parties contribute to and benefit from each other’s success. With responsibility for global development, Infinity is motivated to seek Mundipharma’s insights on global commercialization dynamics. This is reinforced by a financial incentive, as Infinity receives significant double-digit royalties on sales from successful Mundipharma commercialization outside the US. Mundipharma also has a financial interest in Infinity’s success, through royalty payments from Infinity’s US sales and a meaningful equity ownership in Infinity. • Independence: It was essential to both parties that Infinity retain independent decision-making during development — the right to reallocate resources across product candidates in response to changing data. Yes, the right to evolve! Interestingly, Infinity’s independence was facilitated by the parties’ interdependence — the bulk of Infinity’s pipeline was included in the partnership, thereby removing potential conflicts of interest with respect to product prioritization. And maintaining Infinity’s independence allows the company to retain its small-company culture and incentive structures — attributes that are critical for attracting and retaining the best employees. Conclusion Building a successful biotechnology company is hard. Financing strategies that require you to get it right the first time also require that you be very lucky. To the contrary, structures that allow companies to evolve over time empower them to better manage the risks inherent in drug discovery and development. At the end of the day, of course, this improves the odds for successfully developing medicines that make a meaningful difference in patients’ lives.
- 53. 47 Peter Wirth Genzyme Corporation ExecutiveVice President Legal and Corporate Development Connecting the dots: the impact of the global financial crisis on biotechnology The global financial crisis has fundamentally altered the market landscape for biotechnology companies. The headline-making events of recent months — many in seemingly far-flung sectors of the economy — connect in often unexpected ways, with profound implications for the biotech industry. Market conditions for biotech companies are now far from normal, and a return to anything resembling normalcy will be neither quick nor easy. Connecting the dots A major reason for the severe impact of the financial crisis lies in how the dots are connected. The crisis started, of course, in the US mortgage markets — a segment that, on the surface, would seem to be far removed from biotechnology. But the collapse of the mortgage market also damaged many large investment banks, which held significant numbers of mortgage-backed securities. Those banks were, in turn, prime brokers to hedge funds, and hedge funds were a primary source of capital for the public biotech industry. In the wake of the mortgage crisis, the prime brokers stopped lending to the hedge funds, so the hedge funds stopped buying biotech companies and instead began liquidating their positions. All of a sudden, more than half the money going into biotech simply disappeared, and it isn’t likely to return any time soon. This isn’t another down cycle of investor sentiment that the industry can wait out. Investors aren’t disenchanted with biotech; instead, they have a fundamentally diminished capacity to invest. Fewer options This chain reaction has slashed public funding for biotech companies, and there are few remaining good options. Deals with pharma companies are unlikely to play a major role in filling biotech’s funding gap, for a couple of reasons. First, big pharma is distracted. Pharma’s patent cliff boosted deal activity with biotechs in recent years, and it’s true that big pharma still desperately needs products. But in the near term, these firms are more likely to focus on realigning cost structures for the rapidly approaching future when most of their products will compete with lower-margin generics. It isn’t easy for a large company to make radical changes from within, because of cultural inertia and other barriers. But a company may be able to overcome those barriers by merging with another large firm and “buying margin” — the merger boosts the top line while also providing an opportunity to slash redundant costs. Consequently, many are predicting increased merger activity between large pharma companies. For biotech, this means there will be fewer remaining buyers, and those buyers will be distracted by internal challenges. Second, the presence of undervalued biotech companies is unlikely to spur a wave of acquisitions. At Genzyme, for instance, we have a well-defined list of opportunities in which we are interested. But the list is pretty short, and things that weren’t interesting to us before are unlikely to become more interesting just because they are cheaper. So while competition for the most desirable companies remains healthy, and they will command strong premiums relative to their current public valuations, others will need to become more pragmatic. This is now a buyer’s market. While venture capitalists (VCs) have not abandoned biotech, many face their own capital constraints and all see acquisition as the most likely exit. In a remarkable sign of the times, VCs have been more proactive in approaching big pharma and big biotech firms to ask them which assets they might want to buy and tailoring their funding and development plans accordingly. We are also seeing more deals with earn-outs (even with public companies!) and option deals with prenegotiated prices but no firm commitment to buy. New models These are worrisome trends. We need innovation. But drug development is expensive, and without adequate funding, much of that innovation may be threatened. In this environment, we will need new business and financial models. Companies must consider capital-sparing business models — partnering assets, for instance, that they would otherwise have developed independently. Approaches to deal-making will have to become more creative as well. In a buyer’s market, deal structures are likely to offer large companies more risk mitigation, e.g., alliances rather than acquisitions or acquisitions with earn-outs. But buyers should also be mindful of smaller firms’ capital constraints and structure deals to protect their partners’ viability. For their own self-interest, as well as for the sake of sustaining innovation, large companies may want to value the most promising assets more realistically than the public markets currently do, and structure deals that provide capital to advance assets while sharing rewards with original innovators.
- 54. 48 Beyond bordersGlobal biotechnology report 2009 From windows to housing collapses Through much of the history of the biotechnology industry, companies and analysts have relied on the time-tested metaphor of biotech financing “windows” that open and shut. The image refers, of course, to the sector’s boom-and-bust cycles of investment, driven mostly by vacillating investor sentiment toward biotech stocks — excitement one year about scientific promise followed by a precipitous retreat a few years later when the timelines to commercializing that promise become clear. In last year’s Beyond borders, we noted that the current crisis, which had started to manifest itself in 2007, was something entirely new — not the closing of another window so much as the collapse of the house around the window. The house metaphor, it turns out, is appropriate in more ways than one, since the crisis originated in the US housing market. Thanks to the way the cards are arrayed in the global financial system — through complex derivatives and intertwined financial institutions — mortgage troubles reverberated throughout the global economy. As 2008 progressed, a credit crisis devolved into the deepest global recession in decades. By year’s end, with corporate restructurings, bailouts and outright collapses increasingly common, it was clear that the financing environment for biotechnology companies had become part of the extensive “collateral damage.” As the system started to deleverage, uncertainty around when equity markets would touch bottom and where new capital would come from drove buyers to the sidelines and pummeled the market capitalizations of many biotech companies. Firms without sufficient capital to fund operations until the next value-creating milestone were hit particularly hard as investors put financing risk on par with development risk. With so many companies trading at historic lows — and some even facing the prospect of being delisted — there was no interest in new issuances of biotech stocks and only limited interest in funding existing public companies. Venture capital, while down from the record levels of 2007, remained relatively strong. However, venture investors modified their strategies in light of bargains in the public markets and the need to reserve more funding to sustain existing portfolio companies. The total amount raised by the US biotech industry fell 39% in 2008 to US$13 billion — the lowest total since 2002. A significant portion of the fundraising in 2007 and 2008 came from a few very large debt offerings by industry leaders such as Amgen and Biogen Idec. If these huge transactions are removed from the totals of both years, the year-on-year decline is 25% instead of 39%. Venture capital hangs in Private funding was a relative bright spot in 2008, with the US industry raising approximately US$4.4 billion from venture investors. While this was a 19% decrease relative to 2007, the 2007 total had itself been an all-time record that outdistanced any prior year by a gaping US$2 billion margin. The amount raised in 2008 represented the second-best year on record — comfortably ahead of the US$3.2 billion average for 2003–06, and particularly heartening given the overall financial-market turmoil. This is not to suggest that venture capitalists (VCs) are immune to broader economic trends. Indeed, the pace of investments slowed significantly late in the year as the financial crisis deepened, from an average of US$1.2 billion in the first three quarters to US$875 million in the fourth quarter. This decrease can be attributed partially to caution, as VCs assessed the need to reserve additional funds for existing US financing Collateral damage 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 IPOs 6 1,238 944 626 1,618 448 456 208 4,997 685 260 Follow-ons 1,715 2,494 5,114 3,952 2,846 2,825 838 1,695 14,964 3,680 500 Other 6,832 12,195 10,953 6,788 8,964 8,306 5,242 3,635 9,987 2,969 787 Venture 4,445 5,464 3,302 3,328 3,551 2,826 2,164 2,392 2,773 1,435 1,219 Total $12,998 $21,391 $20,313 $14,694 $16,979 $14,405 $8,699 $7,930 $32,722 $8,769 $2,766 Source: Ernst & Young, BioCentury, BioWorld and VentureSource. Numbers may appear inconsistent because of rounding. US yearly biotechnology financings (US$m)
- 55. 49 portfolio companies inthe expectation that these firms will need to be nurtured longer. In addition, VCs face the risk that limited partners, themselves damaged by declines across their portfolios, will not be able to honor funding commitments. While this phenomenon has not yet manifested itself in any meaningful way, it could become visible as firms seek to raise new funds. Many analysts expect a culling of the ranks of venture funds as well as a decrease in average fund sizes. Established players with strong track records will face less pressure, and several such firms were able to close new funds raised during the market turmoil, including Clarus Ventures (which raised US$660 million in February 2008), Versant Ventures (US$500 million in July 2008) and Aisling Capital (US$650 million in January 2009). Venture capitalists are inherently optimistic (see “The more things change, the more they remain the same?” in the Global section for ample evidence of this inclination) and hold faith in the industry’s resilience, creativity and ability to commercialize breakthrough technologies. Most VCs are operating under the premise that the economy, financial markets and hence the biotech industry will ultimately return to “normal.” Since their new investments today require a three- to five-year gestation period, they are counting on recovery in that time frame. Meanwhile, the reality that the public markets will not be a viable exit option for some time will require new approaches to managing existing portfolio companies. This includes strategies such as reducing burn rates by focusing on fewer R&D candidates, aggressively seeking partners to share funding and development risk, and agreeing to tie up with an acquirer earlier. As acquisitions become the most viable exit, building a company to “fit” the strategic needs of a larger entity — much the way the medical-device industry has functioned for many years — may become more common. A willingness to share the US IPOs essentially dried up in 2008 ... Source: Ernst & Young, BioCentury, BioWorld and VentureSource 400 300 100 0 700 Q1 2007 Q2 2007 Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008 Q4 2008 IPOs (US$m) 200 500 600 … and follow-on offerings disappeared in the fourth quarter ... Source: Ernst & Young, BioCentury, BioWorld and VentureSource 0.8 0.6 0.2 0 1.6 Q1 2007 Q2 2007 Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008 Q4 2008 Follow-on (US$b) 0.4 1.0 1.2 1.4 … but venture capital has not declined dramatically Source: Ernst & Young, BioCentury, BioWorld and VentureSource 2.0 1.5 0.5 0 2.5 Q1 2007 Q2 2007 Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008 Q4 2008 Venture capital (US$b) 1.0
- 56. 50 Beyond bordersGlobal biotechnology report 2009 risk and the upside rewards of development, for example by agreeing up front to be acquired at a defined price following the achievement of a specified milestone or agreeing to a greater percentage of merger consideration in the form of downstream milestones, can be a creative way to help establish a path to liquidity. An instance of this is the agreement between Cephalon and Ception, which includes up-front payments for Ception plus an arrangement whereby Cephalon has the option to acquire Ception following results of a Phase IIb/III trial. In 2008, there were 15 venture rounds of US$50 million or more, led by the sizeable US$103 million raised by San Francisco Bay Area-based OncoMed Pharmaceuticals in several tranches which brought the total raised or committed in the series to US$169 million. OncoMed will use the proceeds, along with the funds raised in a significant 2007 collaboration with GlaxoSmithKline, to further its research of cancer stem cells. Another Bay Area company, Pacific Biosciences, completed a US$100 million venture round as it continues developing its next-generation sequencing technology. EKR Therapeutics, a New Jersey-based specialty pharma, completed an unusual transaction which included US$50 million in equity and US$95 million in senior debt, the proceeds of which were in part used to buy two products from PDL BioPharma. As the year progressed, more and more companies, including many with advanced pipelines, were trading well below their IPO prices and sometimes even below the cash on their balance sheets. For venture-capital funds with charters that permit investments in public companies, this presented a new buying opportunity. Many began looking for undervalued assets, and a new acronym, VIPE (venture investment in a public entity) was duly added to the alphabet soup of investment terminology. However, VIPEs are unlikely to provide new capital for many micro-cap companies, since VCs will look beyond valuations to strategic fit. They are most likely to focus on specific opportunities where their expertise can add value or where assets can be repurposed or positioned for high return. Yes, we have no IPOs There was only one biotech IPO in 2008: the February offering by Florida-based BioHeart. However, by industry standards, this minor transaction — with gross proceeds of less than US$6 million and net proceeds of less than US$2 million — barely moved the needle. It did little to sustain the firm in any meaningful way, either, and by year-end, BioHeart was warning that it was unable to meet debt obligations due to a lack of financial resources. The US industry’s last institutional-sized IPO occurred in November 2007. As we go to press, the sector will have endured over five quarters without such an offering, which exceeds the post-genomics-bubble drought and is likely to surpass the six-quarter lull of the mid-1980s. Unlike the closed windows of the past, which were biotech-specific, the current lack of IPO activity has spanned all industries. According to VentureSource, only seven venture-backed IPOs closed in all of 2008, and only one of those occurred after the first quarter. The industry is building a significant backlog of new issues, and when IPOs do return, they are likely to do so with a bang rather than a whimper. Until then, private companies will have to find other paths to the public markets. In 2008, several firms sought mergers with public “fallen angels.” Both parties benefit from these transactions — the public company typically has cash and a viable stock-market listing but lacks ongoing technology value, while the private company usually has a pipeline and management team but needs to access public markets for additional fundraising flexibility. The private-company shareholders typically end up with a significant majority of the merged entity, and thus these transactions are called reverse public offerings, or RPOs. In a sign of the times, any public company willing to enter an RPO in 2008 attracted a long list of suitors. Several of these transactions closed during the year, including the mergers of AVANT Immunotherapeutics with Celldex Therapeutics, and Point Capital raised by leading US regions, 2008 Source: Ernst & Young, BioCentury and VentureSource Size of bubbles shows number of financings per region 0 Totalcapitalraised(US$b) 0 200 400 600 800 1,000 1,200 1,400 Pacific NW San Diego San Francisco Bay Area New England Venture capital raised (US$m) 4.5 1.5 1.0 0.5 2.0 2.5 3.0 3.5 4.0 New York State Mid-Atlantic New Jersey Pennsylvania/Delaware Valley
- 57. 51 Therapeutics with DaraBioSciences. RPOs do not always please the public company’s existing investors, and this was apparent in the proposed merger of NitroMed and Archemix. Deerfield Funds, a significant NitroMed shareholder, not only refused to approve the deal, but also countered with a higher bid and ultimately prevailed in taking the company private in early 2009. Other financing While the IPO market was closed, financing was still available to existing public companies, especially in the first half of the year. Leading the charge was Vertex Pharmaceuticals, which raised US$338 million in two equity offerings (including one for US$220 million in the midst of the September market meltdown) and a further US$287 million in a convertible-debt transaction. Combined with US$160 million raised through a royalty financing arrangement, Vertex filled its coffers for its anticipated final run to the approval of Telaprevir, now in Phase III trials for the treatment of HCV. Investors clearly favored companies with commercialized products or near-term clinical milestones. Illumina followed its 2007 US$400 million convertible-debt offering with a follow-on equity offering of US$353 million, the largest of 2008. Other companies completing follow-on offerings of greater than US$100 million included Rigel Pharmaceuticals, Accorda Therapeutics, Incyte and Seattle Genomics. Private investments in public entities (PIPEs) and registered direct offerings remained popular because of their speed and lower transaction costs. The largest PIPE transaction of the year was the US$100 million raised by Middlebrook Pharmaceuticals to support a new product launch. However, investors, who had been expecting the company to be bought, did not cheer the deal and instead sent the stock down more than 50%. At a time when most companies’ valuations have seen steep declines, it is challenging for investors to raise additional capital in ways that do not overly dilute the stakes of existing shareholders. Short of a strategic alliance or asset sale, most chief financial officers must place the continued viability of the company and the interests of all stakeholders (including patients and employees) ahead of current investors’ wish to avoid dilution. A little-used approach that companies may wish to consider is a “rights offering.” These transactions, which allow all current stockholders to invest and maintain their proportionate shares, take longer and incur more costs than typical privately arranged sales. However, they allow the company to raise capital without diluting the shares of loyal stockholders. Debt dollars In spite of the credit squeeze, some companies did raise convertible debt, although the total amount raised decreased from US$700 million in the first quarter to under US$100 million in the fourth quarter. In addition to Vertex, OSI Pharmaceuticals raised US$175 million and Theravance US$173 million in first-quarter transactions. It remains to be seen whether a convertible-debt market will return to biotech as the broader market recovers. As noted in the Global introduction article, there are impediments to this which may squeeze current issuers with debt that is significantly under water as the debt maturity date approaches. Not all debt transactions were of the convertible variety. The biggest debt deals of the year went to mature companies. In February, Biogen Idec raised US$1 billion to refinance existing debt, and in September, Life Technologies (formerly Invitrogen) secured US$2.65 billion of new debt to fund its acquisition of Applied BioSystems. Exelixis availed itself of a US$150 million line of credit from Deerfield Management that can be drawn down in US$15 million increments at the company’s option, subject to various conditions, through the end of 2009. In exchange for making this facility available, Deerfield will collect fees and warrants up through the 2013 maturity of the facility. In a similar deal with a twist, Deerfield made available a US$100 million facility to Seattle-based ZymoGenetics. The twist is that each US$25 million tranche drawn will be secured by a two percent royalty on the net sales of RECOTHROM, ZymoGenetics’ recombinant thrombin product, which was approved in 2008. Beyond dilution In addition to the royalty deals noted above, CV Therapeutics and Indevus Pharmaceuticals also both completed royalty financing transactions, which netted proceeds of over US$100 million each. Our report last year described the project financing structure employed by Symphony Capital as another potential source of nondilutive (or at least less dilutive) capital. Symphony continues to entertain opportunities but closed only one new investment in 2008, with OXiGENE. Geographic distribution While total capital raised was down in most regions, the leading clusters of Northern and Southern California and New England once again dominated the regional comparisons. San Diego Increased selectivity: venture investors gravitated toward later rounds in Q4 2008 Source: Ernst & Young and VentureSource 80% 60% 20% 0% 100% Q1 2008 Q2 2008 Q3 2008 Q4 2008 40% Second round First roundLater stage Seed round
- 58. 52 Beyond bordersGlobal biotechnology report 2009 vaulted to the top position in terms of total financing because of the Life Technologies debt issuance, but still trails the other two regions in number of financing rounds and venture-capital investment. New England edged out Northern California in total dollars raised, as a result of the Biogen Idec debt refinancing, while the latter region had a slight lead in venture-capital investment. The remaining regions continue to be very close in terms of total dollars raised. Casting a wider net In the current market, companies are increasingly looking at nontraditional sources of capital. These include disease foundations, which typically target conditions that have smaller patient populations in order to increase the otherwise low commercial incentive for R&D. Some firms are examining whether they might qualify for foundation money by applying an existing platform to a different therapeutic area or reprioritizing items in development. Others are looking at government grants or incentive programs to understand eligibility requirements and examine how their existing platforms and projects could be made eligible. (For more information, see “A closer look” on this page.) Outlook On the surface, the current funding situation looks comparable to prior down cycles with respect to the number of distressed companies. For example, in our 1994 annual report, we noted that 58% of the public companies had less than two years of cash on their balance sheets. What is different in this crisis, however, is the absence of buyers. In prior down markets, companies could always find another group of potential investors. These investors may have exacted more than the proverbial pound of flesh (industry veterans might remember “death spiral” preferred-stock offerings with conversion ratios that changed as a company’s stock price decreased), but at least the additional capital injections allowed companies to survive. As a result, very few companies ceased operations or filed for bankruptcy. Today, with massive deleveraging across the financial markets, such buyers are scarce. By the end of 2009, there will be fewer public companies as firms turn to mergers and acquisitions or simply cease operations, while the pipeline of new IPO companies will remain backed up. Companies will still be able to raise funds in 2009, but investors will be more selective, leading to a wider gap between haves and have-nots. We expect venture-capital investment to remain strong, although probably at lower levels than in 2008. But while market fundamentals may have changed in 2008, certain fundamental truths have not. To access capital, companies will need solid product stories and a single-minded focus on clinical success. Biotech funding, which became collateral damage in the mayhem of global financial markets, will fully recover only when those broader markets recuperate and rebuild investor confidence. By all accounts, that will take many quarters rather than mere months. But, while a number of companies will likely perish, the biotech industry as a whole will survive to see the return of better funding days. At a time when many biotech companies are struggling to raise capital for their operational needs, firms are becoming creative and looking beyond traditional sources of funding. In this challenging climate, government incentives can provide welcome injections of cash or relief through tax savings or subsidies. And while many state and local governments are under heightened budgetary pressure in this downturn, attracting and retaining biotech companies remains a priority for economic development agencies. Incentives are often keyed to specific metrics such as workforce expansions, new capital investments, R&D spending and/or employee training. As such, companies should explore their incentives options any time they make significant investments or undertake business expansions. While incentives are not likely to be the sole driver of a capital investment decision, they should be evaluated when choosing the location and scope of new investments. In reviewing potential incentives, companies should consider the monetary benefit that each program can provide, the impact of an incentives application process on the overall project timeline and the compliance requirements of each program. This analysis should be done throughout the site selection and investment process. Not all incentive programs may be relevant. For instance, while many jurisdictions offer income tax-based credits, these are not very valuable for biotech companies that are not currently in an income tax position. Other incentives, such as direct financing, cash grants, or abatements for property, sales or use tax may provide greater immediate value. Like all money, these funds come with some strings attached. Most incentives programs require formal agreements between governments and the companies receiving funding. These agreements list the specific levels of job creation, capital investment and/or job training that a company commits to make in exchange for a specified incentives package. If a company fails to meet its commitments, many jurisdictions reserve the ability to retract or “claw back” the incentives. State capital: incentive programs A closer look
- 59. 53 One constant inthe world of biotechnology is that drug development is costly and lengthy, requiring companies to raise large amounts of capital. Firms have traditionally raised funds from some combination of financial buyers — such as equity or debt investors — or strategic buyers in the form of other corporate entities looking to access technology and products. In 2008, the wholesale retreat of the public equity market and convertible-debt market has limited the menu of choices for many biotech companies. For the most part, what is left for those needing capital to sustain operations is to tie up with a larger and better-capitalized entity, either through a strategic alliance or an acquisition. In ordinary times, many companies might have chosen to go it alone longer, hoping to hit that next value inflection point in the development cycle. In the current environment, dwindling cash balances and reticent financial investors are increasing companies’ urgency to complete strategic transactions. For most assets, with the exception of a few truly innovative platform technologies, buyers would prefer an alliance over an acquisition simply to mitigate risk. However, shrinking equity valuations may make acquisitions the only reasonable alternative in some cases. The good news is that the primary buyers in this market, big pharmaceutical companies, continue to need products and technologies to supplement their own internal pipelines and are all aggressively reaching out to biotech companies and their investors. The question is, who has the bargaining power at the deal table? In early 2008, power appeared to be moving toward biotech companies, but by the end of the year, the pendulum had swung rapidly in the other direction as biotech companies’ fundraising options dwindled. Still, as many of the guest authors in this report suggest, bargaining power will ultimately be deal- and time-specific. Companies with sought-after assets will continue to command multiple bidders and high prices, while those with products that address smaller markets or have significant development risk will be at the mercy of the market. While the number of strategic alliance transactions involving US biotechnology companies in 2008 remained fairly consistent with prior years, the potential value of strategic alliances increased to a record level of almost US$30 billion. This was driven mostly by an increase in the potential value of biotech-biotech deals, which increased more than 50% to US$9.7 billion. Of course, it is unlikely that all of this cash will actually exchange hands, since these “biobucks” totals implicitly assume that all milestones will be achieved. The disclosed up-front payments in these transactions, in the form of license payments and equity investments, totaled US$3.7 billion, providing an important source of capital for current operations. On the M&A front, 2008 was another strong year for the US biotech industry. There were 53 transactions involving US biotech companies, with a total value of more than US$28.5 billion. This aggregate value is a record for any single year, if one excludes megadeals in prior years — such as the 2007 acquisition of MedImmune by AstraZeneca — which can skew deal totals. While there was no single megadeal in 2008 (defined as an acquisition valued at more than US$10 billion), the year’s totals were instead heavily influenced by three large transactions valued at more than US$5 billion each: Takeda Pharmaceuticals’ acquisition of Millennium Pharmaceuticals, Eli Lilly’s acquisition of ImClone Systems and the acquisition of Applied Biosystems by Invitrogen (since renamed Life Technologies). This is both familiar and unprecedented. We have seen very high M&A totals in the absence of a megadeal US deals Buying biotech, being biotech Source: Ernst & Young, Windhover, MedTRACK and company press releases Chart shows potential value, including up-front and milestone payments, for alliances where deal terms are publicly disclosed 0 Biotech-biotech The potential value of strategic alliances set a new record Pharma-biotech 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 35 10 30 25 20 15 Potentialvalue(US$b) 5
- 60. 54 Beyond bordersGlobal biotechnology report 2009 before, in 2006, when we observed that “the large totals were driven by several big deals — a measure of the heightened interest across a broad spectrum of buyers for valuable biotech assets.” But while the 2008 totals were driven by three “mini-megadeals” valued at more than US$5 billion each, there were no deals of this magnitude in 2006 — indeed, the largest deal that year was Abbott’s acquisition of KOS for US$3.7 billion. At a time when several mid-cap biotech companies are attracting the eyes of larger buyers, the arrival of the mini-mega may be a harbinger of things to come. M&A: megas and mini-megas Big pharma’s interest in mature biotech enterprises resulted in more than mini- mega activity in 2008. Indeed, it gave us what is probably the year’s most- watched transaction and is certainly the mother of all megadeals: Roche’s acquisition of Genentech. In July, Roche offered to buy out the minority shareholders of Genentech for US$43.7 billion. Over the next few months, the deal kept everyone guessing as negotiations dragged on and even turned hostile before the two parties agreed in March 2009 to a deal priced at US$46.8 billion, or US$95 per share. Interestingly, the biggest challenge for Roche will not be financing the transaction in the midst of a global credit crisis but rather retaining the talent and culture that has made Genentech an R&D and financial juggernaut over the years. As we argued in last year’s Beyond borders, structures and incentives drive conduct and performance. And while many companies are trying not to upset the cultures at their acquired children (examples include AstraZeneca/ MedImmune, GSK/Sirtris and Takeda/ Millennium), stock options and other equity incentives give independent biotechs a powerful tool tying performance to financial reward. The Roche-Genentech structure — termed “the 60% solution” in the 1990s — was the industry’s longest-standing example of this arrangement. Other similar transactions, including Wyeth/Genetics Institute, Novartis/Chiron and Sandoz/ Systemix ultimately succumbed to the allure of “valuing synergies more highly than culture.” Roche has promised that Genentech will continue to operate autonomously, but if history is any guide, the takeout of Genentech could well lead to a Company Location Acquired company Location Value (US$m) Takeda Japan Millennium New England 8,800 Life Technologies San Diego Applied Biosystems SF Bay Area 6,700 Eli Lilly Other (Indiana) ImClone New York State 6,500 Kinetic Concepts Texas LifeCell New Jersey 1,700 GlaxoSmithKline UK Sirtris New England 720 ViroPharma PA/Delaware Valley Lev New York State 618 Hologic New England Third Wave Technologies Midwest 580 Johnson & Johnson New Jersey Omrix New York State 438 Galderma Pharma Switzerland CollaGenex PA/Delaware Valley 420 Ipsen France Tercica SF Bay Area 404 Novartis Switzerland Protez PA/Delaware Valley 400 Teva Israel CoGenesys Mid-Atlantic 400 Valeant LA/Orange County Dow Pharmaceutical Sciences SF Bay Area 277 Source: Ernst & Young, Windhover, MedTRACK and company press releases Selected 2008 US biotech M&As Source: Ernst & Young, Windhover, MedTRACK and company press releases 0 Pharma-biotech Adjusted for megadeals, M&As reached new highs in 2008 Pharma-biotech megadeals 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 35 10 30 25 20 15 Value(US$b) 5 Biotech-biotech megadealsBiotech-biotech
- 61. 55 groundswell of newstart-ups in the San Francisco Bay Area as talented scientists and executives decide to forge their own paths. Another pioneering big biotech, Biogen Idec, flirted with selling itself after public statements by shareholder Carl Icahn suggested that a sale was the best way to maximize shareholder value. Seeking to avoid a drawn-out process that would impact employee productivity and retention, Biogen structured a formal auction process with a defined deadline. In the end, the complexities of Biogen’s relationships with Genentech (for Rituxan) and with Ireland’s Elan (for Tysabri) resulted in no offers from big pharma. While Mr. Icahn criticized the process because potential suitors were not permitted to talk to Biogen’s partners before making an offer, shareholders supported management and the board’s approach by refusing to elect a slate of Icahn-nominated directors at a subsequent annual meeting. Mr. Icahn was also involved in one of the year’s most prominent deals: Eli Lilly’s acquisition of ImClone Systems, where Icahn had been a significant shareholder for many years and had chaired the board of directors. Icahn realized a sizeable return on his investment after a very public process in which Bristol-Myers Squibb, ImClone’s partner for the blockbuster drug Erbitux and the most likely suitor, had its offer rebuffed as too low. Lilly emerged as an unexpected white knight, ultimately agreeing to pay US$70 per share — 13% higher than BMS’ last offer. Lilly and BMS will now co-promote Eribitux, while a potential dispute over whether BMS also has rights to a “next generation” compound through its original agreement with ImClone remains unsettled. Another notable acquisition was GlaxoSmithKline’s US$720 million takeout of Sirtris Pharmaceuticals, less than a year after Sirtris went public in an offering that raised US$69 million. The valuation no doubt pleased investors, especially since Sirtris had only one clinical-stage program at the time of the transaction. GSK was clearly more interested in the potential of sirtuins to be a new drug-development platform than in any single drug candidate. As noted above, GSK has chosen to let Sirtris continue to pursue its research autonomously in the hope of preserving the entrepreneurial culture and focus of the company. Big pharma was not only interested in large deals; with falling valuations and limited financing options came a number of acquisitions between existing alliance partners, including Eli Lilly’s acquisition of SGX for US$64 million (a premium of 122%), GSK’s takeout of Genelabs for US$57 million (a premium of 465%) and Roche’s acquisition of Memory Pharmaceuticals for US$50 million (a premium of 319%). While the valuations in these acquisitions (and many of the year’s other sizeable transactions) reflected strong premiums relative to the day before the deal was announced, the share prices of many acquired companies had plummeted in the weeks and months preceding these deals as markets spiraled downward. When compared to the high price for the 52 weeks preceding the deal announcement, the purchase price in each of these acquisitions was not a healthy premium, but a discount. Milestones and stepping stones Indeed, with the capital markets taking a toll on many small-cap company valuations, negotiating an M&A price that reflects “fair value” has become particularly Lowered expectations? 2008 US public company acquisition premiums Source: Ernst & Young 400% 200% 0% -100% 500% 100% 300% Roche/M em ory Galderm a/CollaGenex Tripos/Pharsight J&J/O m rix GSK/Genelabs H ologic/Third W ave Lilly/SGX ViroPharm a/Lev Ligand/Pharm acopeia GSK/Sirtris Stiefel/Barrier Kinetic/LifeCell BM S/Kosan Lilly/Im Clone Pfizer/Encysive Life Technologies/ A pplied Biosystem s Ipsen/Tercica Takeda/M illennium One–day premium 52–week premium Deal size: US$50-200 million Deal size: over US$400 million
- 62. 56 Beyond bordersGlobal biotechnology report 2009 challenging. On the sell side, management teams typically start from the premise that current equity markets do not reflect the true value of their companies, especially if clinical-development milestones are eventually achieved. One way to bridge this gap is to settle on an up-front price and then provide for additional consideration if certain performance targets are reached. Such “earn-outs” have been common in acquisitions of private companies, but in the current environment they are often occurring even in acquisitions of publicly traded companies. Public investors’ increased willingness to forgo a clean exit in exchange for the chance to capture more upside later is an indicator of the tough environment for deal negotiations. In this environment, some compensation now is better than suffering dilution with no guarantee of an exit at a higher valuation later. One prominent example in 2008 was ViroPharma’s acquisition of Lev Pharmaceuticals. While the up-front exchange was US$443 million in cash and stock, Lev’s shareholders can receive up to an additional US$175 million if certain regulatory and commercial milestones are achieved. Investors are willing to be patient — one of the commercial milestones is for Cinryze, Lev’s product for the treatment of hereditary angioedema, to achieve cumulative sales greater than US$600 million over the next 10 years. Two option-based acquisitions of private companies were variants of this structure. Actimis Pharmaceuticals agreed to a “step” acquisition by Boehringer Ingelheim valued at up to US$515 million. Under the deal terms, Boehringer will acquire additional shares of Actimis if milestones related to the company’s lead asthma product candidate are achieved. In early 2009, Cephalon announced a similar deal in which it will pay US$100 million for the option to acquire Ception Therapeutics for an additional US$250 million (exercisable at any time up to 15 days after Ception receives results from a Phase III clinical trial). US$50 million of Mergers and acquisitions are a constant in the biotech industry, and challenging funding environments tend to spur creative deal structures. In an environment of rapidly decreasing valuations, negotiations often turn on the ability to bridge a valuation gap between the parties. Earn-out payments or other contingent considerations have been commonly used in this regard, especially when the target was closely held. Several recent transactions involving publicly traded companies have also embraced contingent payments as a mechanism to get deals done rapidly. We expect this trend to continue as long as companies have limited capital alternatives. Typically, contingent payments are tied to future milestone events such as clinical advancement or revenue. Another recent phenomenon is for private and public companies to enter into staged buyouts that include an up-front payment, usually to fund clinical trials and product development, in exchange for an option to buy the entire company upon product approval or achievement of some other milestone. While companies negotiating a deal may be most focused on strategic and valuation issues, creative transaction structures with contingent payments such as earn-outs can carry significant accounting consequences. These implications should be fully explored before signing a deal, particularly in light of the 2009 adoption of US Financial Accounting Standards Board Statement No. 141(R), Business Combinations, which is substantially consistent with International Accounting Standard 3(R). Under these rules, acquirers need to consider the fair value of contingent payments and record these amounts as liabilities at the date of the acquisition. An acquirer will also need to be comprehensive in identifying contingent payments — for example the target’s contractual obligations to collaborators (which may or may not relate to the same product or technologies). The ultimate amount paid could differ significantly from the amounts recorded at the acquisition date, with any differences generally recognized in earnings. Statement 141(R) and the comparable international standard also require that the fair value of purchased in-process research and development (IPR&D) be recorded as an asset on the date of the acquisition and then evaluated for impairment over time. If a product is ultimately commercialized, the asset would be amortized to expense over the expected life of the product. Judgments around impairment will be inherently subjective and will typically require consultation with valuation specialists. Further, under US standards, transactions where a company provides an up-front payment with an option to purchase the entire company at a later date for a predetermined price may require the acquirer to consolidate the operations of the target. Interestingly, under Statement 141(R), if the target is consolidated and subsequently the milestone is achieved, the contingent consideration paid is recorded in stockholders’ equity and does not require the revaluation of any assets of the target — including IPR&D. These new rules, while complicated and at times subjective, will not overshadow the business rationale for transactions. Management teams will be charged with explaining in a clear and transparent manner the applicable accounting treatment, and financial statement users, including analysts, will need to adapt to a new world in which significant adjustments to purchased assets and liabilities in subsequent periods will be increasingly common. New rules for the M&A road A closer look
- 63. 57 the initial paymentwas made to Ception investors, giving them a partial return on their investment. While US biotech companies have a long history of deal creativity in response to challenging funding climates, one element that is different in the current environment is changes in the accounting treatment of such structures. For instance, the adoption of new accounting rules governing business combinations in 2009 could affect the way acquisitions with earn-outs and option-to-purchase transactions are reflected on financial statements. Companies should consider the implications of these changes when negotiating deals. (See “A closer look” on the previous page for details.) Strategic alliances For the US biotech industry, 2008 was another strong year on the strategic alliance front. The two largest transactions were biotech-biotech deals — Genzyme’s alliance with ISIS (which also included the largest total up-front payment of the year, US$325 million, for a technology license and equity), and Celgene’s transaction with privately held Acceleron Pharmaceuticals, which was more weighted toward future milestones. Genzyme remained an active acquirer of technologies during the year, forming alliances with Osiris Therapeutics for ex-US rights to two late-stage stem-cell therapies and with PTC Therapeutics for ex-North American rights to a drug being tested for the treatment of Duchenne muscular dystrophy. Both deals included impressive up-front payments of US$100 million or more. Up-front payments of this magnitude are in part a recognition of the need to provide some sustainability to the biotech partner and insulate it from having to return to the capital markets in the near term. Indeed, Peter Wirth, Genzyme’s Executive Vice President of Legal and Corporate Development, observes in his article in this issue of Beyond borders that deal structures that give smaller companies sufficient capital to advance their pipelines can help protect their viability in the current climate. (See “Connecting the dots” for more details.) Company Location Partner Location Up-front license payments (US$m) Potential value (US$m) Genzyme New England ISIS San Diego 175 1,900 Celgene New Jersey Acceleron New England 45 1,871 GlaxoSmithKline UK Archemix New England 21 1,428 Genzyme New England Osiris Mid-Atlantic 130 1,380 Takeda Japan Amgen LA/Orange County 300 1,177 Roche Switzerland Synta New England 16 1,025 Bristol-Myers Squibb New York State Exelixis SF Bay Area 195 1,000 Takeda Japan Alnylam New England 100 1,000 AstraZeneca UK MAP Pharmaceuticals SF Bay Area 40 900 GlaxoSmithKline UK Valeant LA/Orange County 125 820 GlaxoSmithKline UK Dynavax SF Bay Area 10 810 GlaxoSmithKline UK Mpex San Diego 9 765 Astellas Japan CoMentis SF Bay Area 80 760 Pfizer New York State Medivation SF Bay Area 225 725 Bristol-Myers Squibb New York State PDL SF Bay Area 30 710 Nycomed Denmark Immunomedics New Jersey 40 620 GlaxoSmithKline UK Regulus San Diego 20 598 Onyx SF Bay Area S*Bio Singapore 25 550 Amgen LA/Orange County Kyowa Hakko Kogyo Japan 100 520 Cephalon PA/Delaware Valley ImmuPharma UK 15 515 Sanofi-Aventis France DYAX New England — 500 Source: Ernst & Young, Windhover, MedTRACK and company press releases Selected 2008 US biotech alliances
- 64. 58 Beyond bordersGlobal biotechnology report 2009 Two other Massachusetts-based companies pursued different approaches to achieve the goal of insulation from the capital markets. In a deal that echoed its 2007 transaction with Roche, Alnylam Pharmaceuticals provided nonexclusive access to its intellectual-property platform to Takeda Pharmaceuticals of Japan while retaining independence to pursue its own R&D. Takeda paid US$100 million up front in a deal that could be worth up to US$1 billion to Alnylam. In addition, Alnylam will have the rights to co-promote in the United States any drugs developed by Takeda based on its RNAi technology. The deal allows Alnylam, which will not perform research services for its partner, to leverage its technology platform, and increases its opportunity to realize a return (either through an internal program or the success of a partner). With US$430 million of cash and short-term investments on its balance sheet at the end of 2008, Alnylam has independence from the capital markets and a war chest to expand its own programs. While not possessing the same kind of technology platform, Infinity Pharmaceuticals completed one of the most innovative alliances in recent memory with its transaction with Purdue Pharmaceuticals. Purdue, a privately held company, was looking to create or access an R&D capability for innovative drugs in areas it had not previously pursued, such as oncology. Infinity, like most companies its size, needed to raise capital, but wanted to retain significant commercial rights to its programs. The result is a structure similar to the hallmark Roche-Genentech transaction, with Purdue taking a significant, but not controlling, equity stake and agreeing to offset a substantial part of Infinity’s R&D expenses in the coming years. In exchange, Purdue gets ex-US commercialization rights to all previously unpartnered oncology products developed by Infinity during the collaboration. Importantly, Infinity controls all R&D decisions and retains the US rights to all products — which, as the Genentech example has proven, can be a very lucrative franchise. (For more on this transaction, refer to “The Darwinian challenge” by Adelene Perkins, Infinity’s President, in this issue of Beyond borders.) Big spenders One company made a big impression in the US in 2008 — Japan’s Takeda Pharmaceuticals. Takeda opened its wallet for a diverse set of deals, two of which are mentioned above. The takeout of Millennium (now referred to as “The Takeda Oncology Company”) brought the Japanese pharma the blockbuster Velcade (marketed jointly with partner Johnson & Johnson) and a strong R&D capability in oncology. The nonexclusive license with Alnylam has the potential to make Takeda a leading player in the emerging RNAi space, especially in Asia. In addition, Takeda paid Amgen US$300 million up front and could pay US$700 million or more in development support and potential milestones to Amgen for Japanese rights to 13 compounds in development. This deal gives Takeda an expanded pipeline in the home market — the world’s second-largest. These three transactions were indicative of a broader trend toward oncology products adopted by many big pharmas. As Avastin, Erbitux, Velcade and others have demonstrated, biotech oncology products that address important medical needs have been less susceptible to price pressures and to generic competition (at least so far) and can be marketed with a more modest commercial infrastructure than treatments for chronic illnesses. (For more discussion of these deals, see the Japan year in review article in this issue of Beyond borders.) Outlook: buying biotech, being biotech What lies ahead? A daunting fundraising environment will continue to spur deal activity, and we expect to see considerable consolidation among small-cap biotechs that are struggling to survive. These trends are also producing new challenges and sources of risks for partners. While due diligence in alliances may have previously focused on technology, intellectual property and potential market size, buyers must now also consider their partners’ financial viability and ongoing fundraising ability. The other big driver of deals, of course, is big pharma’s continuing drive to replenish its pipeline and reinvent its approach to R&D. Pharmaceutical companies are responding in two ways. In recent years, we saw firms move to transactions that attempt to preserve the innovative cultures, structures and incentives of biotech firms — a “being biotech” philosophy that is embodied in acquire-and-preserve-independence deals such as Takeda/Millennium, GSK/ Sirtris, Pfizer/Rinat and a host of others. In 2008 and 2009, Roche, the company that was long synonymous with this philosophy, moved instead to “buy biotech” by acquiring the remaining stake in Genentech. While some big pharmas have come out against megamergers as drains on focus and productivity, others are moving ahead with even bigger transactions — for example, Pfizer’s acquisition of Wyeth and the merger of Merck & Co. with Schering-Plough, with speculation of more to follow. Post-merger integration necessarily brings distractions which impact both existing and potential partners, as jobs, reporting structures and even therapeutic areas of focus change. Biotech companies, which are particularly sensitive to the pace of development, would be wise to consider what else may be on the radar of the partners before entering a transaction.
- 65. 59 For the drugdevelopment industry, these are times of tremendous change. Many private and small-cap biotechnology companies, hit hard by tumbling stock markets and reticent investors, are fighting for survival. Large pharmaceutical companies, meanwhile, are gearing up for the huge changes that will be unleashed by a wave of sizeable patent expirations. While many firms may understandably be focused on responding to these sweeping market changes, there are also tremendous changes afoot in Washington, DC, where a new administration with a mandate for change could potentially alter the course of public policy and regulation on a host of healthcare-related issues — with significant implications for the biotech industry. Reforming healthcare: fulfilling a campaign promise As a presidential candidate, Barack Obama made healthcare reform a key part of his campaign platform. He pledged to reduce the number of uninsured Americans, improve the quality of care, save the typical family US$2,500 a year in medical-related costs — and bring much-needed efficiency to a health system that costs US$2.3 trillion a year. Yet given the nation’s economic woes, soaring federal deficit and delays in confirming a new Secretary of Health and Human Services, many have questioned whether healthcare reform is a feasible goal for the near-term horizon. Healthcare reform remains a high priority, as the president has maintained that solving the nation’s healthcare crisis is inextricably linked to creating a strong economy for the future. In its budget blueprint for 2010, the administration proposed to begin a vast expansion of the government’s involvement in the healthcare system by creating a US$634 billion reserve fund over the next decade, launching an overhaul that many experts project will ultimately cost at least US$1 trillion. Called a “down payment on healthcare reform,” the reserve fund would be financed in part by squeezing US$316 billion in efficiencies out of the current healthcare system by aligning incentives toward quality and promoting accountability and shared responsibility. Among other changes, subsidies paid to insurers that sell Medicare managed-care plans would be eliminated, and Medicare Advantage plans would be subject to a competitive bidding process. The reserve fund would be financed also by trimming tax breaks for the nation’s wealthiest individuals. The last time the US considered fundamental healthcare reform — in the early years of the first Clinton administration — the proposal bitterly divided the various stakeholders in the healthcare economy and ultimately suffered a decisive defeat. Biotech companies and their investors were concerned about the prospect of price controls under universal care, and this triggered a wholesale retreat in the public markets. This time, things are different in that present dialog does not mandate a single-payer government-run system. There is also much broader consensus on the need for reform, with many industry participants lending their support to the administration’s efforts. Still, the reform debate is expected to be contentious. Critics argue that, given the money spent on the stimulus and bailout, the nation can’t afford health-system overhaul. The president seeks to build consensus before Congress tackles the issue, by creating a bipartisan reform study group of key stakeholders. For the drug industry, a population with more access to healthcare could mute the potential effect of lower prices. However, it is critical for the future viability of the biotech industry that market incentives remain to reward the innovation of companies pursuing therapies that address unmet medical needs and small patient populations. Drug prices: raising the heat In the quest for lower healthcare costs, the political and public pressure to reduce drug prices continues. The president’s healthcare plan challenges drug prices on three main fronts, proposing to 1) increase the use of cheaper generic drugs, 2) allow drugs approved by the Food and Drug Administration (FDA) to be imported from other countries, and 3) authorize Medicare to negotiate with drug makers for lower US prices. The US$3.5 trillion budget proposal for fiscal year 2010 released in April calls for a regulatory pathway for companies to bring to market generic versions of biotechnology drugs — known as follow-on biologics, or FOBs (sometimes also referred to as biosimilars, biogenerics or bioequivalents). The goal is to keep a tighter rein on drug costs by creating greater competition in the biotech market. According to budget documents, FOBs could save taxpayers an estimated US$9.2 billion over 10 years and help pay for improved care and expanded insurance coverage. Drug companies would be prevented from blocking generic drugs with anticompetitive agreements to keep FOBs off the market. The budget proposal also aims to prohibit makers of brand-name biotech medicines from “evergreening,” or extending the US public policy Will biotech get the change it needs?
- 66. 60 Beyond bordersGlobal biotechnology report 2009 patent-protected life of current products by changing them slightly. The president’s plan for biosimilars has received mixed reactions from the biotech industry. Winning a legal pathway for FOBs could open a significant new market for generic and pharmaceutical companies that choose to play in this space. While the biotech industry is supportive of FOBs in principle, companies want any legislation to provide an adequate period of market exclusivity for original products, to ensure a reasonable time to earn a return on investment before others can copy their discoveries. In March 2009, a bipartisan group of Congressional representatives (led by California Rep. Henry Waxman) introduced biosimilar legislation consistent with the language of the president’s budget With nearly 11,000 employees and an annual budget of more than US$2 billion, the FDA is charged with the critical mission of promoting and protecting public health. It oversees products that account for one-fourth of every consumer dollar spent in the US, from foods to cosmetics, therapies to medical products. A recent wave of scandals, ranging from contaminated blood thinner from China to tainted peanuts from Georgia, has tarnished the FDA’s gold-standard image, undermining public trust and intensifying pressures for an agency overhaul. Observers agree that transforming the FDA starts with a new commissioner. The Obama administration has tapped Margaret A. Hamburg, a physician and former New York City health commissioner, for the top post. Joshua Sharfstein, commissioner of the Baltimore City Health Department and also a physician, has been named to serve as Hamburg’s chief deputy. The next commissioner faces a daunting array of challenges, including: Improving the safety and effectiveness of drugs, biologics• and medical devices. A report from the Government Accountability Office (GAO), the investigative arm of Congress, charges that the FDA is putting the public at risk of bad drugs and unsafe products. Safety concerns extend also to the FDA’s capacity for inspecting foreign drug plants. Although 80% of active drug ingredients are produced abroad, just 7% of the plants exporting to the US are inspected by the FDA, the GAO says. Recently, the FDA Globalization Act of 2009 was introduced in the House of Representatives, designed to improve the FDA’s inspection process for drug-manufacturing facilities. Opponents of the bill argue that it would likely increase producer costs and patient prices. Speeding up the drug approval process. Although more• than 600 biologics are under development, fewer than 10 are approved by the FDA each year. With a renewed focus on product safety, approval of new drugs and therapies could face even further delays. Critics question whether the FDA is doing its part to make sure new therapies can reach the patients who need them. Advocates look to the new commissioner to advance the agency’s Critical Path Initiative, a national effort to modernize the scientific process through which FDA-regulated products are developed, evaluated and manufactured. Giving equal weight to the food-safety and drug-safety• functions. Some lawmakers have argued that the FDA is too busy evaluating drugs and medical devices to adequately regulate food. Rep. Rosa DeLauro, for example, has proposed merging most government responsibilities for food safety under a new Food Safety Administration, which would do the jobs that the FDA and US Department of Agriculture now perform separately. The possibility of separating food from drug has been debated for more than two decades and may be revisited in the Obama administration. Ramping up for global threats. Along with ensuring the• safety of foreign imports, the new FDA must protect Americans from bioterrorism, cross-border disease transmission and the threat of intentional contamination of the nation’s food supply. Attracting a new workforce. Much of the FDA’s staff were• hired in the boom of the 1970s and are ready to retire. The agency’s well-publicized problems, coupled with lower salaries than the private sector, have it made it difficult to replenish staff. In addition, the rapid pace of innovation requires the agency to attract professionals who are current in their knowledge and have expertise across a broad array of cutting-edge technologies. Updating technology. Reviews by the GAO and others have• found the agency, working with outdated computers, lacks the information-technology capabilities to analyze data, assess risks and share intelligence. Many in Congress agree that it is no longer a question of whether or not the FDA will be reformed, but rather how and when. Strong leadership is paramount. Yet to keep American consumers safe and life-saving therapies in ready supply, the FDA will also need expanded authority to make sound regulatory decisions — and increased resources to keep pace with rapidly evolving biomedical innovations. The FDA: transforming an agency in crisis A closer look
- 67. 61 proposal. Dubbed the“Promoting Innovation and Access to Life-Saving Medicine Act,” the bill gives the FDA authority to approve copies of biotech drugs and take steps to ensure they are safe and effective. The legislation would: Allow the FDA to approve FOBs through• an abbreviated application process Require FOB makers to 1) demonstrate• there are no clinically meaningfully differences between the biosimilar and branded product and 2) show the two products are highly similar in molecular structure and share the same mechanism of action, if known Allow an FOB maker to show the FDA• that a product is a biogeneric and is interchangeable with the original product The key issue of debate is length of exclusivity. The new bill limits market exclusivity for innovator products to 5.5 years. Industry advocates argue that biotech companies should be entitled to at least 14 years of data exclusivity to recover their investments in drug discovery. As in the prior Congress, multiple legislative proposals are expected as a starting point for negotiations. In fact, in March 2009, Rep. Anna Eshoo, who represents biotech-heavy Silicon Valley, filed a competing proposal that had 43 cosigners. The Eshoo proposal provides for 14.5 years of data exclusivity. The second part of the president’s plan to reduce drug prices — reimporting prescription drugs from outside the US — is also a point of contention. Drug makers argue that reimportation can erode intellectual property rights and increase safety risks, put de facto constraints on the returns that sustain investment in innovation, and endanger patients with substandard products. The industry is also concerned about the president’s proposed change to the Medicare Part D prescription drug program, which funds drug coverage for some 44 million elderly Americans. Under the current system, the government is prohibited from engaging in Medicare drug pricing negotiations with pharmaceutical manufacturers. Negotiations are handled strictly by private-sector managed care and pharmacy benefit management plans. The president and Congressional Democrats advocate changing the program to enable, or even require, the government to negotiate with drug manufacturers, leading to savings estimates of US$10 billion to US$30 billion. Private payers often take cues from government reimbursement policies, and drug companies are worried that this change could open a back door to price controls as private insurers might follow suit in renegotiating prices. While drug costs account for only a small share of US healthcare expenditures, because of the industry’s historically high margins, drug companies have frequently been a convenient scapegoat in media coverage and policy debate about the cost of healthcare. It is encouraging that the administration’s proposals take a holistic view, emphasizing, among other things, the use of electronic medical records and structuring incentives to improve outcomes. And importantly, not only drugs’ costs but also their financial benefits — such as reductions in hospitalization or other care — are part of the debate. One way to apply this philosophy to drug pricing and reimbursement is through the use of comparative effectiveness research. In the United Kingdom, the National Institute for Healthcare and Clinical Excellence (NICE) uses cost-utility analysis to make coverage decisions based on cost relative to benefit. The Obama administration’s stimulus bill provides US$1.1 billion for comparative effectiveness research. But it is important that any measures implemented are constructed in ways that encourage and reward innovation and are not just a cover for simply cutting costs. These concerns were reflected in the legislative debate, when the biotech and pharmaceutical industries expressed a preference for using the term “comparative clinical effectiveness” rather than “comparative effectiveness,” which many read to mean “cost effectiveness,” in the bill’s language. While the emphasis on reducing costs is important at a time of mushrooming budget deficits, as mentioned above, for the US to retain leadership in biotechnology, it is also critical that prices provide a commercial incentive for innovative R&D. Stem cell research: lifting the ban In an important symbolic victory for the biotech industry, President Obama issued an executive order in March 2009 lifting Funding for scientific research in the stimulus package Source: Ernst & Young and www.HHS.gov US$21 billion for science and research spending, including: US$10 billion for the National Institutes of Health, including US$8.5 billion for• research grants (US$2 billion for biomedical research) and US$1.5 billion to renovate university research facilities US$3 billion for the National Science Foundation• US$4.5 billion for renewable energy research, including bioethanol and other• biotech solutions US$1.1 billion for grants for disease prevention• US$1.1 billion for comparative effectiveness research•
- 68. 62 Beyond bordersGlobal biotechnology report 2009 the restrictions imposed by President Bush on federal funding for research on human embryonic stem cells. The reversal was expected, as the president — long a proponent of stem cell research and regenerative medicine — had pledged a policy shift on the campaign trail. Advocates have stressed, however, that the change is more a symbolic move for industry than a true financial driver. Federal research grants, distributed almost exclusively to government agencies and academic research centers, will not generally end up in biotechnology companies. Thus companies pursuing embryonic stem cell research will still need to raise funding from investors, which has become more challenging in the wake of the economic crisis. States’ rights In the most watched judicial case of the year, the US Supreme Court heard arguments in late 2008 in the case of Wyeth v. Levine, which dealt with a plaintiff’s right to pursue a claim. The plaintiff in the case alleged that Wyeth failed to provide an adequate safety warning even though the product’s label had been approved by the FDA. The decision, which was issued in March 2009, upheld a state supreme court decision that concluded FDA approval does not preempt the right of a plaintiff to claim damages in a state court. The decision was in contrast to a recent decision by the court in Riegel v. Medtronic which upheld preemption. A key difference in the Medtronic case was that the federal law granting the FDA its authority to approve and regulate medical devices states that federal requirements preempt state requirements, while no such statement exists for pharmaceuticals. The Court rejected Wyeth’s argument that a drug maker could face an FDA enforcement action for strengthening a safety warning. Patent reform: returning to the battleground Patent reform is making its way through Congress once again with the introduction of the Patent Reform Act of 2009. The legislation mirrors much of the proposed legislation from 2008 that died on the Senate floor. (See Beyond borders 2008 for more details.) In the last Congress, the debate pitted the legitimate needs of drug companies against those of technology companies. Their different needs result from the very different nature of intellectual property and length of innovation cycle in the two industries. While technology product cycles are rapid and many innovations are incremental improvements on existing technologies, drugs often take more than a decade to develop at a cost of at least several hundred million dollars. With both sides remaining actively involved in the debate, the new measure could result in a similar stalemate. The change we need? President Obama ran his presidential race on the slogan, “the change we need.” While the legislative debate on the issues listed above is just getting started, the changes being considered are nothing if not ambitious. While biotech companies may understandably be preoccupied with thorny operational challenges related to raising funds and running lean, the issues being debated in Washington, DC, could potentially have huge implications for the future of the entire industry. For lawmakers, the challenge will be to not just change policies, but modify them in ways that sustain the industry and its tremendous innovation and economic engine. From the measurement of outcomes to the protection of intellectual property and the pricing of innovative and life-saving drugs, legislators should consider the incentives created by their policy initiatives. With the right measures that produce the right incentives for the right behaviors, the biotech industry — and the healthcare economy at large — could indeed get the change it needs.
- 69. 63 Progress: increased approvals TheUS Food and Drug Administration (FDA) approved 27 new molecular entities (NMEs) and biologic license applications (BLAs) in 2008 — a marked improvement over 2007, when product approvals at the agency fell to 18, the lowest level since 1983. This represents a return to the levels seen in 2005 and 2006, when 20 and 22 products were approved, but a far cry from 2004, when 36 NMEs were approved. According to “The Pink Sheet” less than half of the year’s approvals were for breakthrough technologies or products addressing unmet medical needs. The majority of products receiving approval were more than just “me-too” technologies, even though they were in treatment classes that already had several existing approved options. To the extent that there were innovative products in the class of 2008, they often stemmed from biotech companies. Regeneron’s Arcalyst was approved for Cryopyrin-Associated Periodic Syndromes or CAPS, a group of rare, inherited, auto-inflammatory conditions. Two products were approved for Idiopathic Thrombocytopenic Purpura (ITP), a blood clotting disease: Amgen’s Nplate and Ligand/GSK’s Promacta. Genzyme received approval for Mozobil, an injectable drug that provides enhanced mobilization of stem cells for autologous transplantation in patients with non-Hodgkin’s lymphoma and multiple myeloma. Overall, additional approvals in 2008 were widely dispersed throughout multiple product types, including those for epilepsy, pain management and contrasting/imaging agents. Unlike the last few years, the leading innovative technologies in 2008 were neither anti-infectives nor oncology products. The most prominent grouping was the area of imaging and contrast agents where four new products were approved. These included two biotech-developed products, CV Therapeutics/Astellas’ Lexiscan and Epix Pharmaceuticals’ first drug, Vasovist. Both of these products target cardiovascular scanning procedures. Lexiscan is a stress test agent that increases arterial blood flow in the arteries for patients unable to undergo adequate exercise-induced stress, while Vasovist is the first contrast agent approved to support the relatively new procedure of magnetic resonance angiography (MRA). REMS: monitoring safety With the signing of the Food and Drug Administration Amendments Act (FDAAA) in September 2007, sweeping changes were made in the FDA. The Act’s greatest impact on future drug approvals could be through its mechanism for post-marketing safety surveillance, the risk evaluation and mitigation strategy (REMS). Of course, post-approval studies are not new, but as of 2008, these are no longer voluntary post-marketing commitments, but rather, enforceable studies with predetermined time frames and outcome targets. The FDA can now require drug companies to develop and propose a REMS (which can include a medication guide, patient package insert or a communication plan) to ensure that the benefits of a drug outweigh the risks. As of December 2008, the FDA had approved 21 REMS from companies submitting new drug applications (NDAs). The majority of these REMS have required the submission of a medication guide to address drug- and drug class-specific issues and provide further information to help patients avoid serious adverse events. In a few cases, the FDA also required that the programs include steps to assure safe use, such as the certification of prescribers and pharmacies and enrollment of patients in special programs to ensure that they fully understand the associated risks. REMS programs are not restricted to new drugs seeking approval; the FDA can also require them for existing, approved products. The FDA posted its first list of previously approved products requiring REMS in March 2008, which included products such as Biogen Idec and Elan’s multiple sclerosis drug, Tysabri, and Celgene’s multiple myeloma and MDS therapy, Revlimid. Remarkably, the agency even included Exubera, which Pfizer had already pulled from the market in 2007. Both of the drugs approved in 2008 for ITP, Amgen’s Nplate and Ligand/GSK’s Promacta, required sponsors to develop a REMS to meet approval requirements. Nplate’s REMS included a medication guide for patients and required that all prescribers and patients enroll in a special program to track the long-term safety of Nplate therapy. The introduction of the REMS framework may provide greater comfort to regulators in approving novel therapies for serious conditions that also have identified risks, and may also help in boosting patient and practitioner acceptance and usage of these drugs. For example, the REMS for Tysabri may have allowed the product to remain on the market and be seen as an acceptable alternative by patients and doctors. The product, which had initially been pulled from the market in 2005 after three patients developed progressive multifocal US products and technologies Monitoring progress
- 70. 64 Beyond bordersGlobal biotechnology report 2009 leukoencephalopathy (PML), was subsequently re-approved by the FDA. Even though cases of PML have been reported since the reintroduction of Tysabri, the FDA has not pulled the drug from the market this time around. The existence of a REMS has given the Agency greater confidence that they can understand and monitor the degree of risk presented to patients, while letting doctors know how to carefully monitor for the occurrence of PML in their patients. PDUFA dates: monitoring timelines Another significant issue in 2008 was the FDA’s inability to meet its target dates for acting on new drug applications. While the FDA had set non-binding timelines for review and action on new medicines under the Prescription Drug User Fee Act (PDUFA) — targeting action within 10 months of submission for 90% of standard NDAs and within 6 months of submission for priority applications — the agency failed to meet PDUFA dates for at least 15 drugs. The FDA stated that the delay in approvals was the result of inadequate staff, particularly since it needed to implement the safety legislation approved by Congress in 2007. These missed target deadlines denied patients access to potential treatments and increased uncertainty for companies and investors. In several cases, the missed dates were not accompanied with clear reasons from the FDA, leaving investors to wonder whether the delays were because of the FDA’s lack of resources or because of problems with the application itself. Company Location Brand name Generic name Type Indication REMS required Month Adolor/GSK Pennsylvania/ Delaware Valley Entereg alvimopan New molecular entity Regain GI function after bowel resection Yes May Amgen Los Angeles/ Orange County Nplate romiplostim Biologics license application Immune thrombocytopenic purpura (ITP) Yes August Cephalon Pennsylvania/ Delaware Valley Treanda bendamustine hydrochloride New molecular entity Non-Hodgkins lymphoma March CV Therapeutics/ Astellas San Francisco Bay Area Lexiscan regadenoson New molecular entity Cardiac imaging agent Yes April Epix New England Vasovist gadofosveset trisodium New molecular entity Contrast agent December Genzyme (acquired from Anormed) New England Mozobil plerixafor New molecular entity Bone marrow transplants in non- Hodgkins lymphoma and multiple myelomas December Lev Pharmaceuticals New York State Cinryze C1 inhibitor Biologics license application CI hibitor HAE October Ligand Pharmaceuticals/ GSK San Diego Promacta eltrombopag olamine New molecular entity Chronic ITP Yes November Progenics/Wyeth New York State Relistor methylnaltrexone bromide New molecular entity Opiod-induced constipation April Regeneron New York State Arcalyst rilonacept Biologics license application Cryopyrin-associated periodic syndromes February The Medicines Company New Jersey Cleviprex clevidipine New molecular entity Hypertension August Zymogenetics Pacific NW Recothrom thrombin, topical (recombinant) Biologics license application Stopping blood loss in surgery January Source: Ernst & Young, US Food and Drug Administration Selected US product approvals, 2008
- 71. 65 Complete response letters: monitoringapplications In 2008, the FDA switched from issuing “approvable” and “not approvable” letters in response to NDAs to issuing complete response letters (CRLs) — which had previously only been used for BLAs. Under the approvable/not approvable system, the release of a letter gave the sponsor, investors and the public an instant understanding of the application’s status. The new nomenclature is more ambiguous, making it somewhat harder to monitor the status of applications. While the term “complete response letter” might suggest the end of a process, it often indicates the opposite — signaling that an application is incomplete, and initiating a new round of action. The biotechnology industry and biologics products were well represented in the applications that received a CRL in 2008. In nearly all of these cases, the letters required sponsors to continue working on their product applications, and some of the products were approved in early 2009. These include products for which additional trials were not required, such as Roche’s Actemra and AMAG’s Feraheme (both of which were challenged to produce additional documentation concerning manufacturing and final labeling), MedImmune’s motavizumab (in which the FDA asked for supplementary documentation), and Centocor’s ustekinumab (which requested the sponsor to submit a REMS). However, in Targanta’s CRL for ortavancin, a gram-positive anti-infective for hospital-based patients, the FDA found that the data was not sufficient and required new clinical trials. The CRL resulted in Targanta’s sale to The Medicines Company. (For details, see the US deals article.) The Medicines Company believes ortavancin will add to their strategic plan of becoming a global leader in critical care medicine. Looking ahead: monitoring progress As of early 2009, more than 125 new drug applications (NDAs) and biologics license applications (BLAs) are on file with the FDA with decisions scheduled during the year. Approximately one third of these products were developed either entirely by or in partnership with biotechnology companies. Many of them are novel therapeutics, such as Amgen’s denosumab for postmenopausal osteoporosis, Novo Nordisk’s liraglutide for type 2 diabetes and Theravance’s telavancin for the treatment of complicated skin and skin-structure infections. Other submissions seek to expand successful marketed products into treating new indications, including applications to use Genzyme’s Clolar as a first-line therapy for acute myeloid leukemia and Merck/CSL’s Gardasil human papillomavirus vaccine not just for women (for whom it is currently approved) but for men as well. Also filed with responses expected shortly are the CRL follow-ups for AMAG’s Feraheme and MedImmune’s motavizumab. After a dismal 2007, there was definite progress on the products front in 2008, but that progress will need to be monitored to make sure it is sustained. The FDA, which has struggled in recent years with political pressures and resource constraints, is undergoing considerable reform (see the US public policy article for details), and companies will need to stay abreast of developments at the agency to understand the changing regulatory climate. One area where things have already changed, of course, is in the area of monitoring safety. For companies seeking product approvals in 2009, some of the biggest challenges may lie in developing REMS and responding to the anticipated slate of CRLs — challenges that will likely require additional investments in the final phases of bringing products to market. 2008 was a year of considerable procedural change and reasonable progress in product approvals. An atmosphere of change at the FDA will most likely continue to cloud the predictability of outcomes. But the pace of overall applications continues to be strong and much of this pipeline is in truly innovative technologies with products that target oncology, orphan diseases, autoimmune disorders and other underserved disease segments. We all have much at stake in ensuring that these applications are processed promptly and innovative new products are brought to market. For a drug industry facing a significant patent expiration cliff, 2009 applications pending at the FDA — which Cowen and Company estimates could generate revenues of as much as US$60 billion by 2013 — could contribute to a recovery in the sector. And of course, for patients everywhere, these products could provide the ultimate benefit — by improving and saving lives.
- 72. 66 Beyond bordersGlobal biotechnology report 2009 The global financial crisis, which is straining the Canadian economy, has taken a major toll on the biotech sector. Public markets have been firmly closed since mid-2007, while follow-on offerings fell to the lowest level in more than a decade. Venture capital, which had rebounded in 2007, fell substantially in 2008, especially for new start-ups and early-stage corporations. This funding crisis is straining companies and their business strategies, leading to a significant decline in the number of firms. More than half of the remaining public companies now have less than a year’s worth of cash. For the Canadian industry, this is now a time of reckoning. Without new approaches and solutions, the next few years could cripple the sector. Financial performance The financial results of the Canadian biotech industry reflect the challenging realities of the current economic crisis. To a large extent, the numbers have also been dampened by the acquisition in 2008 of four significant public companies — Arius, Aspreva, Axcan and Draxis — by foreign firms. The revenues of the publicly traded biotech industry decreased 9%, from US$2.2 billion in 2007 to US$2 billion in 2008, mainly due to the large acquisitions mentioned above. If 2007 revenues were adjusted to exclude those four companies, the industry’s revenues would have increased by 26% instead of falling. This strong growth is indicative of new product approvals and solid revenue growth of existing products. This can also be seen in the 9% increase in the number of employees. However, R&D expenses decreased from US$743 million to US$703 million — a source of concern and a direct result of the lack of funding. The industry needs sustained R&D investments to attract investors and grow sustainably. The funding crisis has driven reductions in R&D programs and related expenditures and has produced substantial intangible asset impairments. Net loss increased from US$759 million to US$1.1 billion as a result of write-offs of intangible assets and goodwill. Angiotech wrote off US$650 million of goodwill in 2008, representing more than the entire increase in losses in the industry. In the absence of this write-down and the acquisitions of the four companies mentioned above, the industry’s net loss would have decreased by 57%. The extent of noncash charges makes net loss no longer a good indicator of the health of the sector. The market capitalization of the Canadian industry declined 61%, from US$10.8 billion in 2007 to US$4.2 billion in 2008. While this is at least partially driven by the four significant public-company acquisitions, the 72 public companies in existence at the end of 2008 saw their total market value shrink by a very significant 47%. This decline was driven by a number of companies that have announced the need to “pursue strategic alternatives” and by companies that experienced clinical-trial setbacks in addition to the general market decline. However, the fact that the Canadian industry Canada year in review A time of reckoning 2008 2007 % change Public company data Revenues 2,041 2,237 -9% R&D expense 703 743 -5% Net income (loss) (1,143) (759) 51% Market capitalization 4,217 10,844 -61% Number of employees 7,972 7,326 9% Financings Public company financings 271 707 -62% Number of IPOs 0 1 -100% Private company financings 207 352 -41% Number of companies Public companies 72 84 -14% Private companies 286 322 -11% Public and private companies 358 404 -11% Source: Ernst & Young Financial data for 2008 were converted to US$ using an exchange rate of 1.07 (Canadian per US$), except market capitalization, which was converted using an exchange rate of 1.22. Data for 2007 were converted to US$ using an exchange rate of 1.07, except market capitalization, which was converted using an exchange rate of 0.99. Data for 2007 have been restated to reflect full-year results, since estimates in Beyond borders 2008 included some estimation of fourth-quarter results. Numbers may appear inconsistent because of rounding. Canadian biotechnology at a glance 2008 (US$m)
- 73. 67 is no longerfollowed by a significant number of analysts and many of the larger investment banks no longer have a separate life sciences industry group also contributed to the decline. In 2004, there were 18 full-time analysts covering the life sciences industry in Canada; at the end of 2008, there were only 3. Further, few mutual funds require a certain percentage of their investments to be in life sciences companies, and most stock market indices contain only one or two Canadian biotech companies. The number of Canadian public companies decreased by 12%, from 84 in 2007 to 72 in 2008. This was driven in part by the acquisition of successful companies. Most of the decline in company count, however, was due to clinical-trial failures, companies transforming themselves into service or resource companies, or firms being wound up or becoming insolvent. For many years, Canada was second only to the US in the number of biotech companies it had, but it now ranks third, well behind Germany. Financing In 2008, the industry collectively raised a little more than US$475 million, the lowest total since 1995. Not surprisingly, the decline accelerated in the fourth quarter, when the industry raised less than US$64 million, the smallest quarterly amount in the years that Ernst & Young has been tracking the Canadian sector. The public markets have essentially been closed to Canadian biotechs since mid-2007. The complete lack of IPOs during the year was coupled with a striking decline in follow-on public offerings of common shares or units, from US$398 million in 2007 to US$80 million in 2008. The largest follow-on offerings were by Theratechnologies for approximately C$30 million and by Akela Pharma for a little more than US$10 million. Funds raised in the “other” offerings category decreased to US$191 million from US$305 million in 2007. Of this total, private placements of equity securities represented only US$103 million, while private placements of debt (mostly convertible debt) amounted to US$87 million. The shift from equity securities to debt instruments — which accounted for 31% of total public financings in 2008, up from 17% a year earlier — indicates the level of investor uncertainty. Convertible debt allows investors to participate in any equity upside while also giving them collateral from the corporation’s assets, often ... while Biovail did better than the rest of the industry Source: Ernst & Young, finance.yahoo.com EY Canadian biotech industry represents the aggregate market cap of all Canadian public biotech companies as defined by Ernst & Young. +20% -40% -60% -80% 0% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec -20% EY Canadian biotech industryBiovail Medium cap (250m–1b) Micro cap (under 100m)Small cap (100m–250m) In 2008, the Canadian biotech industry underperformed the market ... Source: Ernst & Young, finance.yahoo.com EY Canadian biotech industry represents the aggregate market cap of all Canadian public biotech companies as defined by Ernst & Young. +20% -20% -40% -60% 0% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec EY Canadian biotech industry S&P/TSE Composite Index (Canada) S&P 500 (US)
- 74. 68 Beyond bordersGlobal biotechnology report 2009 its intellectual property (IP). If the corporation is unable to raise additional financing and is forced into restructuring or a liquidation, these investors would have rights to some of the IP and would come before equity holders in recovering at least some of their investment. Another concern is the size of the individual offerings. The average private placement of equity amounted to slightly more than US$4 million, while the average private placement of convertible debt amounted to US$3.8 million. Many of these financings were provided by existing investors to maintain minimum operations and were not sufficient for expanding operations or acquiring or developing new technologies. Similarly, follow-on offerings had an average size of only US$10 million, which is significantly smaller than most venture rounds in the US. Venture funding fell from US$353 million to US$207 million. This is roughly comparable to the annual totals during most of the last seven years (except 2007 and 2005, when more than US$300 million was raised.) Interestingly, the average venture round was about US$8 million, significantly higher than the average size of private placements in public companies. This was driven by a few large rounds raised by later-stage companies that would normally have gone public in earlier years. These included Cytochroma (US$45 million), Gemin X (US$38 million), Inimex Pharmaceuticals (US$22 million) and Klarogen Biotherapies (US$17 million). Without these rounds, which represented almost 60% of the venture financing in 2008, the average round would have been about US$4 million. Although not included in our financing data, Quebec-based Æterna Zentaris raised US$52.5 million in a royalty financing deal with Cowen Healthcare Royalty Partnership. While the sale of future royalty streams is an excellent method of raising capital in the current financial crisis — and is increasingly used in the US — it has limited applicability in Canada, where only a small number of companies have products that are marketed or close to approval. QLT redeemed US$172.5 million of convertible senior notes for cash in September. Since the publicly traded industry raised only US$271 million in aggregate during the year, this implies that net funding for the sector was less than US$100 million. Further, in December, QLT proceeded with a modified Dutch auction tender to purchase US$50 million of common shares. This process expired on January with the company repurchasing 20 million common shares. The aggregate amount returned to shareholders in these two transactions represents half of the new funds raised by the entire Canadian industry in 2008. Provincial distributions As in prior years, Quebec-based companies attracted more total investment than any other province, with US$199 million raised, followed by Ontario (US$138 million) and British Columbia (US$90 million). Quebec’s lead was facilitated by the province’s US$58 million in follow-on public financings, compared with US$20 million in British Columbia and none in Ontario. On the venture-capital front, Ontario attracted close to US$109 million, primarily related to a US$45 million investment in Cytochroma. Following Ontario were Quebec (US$51 million raised) and British Columbia (US$40 million). These three provinces accounted for 97% of total venture funding. 2008 2007 2006 2005 2004 2003 2002 2001 2000 IPOs 0 5 9 160 85 0 10 42 103 Follow-ons 80 580 925 295 296 723 186 621 364 Other 191 122 664 242 139 416 132 155 258 Venture 207 353 205 313 271 206 199 388 546 Total $478 $1,060 $1,803 $1,010 $791 $1,345 $527 $1,206 $1,271 Source: Ernst & Young, Canadian Biotech News and company websites Numbers may appear inconsistent because of rounding Canadian yearly biotechnology financings (US$m) Capital raised by Canadian province, 2008 Source: Ernst & Young, Canadian Biotech News and company websites 250 150 100 50 0 200 US$m Quebec Ontario British Columbia Alberta Other Private companiesPublic companies 148 51 30 109 78 41 8 7 3 3
- 75. 69 The number ofCanadian companies declined significantly in 2008. The number of private firms decreased from 98 to 84 in Ontario, from 87 to 78 in Quebec and from 57 to 55 in British Columbia. Meanwhile, public companies decreased from 24 to 20 in Ontario and from 25 to 21 in Quebec. Since 2004, all provinces except British Columbia have experienced significant declines in the number of companies, including drops of 44 companies each in Quebec and Ontario. Deals As mentioned above, several successful Canadian biotechs were acquired in 2008. The two largest deals — Aspreva’s acquisition for US$0.9 billion by Galenica Group and Axcan’s purchase by TPG Capital for US$1.3 billion — were among the largest deals ever seen in the Canadian biotech industry. Both transactions were announced in 2007 and completed in early 2008. In addition to these two takeovers, Draxis Health was acquired by India’s Jubilant Organosys for US$226 million, and Arius Research was acquired by Roche for US$190 million. Atrium Innovations sold its active-ingredients and specialty- chemical divisions for US$166 million in cash. Atrium will now become a health and nutrition pure-play corporation. On the private-company side, Oryx Pharmaceuticals was acquired by Sepracor for US$50 million. Shareholders could receive an additional US$20 million upon accomplishment of various regulatory milestones. The year saw several notable strategic alliances as well. In January 2008, BioMS Medical completed a previously announced licensing and development agreement with Eli Lilly. BioMS received an up-front cash payment of US$87 million and could receive additional development and sales milestones up to US$410 million as well as escalating royalties on commercial sales. Aegera Therapeutics outlicensed its oncology drug AEG40826 to Human Genome Sciences in exchange for US$20 million in up-front payments including US$5 million in equity. Aegera could also receive up to US$295 million in future development and commercial milestone payments and double-digit royalties. Theratechnologies signed a collaboration and licensing agreement with EMD Serono (a subsidiary of Merck-Serono) for the exclusive commercialization rights to Tesamorelin in the US. Theratechnologies, which retained ex-US rights, received US$30 million up front (including an US$8 million equity investment and a license fee of US$22 million) and could receive up to an additional US$285 million in development, regulatory and sales milestones plus royalties. In addition, there were at least seven other pharma-biotech strategic alliances and in excess of 35 biotech-biotech agreements, mostly with small deal values. In the current environment, a number of small deals were structured to generate near-term cash for struggling companies or to cut costs by offloading ancillary products or sharing services with other corporations. These included Cipher Pharmaceuticals’ development, distribution and supply agreement with Ranbaxy Pharmaceuticals and MethylGene’s agreement with Otsuka Pharmaceutical to develop small-molecule kinase inhibitors for ocular diseases. Both agreements provided up-front payments of less than US$2 million but could be worth anywhere from US$20 to US$50 million, depending on milestones. Product approvals In a year when the US Food and Drug Administration (FDA) approved relatively few new molecular entities (see the US products and technologies article for details), Canadian firms had limited success bringing new therapeutic products to market. In December, Labopharm received FDA approval of Ryzolt, a once-daily, extended-release formulation of tramadol. In addition, DiagnoCure received US CLIA certification to launch Previstage, its new colorectal cancer-staging test. Bioniche Life Sciences also received licensing approval by the Canadian Food Inspection Agency for Econiche, a cattle vaccine to reduce E. coli 0157 shedding. Canada has 22 public companies as well as some private firms with drugs in Phase III trials. In recent years, approvals at the FDA have slowed, but the Obama administration is looking at overhauling the agency in part to speed Capital raised by leading Canadian biotech clusters, 2008 Source: Ernst & Young, Canadian Biotech News and company websites Size of bubbles shows number of financings per region $250 $150 $100 $50 $0 $200 Totalcapitalraised(US$m) 0 20 40 60 80 100 120 Halifax Quebec Vancouver Montreal Toronto Venture capital raised (US$m)
- 76. 70 Beyond bordersGlobal biotechnology report 2009 approvals. (For more details, refer to the US public policy article.) Companies looking to get new products approved and concerned about survival will need to monitor these changes. Consolidation and survival The funding crisis is threatening companies’ survival. Fifty-seven percent of companies had less than a year’s worth of cash as of 31 December 2008, while 76% had less than two years’ worth. Reflecting this reality, 43 of the 72 public companies had full going-concern disclosures in their 2008 financial statements, indicating that management believes they have less than a year’s worth of cash. In the past, most companies in this situation were able to raise funds to continue, but now this is more difficult since the industry has an unprecedented number of companies with little cash, very low market values and a lack of new buyers. Only 45 of the 72 public companies have noninterest revenue, much of which is generated from research collaborations and other precommercial activities; and only 24 of these firms have approved products. For the two-thirds of public biotech companies that do not yet have approved products, access to funding will be critical. In 2008, Canadian public companies raised only US$271 million in aggregate, which is significantly below the industry’s burn rate and represents about one-third its R&D expenditures. Without renewed funding, significant consolidation will be the most likely outcome. Not surprisingly, six public companies essentially closed operations in 2008, and 20 of the 72 remaining companies have announced that they are actively pursuing strategic alternatives such as reorganization or sales. If these trends continue, the Canadian biotech industry could emerge from the financial crisis much smaller and essentially restricted to the three major clusters in Montreal, Toronto and Vancouver. For Canadian biotech companies, investors and policy-makers, this is now a time of reckoning. If the industry is to survive in any meaningful, sustainable way, it will need new approaches to address the substantial gaps and challenges ahead. The government could play a constructive role by helping to align incentives and fill funding and other gaps. Data from Statistics Canada show that, while the federal government spent US$920 million on biotechnology scientific activities in the year ending 31 March 2008, only US$15 million of that total is related to business enterprises. And while this investment is probably at least matched by provincial contributions, the vast majority of those funds are for pure research. These expenditures may advance science and contribute to many new and innovative biotechnology products, but without robust funding and a strong domestic industry, these inventions will be commercialized by foreign companies with little economic benefit to the Canadian economy. One mechanism the government uses to boost biotech is the scientific and experimental development tax credits (SR&ED) program, which returns cash to private companies based on R&D spending, and is augmented by similar programs in many provinces. While these programs greatly benefit private firms, they may be less useful to many companies in the current environment. As venture-capital firms cut back on early-stage financing, many companies lack the funds to invest in R&D and avail themselves of the credits. Further, these credits are of little value to public companies since they can only be offset against taxable income, which few public Canadian biotechnology companies have. For public companies, making a portion of the SR&ED tax credits and unused SR&ED expenditures refundable would provide immediate relief. Other programs to spur investor interest within the sector could include: “flow-through shares” for public companies, which would permit shareholders to deduct a proportionate share of R&D expenditures; Canadian biotech industry indicators, 2000-08 20 6 4 2 0 14 18 US$b 8 10 12 16 500 150 100 50 0 350 450 200 250 300 400 Source: Ernst & Young 2000 2001 2002 2003 2004 2005 2006 2007 2008 Revenue Number of companiesMarket capitalization
- 77. 71 deductions from incomefor capital losses incurred from direct investments in new shares of public companies; and methodologies to permit investors to deduct direct investments into public companies against income, using a stock savings or similar mechanism. Programs to reduce the perceived risk associated with start-up investments could also help attract investors. These could include matching government funds for start-ups and grants based on employment creation in start-ups. A number of companies have Phase III products that require at least two or three years of additional funding. A loan program to assist such firms with commercialization would be beneficial at a time when the lack of funding could cripple promising projects or push them abroad. While Canada’s Innovation & Technology Office provides funding to a number of industries, such as aerospace, it has not provided these funds to biotech for many years. These measures could help the industry survive the drought. Longer term, however, it will need to become more self-sustaining and not rely on government incentives. Canadian companies will need to behave more like American firms, which focus on the commercial potential of products and less on pure research and very early-stage products. Such a commercial focus with significant attention and resources committed to moving products with good commercial potential toward approval as soon as possible should reduce risks and attract investors. While the Canadian biotech industry will experience significant financial challenges in the near term, about one-third of public companies with approved products are generating revenue, and their revenue growth has been substantial in recent years. These companies will provide a basis for the industry’s continuance into the future. But companies that do not have approved products need a chance to start generating revenue, and unless the industry funds new start-ups, Canada will become a small player in the global industry. Canadian biotech companies by province, 2008 90 30 20 10 0 70 80 40 50 60 Source: Ernst & Young Private companies Public companies Number of companies Ontario Quebec British Columbia Alberta Saskatchewan Nova Scotia Manitoba Prince Edward Island New Brunswick Newfoundland
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- 79. The European perspectiveTheEuropean perspective
- 80. 74 Beyond bordersGlobal biotechnology report 2009 For the European biotech industry, the last few years have seen sustained growth across several fronts — much-needed progress after a prolonged period during which the sector struggled with a challenging financing environment and anemic growth. In 2008, the industry’s success streak may have been brought to an abrupt halt by the global financial crisis. While Europe’s leading mature firms continue to post strong financial results, the environment facing many smaller companies is much more challenging. Financial performance Revenues of publicly traded European biotechnology companies increased 17%, from €9.6 billion in 2007 to €11.2 billion in 2008. This compares favorably to the 6% decline in revenues the industry experienced in 2007. However, as noted in last year’s Beyond borders, the 2007 numbers had been skewed by the acquisition of Serono by Merck KGaA, which had removed one of Europe’s largest biotech companies from the industry. Adjusted for the Serono acquisition, the 2007 growth rate was 20% — roughly on par with the 2008 growth rate. Not surprisingly, the vast majority of this increase in revenues came from a handful of mature European biotechs. In particular, the industry’s performance was boosted by top-line growth in excess of 20% at Elan (based in Ireland), Eurofins Scientific (France), Meda (Sweden) and Qiagen (the Netherlands), while Switzerland-based Actelion and British specialty pharma Shire grew by 16% each. For the most part, these impressive increases are attributable to strong product sales at these firms. The bottom line of publicly traded companies also improved significantly, from a net loss of €1.6 billion in 2007 to €478 million in 2008 — a 70% decline in net loss and a historic low of less than 4% of revenues. Over 40% of this improvement came from just two companies — Shire and Actelion. Actelion’s 2007 bottom line had been impacted by a significant in-process research and development charge. Financing As in most markets, the global financial crisis hindered biotechnology companies’ access to capital, and this was clearly visible in the European industry’s financing totals. By amount of capital raised, 2008 was the third-worst year in the past decade, ahead of only 2002 and 1999. The European industry’s fundraising fell from €5.4 billion (US$7.4 billion) in 2007 to less than €2 billion (US$2.9 billion) in 2008. The bulk of this reduction was in funding for public companies, which shrank from more than €4 billion (US$5.5 billion) in 2007 to only €833 million (US$1.2 billion) in 2008. This is not surprising, given that the global turmoil in stock markets saw public company financing for biotechnology plummet in most major markets. The European industry was subject to the same trends — the industry’s market capitalization fell 34% as investors slashed a substantial €20 billion from the valuations of Europe’s biotech firms. The market for IPOs, which had trickled along in the first half of the year — producing only three IPOs that generated a relatively small €75 million (US$111 million) — evaporated entirely as the financial crisis set in. But while the global financial crisis has certainly made matters worse, Europe’s financing challenges pre-date the worst of the crisis. Indeed, the public markets have been cool to biotech investments since the second half of 2007, when what was then called the credit crunch prompted investors to abandon stocks with greater perceived risk. In the first two quarters of 2007, biotech companies raised €600 million (US$822 million) through IPOs and more than €3.1 billion (US$4.2 billion) through follow-on and other public offerings. In the European introduction Staying afloat? Public companies Industry total 2008 2007 % change 2008 2007 % change Financial Revenues 11,228 9,591 17% 15,348 13,553 13% R&D expense 3,516 3,409 3% 6,812 6,571 4% Net income (loss) (478) (1,588) -70% (1,994) (3,077) -35% Industry Market capitalization 38,487 58,727 -34% — — — Total financings 833 4,269 -80% 1,764 5,438 -68% Number of IPOs 3 21 -86% 3 21 -86% Number of companies 178 185 -4% 1,836 1,869 -2% Number of employees 49,062 47,775 3% 85,612 83,330 3% European biotechnology at a glance (€m) Source: Ernst & Young and company financial data For methodology, refer to table on page 34
- 81. 75 six quarters since,the cumulative amount raised has been less than 40% of the total raised during the first six months of 2007. A large part of this decline is in follow-on and other financings, which withered from €3.5 billion (US$4.8 billion) in 2007 to less than €800 million (US$1.2 billion) in 2008. In contrast with 2007, when there were eight transactions above the €100 million mark, there was only one such financing in 2008. Venture financing held up better than the public markets in 2008. But even here, the amount raised was 20% lower than in 2007. Venture funding fell from €1.2 billion (US$1.6 billion) in 2007 to €932 million (US$1.4 billion) in 2008 — one of only two years since 2000 in which the amount of venture capital raised by the European industry has dipped below €1 billion (US$1.5 billion). Venture investors have been demonstrating a lower appetite for risk, preferring companies with more advanced pipelines that offer relatively low-risk, short-term return horizons. Reflecting this trend, the year’s three largest first-round financings were completed by companies with programs in clinical development and with their origins in established pharmaceutical companies. Deals Deals are a perennial presence in the biotech industry, and the volume and potential value of transactions conducted by European biotech companies remained fairly strong in 2008, despite the financial crisis. In fact, the challenging times may have spurred deal activity in some cases, as distressed circumstances drove firms to find solutions through partnerships while private investors sought exits through acquisitions. During the year, European biotechs announced M&A transactions worth a total of €3.4 billion (US$5.0 billion), split somewhat evenly between biotech-biotech and pharma-biotech transactions. While this total is far lower than the €14.3 billion (US$19.6 billion) of M&A transactions in 2007, the 2007 totals had been skewed by three deals (Merck KGaA/Serono, Qiagen/Digene and Shire/New River). After adjusting for these large deals, the 2008 numbers represent an 81% increase relative to 2007. On the strategic alliance front, the total value of transactions decreased by twelve percent in 2008, to €8.8 billion (US$13.1 billion). While novel clinical-stage product candidates continued to command impressive premiums in alliances, there was also strong deal-making activity around preclinical assets. Indeed, 11 of the 15 largest European deals in 2008 involved discovery programs or assets in preclinical development. Some deal trends were driven by larger challenges facing the industry. For instance, as big pharma companies attempt to reinvent themselves (see the “Reinvention and reinnovation” article in Beyond borders 2008 for details), several of these firms are seeking to rationalize operations and divest themselves of noncore assets — leading to a number of transactions in which smaller European firms inlicensed commercialized products from large companies. And as companies face increased risks even after product launch — from greater post-marketing safety surveillance and a changing pricing and reimbursement environment — this reality drove a number of deal structures in which contingent payments are linked to commercial milestones such as sales performance rather than R&D milestones. Products and pipeline The industry had a mixed performance with regard to product approvals and pipeline development. Building on the success of Ernst & Young survival index: Europe Source: Ernst & Young and company financial data Numbers may appear inconsistent because of rounding 2008 2007 2006 2005 Number of companies Percent of total Number of companies Percent of total Number of companies Percent of total Number of companies Percent of total More than 5 years of cash 50 28% 68 37% 61 38% 51 39% 3–5 years of cash 13 7% 26 14% 18 11% 20 15% 2–3 years of cash 24 14% 18 10% 17 11% 15 11% 1–2 years of cash 25 14% 40 22% 35 22% 25 19% Less than 1 year of cash 66 37% 33 18% 30 19% 21 16% Total public companies 178 185 161 132
- 82. 76 Beyond bordersGlobal biotechnology report 2009 previous years, the pipelines of European companies grew across all phases of clinical development during 2008. The number of candidates in the aggregate pipeline of the industry increased by more than 10% relative to 2007, bringing the total number of candidates in clinical development to more than 1,000. The news was not as strong on the products front. Only one new molecular entity received US Food and Drug Administration approval, while two received approval from the European Medicines Agency for marketing throughout the European Union. In addition, product-approval success was dominated by specialty pharmaceutical companies, while approvals secured by “core” biotechnology companies were mainly new formulations of already-approved and marketed products. Staying afloat? For many privately held and small-cap European biotechnology firms, access to capital has become very difficult in the aftermath of the global financial crisis. With the waters from the market meltdown rising all around them, many are having to take urgent measures simply to stay afloat. Without funding options, many of those that are currently treading water will not be able to do so indefinitely, and will either have to sink or be “rescued” by an acquirer. In 2008 and early 2009, a number of firms took measures to jettison noncore assets and operations as part of restructuring programs. Companies terminated or froze pipeline projects, reduced headcount and spun off divisions. Those that had the means to do so sometimes acquired cash-generating assets, while several firms were able to raise capital from nontraditional sources such as government grants and royalty financing transactions. It is likely that many firms will survive through measures such as these, but it is also clear that others will not. Indeed, a number of companies have already gone into administration or liquidation in 2008, and more are expected to follow suit in 2009. Beyond the sink-or-swim moment confronting many European biotechs, however, is the larger question of the sustainability of the industry itself. Late in 2008, fearing the long-term damage that might be caused by a prolonged funding drought, particularly to small, early-stage companies, national industry associations and other biotech interest groups began to encourage European governments to act. In December, executives from the UK’s biotechnology industry sent a dossier to the UK government proposing a national £1 billion (US$1.85 billion) biomedical public-private partnership with half coming from public funds and half from private investors. The proposals envisage the creation of two funds — one to fund mergers and acquisitions between smaller biotechs, drive consolidation and generate critical mass, and the other to provide capital for “high-potential” candidates. As this publication goes to press, the UK Government has announced the introduction of a £750 million Strategic Investment Fund for emerging technologies, including biotech, and is launching a review to consider whether and in what form further intervention is required. In February 2009, France Biotech called on the French government to enact a stimulus plan to rescue smaller companies following a collapse in biotech funding. The group called for a wide-ranging package of interventions, including boosting the budget of the state innovation agency OSEO; distributing R&D tax credits more equitably between small/ medium sized businesses and multinationals; refocusing the government’s Strategic Investment Fund (FSI) toward innovative companies; and enacting tax breaks for investment in small innovation-led companies. In January 2009, one European country did take positive action: the Norwegian government included a €318 million (US$467 million) provision for life sciences research as part of a wider stimulus package. The government hopes that the intervention — the first such action in Europe this year — will help support companies through the funding crisis. Looking ahead The European industry’s financial results showed sustained growth in 2008, but as always much of this success came from a few mature companies. While these leading firms will remain largely unaffected by the crisis, the reality facing many smaller European companies is vastly different. Many small-cap and private companies will continue to take urgent measures to raise capital and reduce cash burn, but the number of companies in the industry is still expected to decrease in 2009 and 2010 through M&As, bankruptcies and liquidations. While government interventions such as those enacted by Norway could help struggling biotech companies, it is not clear that other national governments are ready to follow suit — after providing capital to shore up the banking sector, European leaders are being scrutinized by taxpayers, who generally do not favor “bailouts.” If governments do act, however, they should not just provide lifelines for companies in danger of going under, but rather look for measures that will promote the long-term viability of the industry.
- 83. 77 Exceptional times spurexceptional creativity. While that maxim has largely held true for the life sciences industry, it is also true that the challenges companies face today are truly unprecedented. More than ever before, companies need to strike a fine balance between pressures and objectives that are often diametrically opposed. Big pharma companies need to enhance their R&D productivity while simultaneously lowering costs and protecting earnings. The financial crisis is driving many smaller companies to aggressively seek alliances to sustain operations — but depressed valuations make it harder for them to negotiate terms that will let them retain sufficient financial upside. While strategic alliances have been an integral part of the biotech business model throughout the industry’s history, the basic elements of biotech deals have not changed much during this period. Today, with biotech and pharma companies confronting such thorny challenges, are we likely to see increased creativity in structuring deals? To get some perspective from the executives most likely to be at the forefront of deal creativity, we caught up with seasoned business-development leaders from four large biotechnology and pharmaceutical companies. Roundtable on deals New deal structures for challenging times Mervyn Turner, Ph.D. Merck & Co., Inc. Senior Vice President, Worldwide Licensing and External Research and Chief Strategy Officer Jeffrey Elton, Ph.D. Novartis Institutes for BioMedical Research Formerly Senior Vice President of Strategy and Global Chief Operating Officer Naseem Amin, M.D. Biogen Idec Senior Vice President, Business Development John Goddard AstraZeneca PLC Senior Vice President, Strategic Planning and Business Development Ernst & Young: The life sciences industry faces unprecedented challenges — from big pharma’s need to reinvent its business model/R&D approach, to the funding challenges of emerging companies. What challenges or bottlenecks are you currently facing that could be addressed through strategic alliances? Goddard: The most significant challenge is the one that big pharma is collectively struggling with — how do we continue to grow revenues at historical rates when we have a headwind of patent expiries of some of our most successful drugs? This means we need ways to boost R&D productivity and bring enough innovative new drugs to market to replenish and grow the top line. So deal-making becomes one way to fill the revenue gap. It’s by no means guaranteed to be successful, but it’s one way to go. Turner: Our biggest challenge as an industry is increasing the productivity of R&D. Look at where our billion-dollar drugs have come from and you’ll see that this industry survives on two or three new mechanisms a year. But we are not very good at identifying early the ones that are likely to succeed. While the number of candidates in Phase I and Phase II clinical trials has increased steadily in recent years, there hasn’t been any corresponding increase in the number of molecules in Phase III. We need, therefore, to get better at early identification of the two or three successful mechanisms that are going to emerge each year, and at effectively separating the winners from the losers. What does this imply for deals? Our real challenge is to work with partners to triage more opportunities, more rapidly and at a lower cost using smart clinical-development strategies. One approach, of course, is using biomarker-based strategies, which give us greater certainty — positive or negative — earlier in development, so we can manage the portfolio risk more effectively. Elton: The pipeline challenges facing the industry are well known, of course, but the current environment is creating risks. Key among these is the financial strength of biotechnology companies, our prospective partners. Access to capital is much more constrained than it has been historically. Ideally, we would like to see companies reach some form of proof of concept on their platform, technology or therapeutic before we partner with them. But given the current economic climate and the venture community’s desire to fund mid- to later-stage opportunities, many firms may not be able to fund themselves through any type of reasonable proof of concept. The economic situation is also negatively impacting the academic community. Large-scale laboratories with top talent are vulnerable. And the ability
- 84. 78 Beyond bordersGlobal biotechnology report 2009 for even the largest academic institutions to provide interim funding based on income generated from endowments and discretionary funds is disappearing. The health of the entire life sciences ecosystem is a critical part of this industry’s ability to innovate. I believe we will see some transactions structured to assure the survivability of smaller companies. This is a survival strategy not only for small firms but also for large companies and, indeed, for innovation itself. Look for more deal structures with earn-outs and other structures that balance the risk of not surviving with the risks of earlier-stage innovations. To assure our own success in this environment, we are finding increasingly innovative ways of working with our partners. Amin: The current financial environment for smaller companies is creating new challenges for us as well. We are seeing an increasing number of companies facing financial challenges and approaching us for partnerships. Even before the present crisis, there were constraints on our ability to make deals, and I’d highlight three. The first constraint is our competency in assessing opportunities outside our core therapeutic areas. When we go outside therapeutic areas and disease pathways where we have extensive knowledge and expertise — such as neurodegenerative, immunology, oncology and acute heart failure — we would need to rely much more on outside experts to help us assess and identify opportunities. As a result, we’ve been reticent to partner outside these areas. Our second constraint is resources — we already have a large late-stage clinical pipeline today, which is, of course, both people- and capital-intensive, so adding more clinical-stage opportunities at present is not a high priority for us. Our third key constraint is the amount we can allocate to R&D. Our R&D spend is about 30% of revenues, which is one of the highest in the industry. And while, as a profitable, cash-flow-positive company we aren’t strapped for capital the way many smaller firms are today, we still have to meet our profitability goals. In the current environment, we are seeing falling valuations of companies. In situations where we are not making an outright acquisition but we are buying equity in the other company as part of a strategic relationship, how those assets are valued is a concern, and there is the risk of having to take write-downs. Ernst & Young: Where do you see the balance of power between large and small companies today? What implications does this have for deal-making? Amin: Clearly, the environment is very tough for small companies right now. Many would argue that this is a buyer’s market. But those buyers still need to find quality assets, and the quality of the asset drives value. So innovative, promising assets will still be valued fairly, because often more than one company will recognize the asset’s potential. But it’s not just about balance of power — you also need a balance of incentives. If large companies want to retain the culture and entrepreneurship of their small-company partners, then they need to negotiate appropriate incentives and remain open about how rights and risk are shared. Goddard: Has the balance of power changed? Absolutely. But what hasn’t changed is how we value an asset. We still do the same analysis to determine how much we think an asset is worth to us. In an acquisition, we always like to think we strike a fair price based on market conditions — the quality of the asset, the number of people who wish to buy it and how much they’re prepared to pay. But we would never pay more than we think it’s worth, because that would destroy shareholder value. In an alliance, other considerations can enter the picture. If you’re doing a license deal rather than an acquisition, you want to make sure that the asset you’re licensing is developed in ways both partners want — so any agreement would need to be clear on matters such as development plans, resources, conflict resolution and change of control. Elton: I agree. We can talk about bargaining power all we like, but the simple truth is that nothing is a bargain if it fails. So if an asset is high-quality, and if it makes sense for the buyer economically as well as from a scientific perspective, then it’s in the buyer’s interest to pay a price that reflects the asset’s market value. If you’re not careful, you can de-motivate your “Our biggest challenge as an industry is increasing the productivity of R&D. Look at where our billion-dollar drugs have come from and you’ll see that this industry survives on two or three new mechanisms a year. But we are not very good at identifying early the ones that are likely to succeed.” “We can talk about bargaining power all we like, but the simple truth is that nothing is a bargain if it fails ... The true spirit of partnership is neither about dumping lots of money on somebody nor about seeing how little you can get away with paying. Instead, it’s about making sure that everybody believes the deal is fair, feels motivated by the structure and incentives, and knows that when there is an upside, all parties will get an appropriate share of the return.”
- 85. 79 partners to thedegree where they are not incented to maximize what they are doing for you. The true spirit of partnership is neither about dumping lots of money on somebody nor about seeing how little you can get away with paying. Instead, it’s about making sure that everybody believes the deal is fair, feels motivated by the structure and incentives and knows that, when there is an upside, all parties will get an appropriate share of the return. Ernst & Young: Strategic alliances are essentially about the sharing of risk and reward. Do you see any changes in how risk is being shared between large and small companies? Turner: There’s a lot of talk about the balance of risk having changed in favor of big pharma. I would say that isn’t true. We’re absorbing far more risk now because of the increase in failure rate in late-stage development. We’re seeing Phase III failures at unprecedented levels, and they’re failing for strategic reasons. Either they’re not meeting the commercial goals because of imposed hurdles, or they’re not overcoming emerging safety issues, or they’re just plain ineffective. I realize that biotechs also face a lot of risk. Their risk is in the capital market — their inability to progress their assets to a point where they can get a true value inflection. We’re all in a very difficult situation when it comes to risk. Goddard: There are some basic principles that always hold true. In an acquisition, the buyer takes on all the risk of projects, while a licensing deal is a way of sharing that risk. Of course, everything else being equal, in most cases, our preference would be to share the risk through alliances rather than acquisitions. One thing that has changed in the current environment is that cash is king and buyers have more negotiating power, so I suspect we will see more deals that are structured to share risk. I’ve seen a couple of interesting structures in the recent past. The first is alternative mechanisms of funding, such as private-equity funds, for drugs in development. A good example is the deal among TPG-Axon, Quintiles’ NovaQuest unit and Eli Lilly to pursue specific drug targets. This makes sense conceptually, but the details can be challenging. The second interesting development is acquisitions with some form of deferred contingent payments. This allows buyers to share the R&D and commercialization risk with sellers. As you know, buyers face a binary, all-or-nothing risk around whether a compound passes a particular milestone. And, as Merv points out, that risk has only gone up, with lower approval rates, delays and additional testing being requested from the Food and Drug Administration. Having to assume all that risk by making a very large up-front cash payment is enough to make even the big pharmas pause for thought. Therefore, having acquisitions with success-related payments should encourage more transactions in the current market environment. “One thing that has changed in the current environment is that cash is king and buyers have more negotiating power, so I suspect we will see more deals that are structured to share risk ... Therefore, having acquisitions with success-related payments should encourage more transactions in the current market environment.” Has bargaining power shifted toward big pharma?
- 86. 80 Beyond bordersGlobal biotechnology report 2009 Amin: One recent trend around the sharing of risk and reward is licensing deals that are nonexclusive, allowing the out-licensor to strike deals with multiple companies. These transactions are typically around platforms and would probably be fraught with challenges if applied to a particular compound (unless it involved a very different delivery system). What’s changed in recent months, of course, is that valuations have plummeted. At a time of depressed valuations, buyers need to find ways to leave enough upside incentive for smaller companies to remain viable and entrepreneurial. If the seller only has one asset and you are going to enter a partnership with them in which you bear all the risk, then you’ve left no incentive for the seller to perform. So I think we may see more creative use of geographic rights. Buyers could consider deals where they take overseas rights and leave US rights for the seller. With large companies becoming increasingly global and getting more of their revenues from overseas, this could be a win-win. It allows a buyer to get rights that they are better equipped to exploit than a small seller, while still giving the seller lots of potential upside through the US rights. Ernst & Young: Big pharma companies are now going out of their way to preserve the independent names, workforces and cultures of the smaller companies they acquire. How well do you think these efforts will work, and do you see them leading to real dividends in R&D productivity? What other changes, if any, are needed for this approach to succeed? How will the competing pressures of boosting innovation versus cost-cutting play out? Turner: This is something we’ve tried with some of our platform acquisitions, such as Sirna and GlycoFi. We purchased them at an immature stage of development. These platforms were developed by very creative and entrepreneurial scientists and we wanted to move those platforms from 50% or 60% completion to the finish line. So, we needed to make sure that the people who knew the area the best remained motivated. So far, it has worked. Our GlycoFi team, for example, has been enormously motivated by their move to Merck, and they are excited about the expanded opportunities we’ve been able to offer them. Regarding the cost-versus-innovation question, certainly there is a cost associated with maintaining large numbers of autonomous subsidiaries. But I can tell you that the organization I run is all about searching for innovation, and we have been unencumbered by the (quite appropriate) focus on driving down the cost base. That’s not to say that we spend our money recklessly. We don’t. But while we have a fiduciary responsibility, our prime responsibility is to find innovation opportunities. That’s why we have a scouting model, with individuals around the world who function as our antennae in the local biotech and academic communities. It’s an innovation-based business. And at the end of the day, you can’t cost-cut your way to a pipeline. Elton: Large pharmas are looking for ways to become more entrepreneurial — ways to combine the incentive structures and motivational factors of smaller companies with the larger scale of big pharma. I think some of these new models that maintain some degree of autonomy are moving in the right direction. For any individual project, this model offers an answer for a period of time, but it would likely need to change down the road. The strengths of the autonomous unit that helped get something through clinical trials may not be the best thing to handle broader-scale commercialization. Goddard: Time will tell how successful this approach is. We’ve certainly used it with some of our acquisitions, but you need to evaluate its relevance on a case-by-case basis. It’s easier to use this model when the acquired assets are very different from the rest of your business. For instance, if you acquire biologics assets, where many aspects of R&D and manufacturing are different from small-molecules activity, then it’s easier to argue for the intangible benefit of keeping the acquisition autonomous versus the tangible synergies from integration. I would emphasize two additional points. First, by preserving an entity separately, you clearly retain some strategic flexibility down the road that you would lose if the asset was totally integrated. The second point I would make is that the real test always comes when a difficult decision has to be made and it’s no longer being made by the top person in the acquired company. There may come a point when there’s a difference of “Regarding the cost-versus-innovation question, certainly there is a cost associated with maintaining large numbers of autonomous subsidiaries. But I can tell you that the organization I run is all about searching for innovation, and we have been unencumbered by the (quite appropriate) focus on driving down the cost base ... And at the end of the day, you can’t cost-cut your way to a pipeline.” “At a time of depressed valuations, buyers need to find ways to leave enough upside incentive for smaller companies to remain viable and entrepreneurial ... Buyers could consider deals where they take overseas rights and leave US rights for the seller. With large companies becoming increasingly global and getting more of their revenues from overseas, this could be a win-win.”
- 87. 81 opinion between theautonomous unit and the parent company, and that’s when the limits of independence get truly tested. Ernst & Young: Could you discuss some examples of deals that you consider “creative”? Amin: One area where I’m seeing a creative approach is where multiple competitors are collaborating to develop a shared resource in certain challenging or precompetitive areas. One example is answering challenging questions that are an Achilles heel for everyone competing in a given disease. For instance, we may not have enough information for a given disease on what distinguishes responders from nonresponders to current treatments. Trying to answer this may be too expensive or resource-intensive for any one company, but if several of us who are trying to address the same problem come together, at least we can collectively try to answer the question. This lack of information is a bottleneck that’s holding us all back, so once it’s addressed we can each take our best shot at developing our drugs. Turner: In terms of specific examples, I like the deal we closed with ARIAD Pharmaceuticals for their mTOR inhibitor in late-phase clinical development for the treatment of metastatic sarcomas. We recognized their expertise and their ability to continue the development for that particular molecule for the sarcoma indications. That deal has several interesting financial structures, which I believe meet the needs of both parties. I would also highlight the acquisition of GlycoFi. That was a very interesting technological play and an extraordinary tour de force of modern molecular biology done on a shoe string. We were very pleased with the way that developed for us. It allowed us to think about biologics for the first time, almost to the degree of precision that you can think about small molecules. As a company trying to build its way into the biologic space, this seemed to be an excellent way for us to get our feet wet. Elton: I can think of a couple of models that may be particularly relevant at the current time, when it’s vital that we maintain a sustainable ecosystem of companies. The first involves companies with proven teams that have successfully delivered projects to the clinic but which are currently without a program. We have novel structures where we identify a target and implant that as a program inside the other company “One area where I’m seeing a creative approach is where multiple competitors are collaborating to develop a shared resource in certain challenging or precompetitive areas ... Trying to answer this may be too expensive or resource-intensive for any one company, but if several of us who are trying to address the same problem come together, at least we can collectively try to answer the question.” Focus Diversify Cut costs Protect upside Spend to innovate Partner to survive Are today’s challenges pulling companies in opposite directions?
- 88. 82 Beyond bordersGlobal biotechnology report 2009 with distinctive capabilities in that specific area. This benefits them but can also benefit us tremendously, allowing us to overcome capacity constraints and tap different creative approaches to the same problem — which is obviously a big part of improving R&D productivity. The second model is the one we just discussed, where you acquire another firm and maintain its operating autonomy. The other firm has relatively advanced programs, has clearly been successful and you want to continue that success. Our acquisition of Protez Pharmaceuticals would be one example, and there are certainly others in the recent past. What’s really interesting, though, are the models and approaches that we might start to consider at a time when we all face such tremendous challenges. Could big pharma companies get creative and explore ways to combine their clinical and scientific expertise with private-equity or venture-capital investing principles? They could bring a more integrated approach and invest on a larger scale than private investors alone. What if a pharma created a portfolio of investments in specific scientific areas of interest — newly emerging technologies, sets of targets or focused pathways — and matched those investments with internal resources? Could we use our current economic challenges to revisit the industry’s organizational model and approach to the value-chain specialization? As we all know, big pharmas, and even some mid-cap pharmas, have a high degree of vertical integration. Today, many of these companies are massively downsizing in specific disease areas or stages of the value chain. Eventually, they will get to the point where they no longer have enough scale, critical mass and expertise to effectively conduct those activities. Rather than slowly reaching that point of diseconomies of scale, it would be better to turn over those stages of the value chain to someone else. The first wave of outsourcing to India and China was primarily driven by cost-cutting in areas such as chemistry. We could now look at partnering with Asian companies around entire areas of the value chain. We could look at bringing in outside capital from private equity and others and set up new companies. A third area where we could get more creative is around mid-size companies pooling some of their discovery and early clinical approaches to specific emerging target areas, in combination with investing companies. The firms could prenegotiate terms around the resulting assets — right of first refusal, allocation by geographic area, etc. One approach could even be for European, American and Asian mid-size firms to partner, which would make the allocation of geographic rights quite straightforward. For mid-size firms, the risk and cost from the failure of a lead clinical program is so high in the current environment. If the next program is five years behind the lead one, the firm may not be able to continue. But this sort of pooling arrangement would greatly enhance the ability of such firms to withstand failures. Ernst & Young: What advice do you have for small and mid-size biotech companies in the current deal environment? Turner: It’s tough out there. We all have to recognize the realities of the marketplace and the very high hurdles for drug approval and reimbursement. So my advice is focus, focus and focus. Do everything you can to develop the highest quality asset you can provide. It’s an almost worthless piece of advice, because it’s as obvious as it is difficult, but that’s what it will take to succeed. Elton: In this environment, many small and mid-size companies may see getting acquired as their exit. But I don’t think you can plan on being acquired. So, in spite of their considerable constraints, these companies need to remain focused on what is going to bring therapeutic value to patients. In addition, they might want to identify other companies with which they could have some complementarities, and consider a combination to enhance the likelihood of reaching that next value-creating milestone. Goddard: I would say: understand what you have, and understand what it’s worth. At big pharma, we often find that when we do due diligence in a deal, the smaller company’s asset is not quite as good as they think it is. That sets back the negotiation while the smaller firm realigns its thinking and recalibrates its expectations. In this environment, a biotech company will need a realistic assessment of its asset, how much it will cost to advance it to the next stage, and what the company’s true options are. With that, they’ll be better prepared for negotiating rather than conducting strategy on the fly. “What’s really interesting, though, are the models and approaches that we might start to consider at a time when we all face such tremendous challenges. Could big pharma companies get creative and explore ways to combine their clinical and scientific expertise with private-equity or venture-capital investing principles?”
- 89. 83 Ernst & Young:At a time of tremendous economic uncertainty, let’s close with some predictions. What deal trends and developments might we see in the next 12-24 months? Do these trends have any implications for large companies, small companies and overall deal creativity? Turner: The physicist Niels Bohr once famously said that prediction is very difficult, especially about the future. Still, I think it’s safe to anticipate additional rounds of consolidation across all tiers of the drug industry — big pharma and small and large biotechs. As we have already observed, big pharmas, because of their pipeline issues, will be active acquirers if they see quality assets at a good price. The big challenge for all of us will be to identify unsuccessful programs more quickly and cheaply. What sorts of deal structures will emerge around those principles? That should be very interesting to watch. Goddard: With all due respect to Niels Bohr, I think it’s actually become somewhat easier to make some predictions in the current environment! The lack of funding has left many companies with few good options, so there’s no doubt that the number of smaller companies is going to decrease. But I think these difficult economic circumstances will be somewhat Darwinian. While there’s always the risk that we will fail to fund what might have turned out to be the next big thing, I suspect that the truly promising candidates will still find ways to raise capital. And when we look back in 20 years, this will probably be a blip rather than the elimination of an entire wave of new science. Amin: I agree that more consolidation is in the works, but in my mind that raises some concerns about the industry’s ability to innovate going forward. First, with fewer companies, there will be fewer platforms and products entering the drug-development funnel, which will hurt us all in the long run. Second, many mergers are driven by commercial considerations — scale economies, expanded reach and so forth — which don’t fundamentally drive innovation. If anything, there’s the danger that acquirers could become distracted by integration issues after a merger and less focused on innovation. Third, as large numbers of companies go under, this is likely to reduce the appetite for risk, leading to less funding in the future. All of this is worrying, because for innovation, the model still needs to be driven by smaller companies, which is where the real breakthroughs often originate. Elton: If I could take some liberties to peer beyond your 12–24 month window, I see a somewhat different picture. First, no matter how you slice the numbers, the longer-term outlook for life sciences is very attractive. We have more people around the world with the capability to access therapeutics. We have more people that are living longer, at much higher functional levels. And we have health systems that want to keep these people productive for longer without needing to put them into high-cost institutions. So under any scenario you can create, under any economics — even if we see our fears about pricing pressures and everything else come true — the sheer numbers will work in our favor. I can’t paint a picture where the fundamental outlook in terms of the demand for innovative medicines is not attractive. One question is where those innovative drugs will be developed. So far, the United States, along with a few other countries, has been a leading innovative force. The US industry has benefited from its pioneering venture-capital community, its long history of funding from the National Institutes of Health (NIH), its strong research infrastructure and its ability to attract top talent to its universities and research-based companies. But the US has been hit hard by the economic crisis, while other countries are investing in biotech and are now benefiting from “returnees” who are creating new centers for life sciences. As policy-makers and business leaders move to revive the US economy, we all need to focus on the issues that will keep this innovative industry going — NIH research funding, supportive immigration policies and funding for early-stage, higher-risk opportunities. We may even need to apply some of the stimulus funds to ensure that these early-stage companies don’t disappear, because that could have such a high cost for long-term innovation. In the life sciences industry and beyond, we are in a climate of tremendous uncertainty that is forcing us to question even our most basic assumptions — how do we organize, what’s efficient, how do the fundamental economics of risk and reward play out? This, more than ever, is the time for us to rapidly adopt new models of collaboration and cooperation that we’ve been talking about for a long time. And that is the real opportunity that any market downturn brings. “Understand what you have, and understand what it’s worth ... In this environment, a biotech company will need a realistic assessment of its asset, how much it will cost to advance it to the next stage, and what the company’s true options are. With that, they’ll be better prepared for negotiating rather than conducting strategy on the fly.”
- 90. 84 Beyond bordersGlobal biotechnology report 2009 After several years of sustained growth, European biotechnology financing fell dramatically in 2008 because of macroeconomic events. With less than €2 billion (US$2.94 billion) raised, 2008 was the third-worst year in the past decade for European biotech financing, ahead of only 2002 and 1999. The bulk of this collapse came from the disappointing totals in public-equity financing, which shrank from a recent high of more than €4 billion (US$5.49 billion) in 2007 to only €833 million (US$1.22 billion). The market for IPOs all but disappeared — only €75 million (US$111 million) was raised, and there were no stock-exchange debuts at all in the second half of the year. Follow-on and other financing also shrank to less than €800 million (US$1.18 billion). And while venture capital held up better than the public markets, the amount raised was still 20% lower than in 2007. Investors retreat Conditions in the public markets severely restricted the ability of companies to undertake IPOs or follow-on offerings, driving down the total amount raised from public markets to levels not seen since 2003. Only three companies successfully completed IPOs in 2008, raising a total of €75 million (US$111 million), and follow-on and other financing fell to €758 million (US$1.12 billion), from €3.5 billion (US$4.8 billion) in 2007. The public markets have cooled dramatically toward biotech investments since the second half of 2007, when the onset of the credit crunch prompted investors to flee to stocks with less perceived risk. In the first two quarters of 2007, biotech companies raised €600 million (US$822 million) through IPOs and more than €3.1 billion (US$4.3 billion) through follow-on and other public offerings. The falloff since then has been striking — in the six quarters since, the cumulative amount raised has been less than 40% of the total raised during the first half of 2007. Venture financing held up better than the public markets in 2008. Nevertheless, with €932 million (US$1.37 billion) secured by European biotechs, the amount raised in 2008 was down 20% relative to the €1.17 billion (US$1.6 billion) secured in 2007. This represents the second consecutive year of decline after the all-time high achieved in 2006, and it is one of only two years since 2000 in which the amount of venture capital raised by the European industry has dipped below €1 billion (US$1.47 billion) (the other being 2003). On a quarterly basis, European venture financing levels were lower in each quarter of 2008 than in the corresponding quarter of 2007. Interestingly, while the full fury of the global financial crisis was only unleashed in the fourth quarter of 2008, there was no dramatic decline in the last months of the year. Indeed, despite tough conditions, a number of European biotechs managed to raise venture capital in early 2009, with follow-on rounds in excess of €20 million (US$29.4 million) each secured by a handful of companies. In January, the Swiss biotech AC Immune, which is focused on discovering drugs targeted at Alzheimer’s disease, raised €25.2 million (CHF40 million; US$37.1 million) in a third round. Also in January, another Swiss company, Synosia Therapeutics, which is engaged in discovery therapeutics for psychiatric and neurological disorders, raised €20 million (CHF32 million; US$29 million) in a second-round transaction. In February, the Danish company Symphogen secured €33 European financing Down, but not out European yearly biotech financings 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: Ernst & Young, BioCentury, BioWorld, VentureSource, Windhover and company news via NewsAnalyzer 7 4 3 2 1 0 €b 5 6 IPO Follow-on and other offeringsVenture financing
- 91. 85 million (US$44 million)to support the clinical development of its portfolio of recombinant polyclonal antibodies. Encouragingly, support for early-stage businesses was also evident in the opening months of 2009, with a number of companies successfully closing first rounds — these included CT Atlantic, DNA Therapeutics, Evostem Finland and Immune Targeting Systems. Public financings: few and far between In March, the Italian biotech MolMed, which has a pipeline largely composed of anticancer therapeutics, made its debut on the Milan stock exchange in a €56.2 million (US$82.3 million) offering — a rare event for the Italian market, which last saw a biotech IPO in 2000 with the flotation of Novuspharma (since acquired by Cell Therapeutics in 2004). Three months later, in June, France’s Ipsogen and Norway-based PCI Biotech completed their IPOs. Drug delivery specialist PCI Biotech raised €8.1 million (NOK$60 million; US$11.9 million) on the Oslo Access Exchange, and Ipsogen, which develops molecular diagnostic tests for cancers, raised €11.8 million (US$18.7 million) on the Alternext market (a submarket of NYSE Euronext). In another indication of the softness of public financings in 2008, all three IPOs priced at the bottom of their filing ranges. The new entrants could not escape the overall tumult in the markets, and all three stocks declined by year-end. While MolMed and PCI Biotech lost 50% and 63% of their market valuations, respectively, Ipsogen performed somewhat better, losing 19% of its value. Ipsogen showed impressive 62% year-over-year revenue growth that exceeded expectations, and investors were likely placated by the fact that the company already had marketed products and a predictable revenue stream. MolMed and PCI Biotech, on the other hand, were in preclinical development and years away from commercializing products. Follow-on and other financings also fell sharply in 2008. In contrast with 2007 when there were eight transactions above the €100 million threshold, there was only one such financing in 2008: the €157 million (SEK1.5 billion; US$231 million) rights offering by Swedish specialty pharma company Meda in late November. Meda’s rights offering in 2008 financed a string of strategic acquisitions in the second half of the year that included the acquisition of four pharmaceutical products from Roche and the acquisition of Valeant Pharmaceutical’s pharmaceutical business in Western and Eastern Europe. The remaining twelve follow-on and other offerings largely consisted of small private investments in Public investors have been cool to biotech since the second half of 2007 ... Q1 2007 Q2 2007 Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008 Q4 2008 Source: Ernst & Young, BioCentury, BioWorld, VentureSource, Windhover and company news via NewsAnalyzer 2.5 2.0 1.5 1.0 0.5 0 €b IPOFollow-on and other offerings … while there has been no significant decline in venture funding Q1 2007 Q2 2007 Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008 Q4 2008 Source: Ernst & Young, BioCentury, BioWorld, VentureSource, Windhover and company news via NewsAnalyzer 350 200 150 100 50 0 Venture capital (€m) 250 300
- 92. 86 Beyond bordersGlobal biotechnology report 2009 public equity (PIPEs). Denmark’s Lifecycle Pharmaceuticals was responsible for the second- and third-largest deals — a €71 million (DKK529 million; US$105 million) royalty financing and a €55 million (DKK408 million; US$80.9 million) rights offering. Venture funding: down, but not out The breakdown of venture financing by round was comparable with 2007, but notably there was an expansion in the number of second- and later-stage rounds and a contraction in seed and first rounds. Seed and first rounds accounted for approximately 32% of the total number of venture financings in 2008, down from 45% in 2007. Venture funds are now showing a reduced appetite for risk, preferring companies with more advanced pipelines that offer relatively low-risk, short-term return horizons. While it is possible that the fall in the number of seed and first-round financings in 2008 is an early indicator of such a shift, one should not over-interpret the data — the distribution in financings in 2008 is not markedly different from investment patterns between 2004 and 2006. Highlighting the attraction of later-stage, lower-risk assets, the year’s three largest first-round financings were completed by companies with programs in clinical development and with their origins in established pharmaceutical businesses. The year’s largest first-round deal, for €25 million (US$40 million), was completed by Albireo, a Swedish spin-out from AstraZeneca focused on gastrointestinal disorders. Vantia Therapeutics, a UK-based spin-out from Ferring Research, raised €24 million (£19 million; US$35 million) in first-round financing in March. At the time of its financing, Vantia had two clinical programs for its lead product. Lumavita, a Swiss company focused on anti-infectives for women’s health, raised €11 million (CHF18 million; US$16.2 million) in September. The Swiss firm was formed out of the operations of Japanese pharmaceutical company Shogoo KK. At the time of its financing, Lumavita had product candidates in Phase IIb and Phase I development. The most significant European venture-backed round of the year (and the third-largest globally) was a fourth-round fundraising by the German biotech Ganymed Pharmaceuticals, which raised €65 million (US$95.6 million) in November from private investors. The company, focused on monoclonal antibodies and oncology, plans to use the funds to further develop its Phase Ib monoclonal antibody claudiximab (iMAB362) and a pipeline of preclinical assets. Other major venture financings of 2008 included three second-round deals: a €27.2 million (US$40 million) round Q1 2008 Q2 2008 Q3 2008 Q4 2008 Total IPO € 56 (1) € 19 (2) € 0 (0) € 0 (0) € 75 (3) Follow-on € 0 (0) € 0 (0) € 26 (1) € 0 (0) € 26 (1) Venture € 302 (44) € 170 (25) € 257 (43) € 203 (26) € 932 (138) Other € 58 (10) € 254 (23) € 202 (26) € 218 (13) € 732 (72) Total € 416 (55) € 443 (50) € 485 (70) € 421 (39) € 1,764 (214) Source: Ernst & Young, BioCentury, BioWorld, VentureSource, Windhover and company news via NewsAnalyzer Figures in parentheses are number of financings Quarterly breakdown of European biotechnology financings 2008 (€m) European venture funding by round class 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: Ernst & Young, BioCentury, BioWorld, Windhover and VentureSource 100% 70% 40% 20% 10% 0 80% 90% First round Second roundSeed round Later round 30% 50% 60%
- 93. 87 by Israeli companyVascular Biogenics in May, a €27.5 million (US$40 million) transaction by Apogenix of Germany in April, and a €26 million (US$38 million) deal by SpePharm Holding of the Netherlands in August. Regional breakout of funding In 2008, as in 2007, Germany, Switzerland and the United Kingdom led Europe in venture capital raised. While Germany once again took the top spot with €198 million (US$291 million), this was a 38% drop from the €319 million (US$437 million) it raised in 2007. In fact, 11 of the 15 countries saw reductions in venture-capital funding relative to 2007, and in two of them, Ireland and Norway, venture funding fell to zero in 2008 from a combined €56 million (US$76.7 million) a year earlier. Meanwhile, the UK, Netherlands, Israel and Italy saw increases in venture capital raised. In the UK, this represented a reversal from three years of consecutive declines between 2004 and 2007. Taking evasive action — business restructuring and alternative financing Depending upon its length and severity, the current crisis has the potential to profoundly impact the European biotech industry. Indeed, the crisis has already begun to either eliminate or reshape many of the companies that make up the population of European biotechs. A number of companies went into administration during 2008. Ardana Bioscience, a UK-listed biotech focused on reproductive health, ceased trading in June. Phoqus Pharmaceuticals followed in July, after the company failed to find a partner for its lead project. In Denmark, Curalogic went into liquidation in November. Company Country Round Date Amount raised (€m) Ganymed Pharmaceuticals Germany Fourth round November 65 Apogenix Germany Second round April 28 Vascular Biogenics Israel Second round May 27 SpePharm Holding Netherlands Second round August 26 Albireo Sweden First round May 25 Endotis Pharma France Third round January 25 Pieris Germany Second round March 25 Vantia Therapeutics UK First round March 24 PanGenetics Netherlands Third round March 23 Synosia Therapeutics Switzerland Second round December 20 Creabilis Therapeutics Italy Second round June 20 Source: Ernst & Young, BioCentury, BioWorld, Windhover and VentureSource Top European venture funding in 2008 European venture capital by country, 2007 and 2008 Germany UK Switzerland France Netherlands Denmark Sweden Israel Italy Belgium Austria Spain Finland Ireland Norway Source: Ernst & Young, BioCentury, BioWorld, VentureSource, Windhover and company news via NewsAnalyzer 200 150 100 50 0 Total raised (€m) 250 300 350 8 6 4 2 0 10 12 14 Average round size (€m) 2008 €m 2007 €m 2008 average (€m) 2007 average (€m)
- 94. 88 Beyond bordersGlobal biotechnology report 2009 Facing the possibility of a deep and prolonged financing drought, many companies undertook strategic reviews and embarked on restructuring programs. In addition to headcount reductions, companies began to close or sell operations and leverage marketed portfolios and pipeline assets to raise capital. The UK biotech Vernalis provides a case in point. Triggered by the failure of the company’s migraine drug to receive Food and Drug Administration approval for the additional indication of menstrual migraine, Vernalis announced plans to close its Canadian clinical operations and has sold its US commercial operations and rights to its Parkinson’s drug Apokyn to Ipsen, raising €7.8 million (US$11.5 million) in up-front payments and an additional €4.1 million (US$6 million) in potential milestone payments. Separately, Vernalis struck a royalty financing deal by selling 90% of frovatriptan royalties to Paul Capital Healthcare in return for €18.4 million (US$27.1 million) in nondilutive financing. Terminating or freezing the development of projects has also been a common feature of restructurings, and many smaller companies are now focusing their resources on just one lead program. Having failed to hit its financing target in a January rights issue, Danish biotech Pharmexa announced its intention to freeze development of bone-disease and early-stage oncology projects in order to focus on higher-priority programs. In February 2008, Germany’s GPC Biotech announced a restructuring in order to extend its cash reserves to sustain three years of burn. More recently, in November, Switzerland’s Arpida announced plans to focus on its lead product, the intravenous antibiotic iclaprim, while reviewing and halting a number of noncore clinical development programs. Other companies have sought to spin off operations. For example, in January 2009, as part of its efforts to refocus on specialty markets and protein therapeutics, Swedish company Biovitrum announced plans to spin out its UK-based small-molecule subsidiary Cambridge Biotechnology as well as primary care assets. Going beyond cost reduction and restructuring, other businesses took action to become self-sustaining from a cash perspective. In September, the UK biotech BTG acquired Protherics, another UK business, in a €274 million (£218 million; US$403 million) deal. Protherics, which has a portfolio of niche-market products, brings BTG an income stream and moves the business toward cash self-sustainability. In addition to restructuring, companies looked to alternative sources of financing in 2008 to help sustain their businesses. For many firms, deals with pharmaceutical companies represent their best opportunities for securing funds, either through the realization of milestone payments under existing agreements or via new deals. Aggregate data (based upon instances where cash payments to European biotechs have been publicly disclosed) suggest that the total cash flowing into the sector through deals with large companies remains healthy and that the average size of cash payments is stable relative to previous years. In the current financial market environment, pharma Source: Ernst & Young and company announcements Company Location Headcount reductions Other restructuring measures Alizyme UK √ Arpida Switzerland √ √ BioAlliance Pharma France √ Biovitrum Sweden √ √ Compugen Israel √ DeCode Genetics Iceland √ √ Elan Ireland √ √ Genmab Denmark √ √ GPC Biotech Germany √ √ Oxford Biomedica UK √ Pharmexa Denmark √ √ Reneuron UK √ √ Sareum Holdings UK √ Stem Cell Sciences UK √ √ TopoTarget Denmark √ √ Tripep Sweden √ Vernalis UK √ √ York Pharma UK √ √ Select restructuring programs announced by European biotech companies in 2008 and early 2009
- 95. 89 money is becomingincreasingly important to the survival of Europe’s biotech companies. It should be noted that while good innovation is always likely to attract buyers, many big pharma companies are becoming increasingly cash conscious and more discerning in their deal-making — trends that could squeeze Europe’s biotech sector still further. Other financing options include royalty financing deals such as those struck by Paul Capital Healthcare with Vernalis (over Frova royalties) and with Plethora Solutions (over the company’s male health portfolio). The largest royalty financing deal of the year was struck by Lifecycle Pharmaceuticals, which sold the future North American royalty stream of Fenoglide, its cholesterol drug, to Cowen Healthcare Royalty Partners for a total payment of up to €71 million (US$105 million) (dependant upon sales milestones) including an up-front payment of €19.7 million (US$29 million). Others companies secured financing in the form of grants and loans. For example, in January 2009, Cardio3Bioscience, a Belgian company specializing in cell-based therapies for the treatment of cardiovascular diseases, successfully raised €13.7 million (US$20.2 million) through a combination of a €7.2 million (US$10.6 million) venture round and a €6.5 million (US$9.6 million) grant. For some biotechs, Europe’s national innovation funds have been an important source of grant and loan financing. Companies that secured financing from these sources in 2008 included: Santaris Pharma (€6 million; DKK45 million; US$8.8 million), from the Danish National Advanced Technology Foundation; Noxxon Pharma (€1.0 million; US$1.47 million), from the German Ministry of Education and Research; and BioTie Therapies (€1.7 million; US$2.5 million), from TEKES, the Finnish Funding Agency for Technology and Innovation. In addition, Genfit (€7.1 million; US$10.4 million), Cellectis (€7.2 million; US$10.6 million) and Genomic Vision (€1.1 million; US$1.6 million) all secured financing from the French state innovation agency OSEO. Outlook The year ahead promises to be challenging for European biotech companies. Public markets are offering little support for biotech assets, and the IPO window is shut for the foreseeable future. Venture money is still moving into the sector, but the financing tap is tightening. If a lower appetite for risk translates into an investor preference for late-stage assets, a financing crisis for early-stage companies could emerge. Companies are likely to fail, while others will attempt to restructure and exploit alternative funding sources to survive. The coming months and years will certainly test the creativity and flexibility of the European industry. More fundamentally, the situation is likely to force executives to revisit the industry’s funding model itself. The prevailing model — based on several venture rounds with the aim of advancing projects into the clinic, securing an IPO and either outlicensing to pharma or commercializing products in-house — is slow, expensive and high-risk. To sustain this model, companies will, at the very least, need creative solutions to the European sector’s financing challenges. In the absence of such solutions, companies may have to seek sustainability earlier in their lifecycles through fee-for-service revenues or the acquisition of portfolios of marketed products. Firms may focus on acquisitions by pharmaceutical companies for exits and tailor their strategies toward this end. One solution to the financing challenge might be for biotech-pharma partnerships to move toward early-stage, long-term alliances. A model where biotechs partner with pharma companies earlier in their lifecycles using financing structures that provide a steadier flow of capital than those currently used could improve the sustainability of biotech companies. For at the end of the day, improving biotech’s sustainability is in the interest not only of biotech firms themselves but also of other constituents of the healthcare economy — pharma, payors, providers and, of course, patients.
- 96. 90 Beyond bordersGlobal biotechnology report 2009 Deal activity remained strong in the European biotechnology sector in 2008, with sustained activity across all segments. Pharmaceutical companies continued to secure technologies and early-stage assets through acquisitions and strategic alliances, while attractive late-stage assets continued to attract favorable deal terms, as demonstrated by GlaxoSmithKline’s record-breaking deal with Actelion. With many biotechs struggling under the impact of the global financial crisis, smaller businesses struck deals with each other to combine strengths; some even purchased income-generating assets from big pharma. Mergers and acquisitions M&A transactions worth a combined €3.4 billion (US$5.0 billion) were announced in 2008, with the value of deals split somewhat evenly between biotech-biotech and pharma-biotech deals. While the total value of European M&A deals in 2008 fell far short of the €14.3 billion (US$19.6 billion) in 2007, three deals accounted for 87% of the 2007 figure. These were Merck KGaA’s €10.1 billion (US$13.8 billion) acquisition of Serono, Qiagen’s €1 billion (US$1.42 billion) acquisition of Digene and Shire’s €1.9 billion (US$2.6 billion) acquisition of New River. When these large deals are excluded, 2008 emerges as one of the most active M&A years by value in the history of the European biotech sector. The United Kingdom was a particular hot spot for transactions. Accounting for 38% of European M&A activity by value, six UK companies were acquired by overseas entities, and consolidation occurred between a number of local players. European M&A activity remains strong 2005 2006 2007 2008 Source: Ernst & Young, Windhover Information, MedTRACK, BioWorld and company news via NewsAnalyzer 16 8 6 4 2 0 Value (€b) 10 12 14 40 20 15 10 5 0 25 30 35 Number of M&As Biotech-biotech megadeals Pharma-biotech megadealsPharma-biotech Number of M&As European alliances by year 2005 2006 2007 2008 Source: Ernst & Young, Windhover Information, MedTRACK, BioWorld and company news via NewsAnalyzer Chart shows potential value, including up-front and milestone payments, for alliances where deal terms are publicly disclosed Pharma-biotech deals include transactions in which biotech companies were buyers 8 6 4 2 0 Potential value (€b) 10 12 200 160 180 Average value (€m) 120 100 40 20 0 140 80 60 Biotech-biotech Pharma-biotech Biotech-biotech average value Pharma-biotech average value European deals Dealing by dealing Biotech-biotech
- 97. 91 Biotech-biotech consolidation There wassignificant consolidation within the population of biotech companies. Biotech-biotech deals accounted for nearly 50% of total deal value, amounting to €1.7 billion (US$2.5 billion). A key driver of consolidation has been corporate weakness, with stronger companies acting opportunistically to capitalize on depressed share prices. For example, the acquisition of the UK’s CeNeS Pharmaceuticals by Germany’s Paion for €13.8 million (US$20.3 million) followed a period of decline in the British company’s share price as it struggled to find a marketing partner for its lead product. Other companies sought out opportunities to realize synergies, pool cash resources and reduce costs. For example, Italian biotech Newron Pharmaceuticals acquired the private UK company Hunter Fleming. The deal will allow the companies to combine R&D portfolios, building on Newron’s central-nervous-system pipeline and expanding it into neuro-inflammation. Similarly, in a drive to achieve cash sustainability, BTG acquired Protherics for €274 million (£218 million; US$402 million), which has bought BTG an income stream from a portfolio of niche-market products. The consolidation trend continued into early 2009, driven by macroeconomic conditions and the tight financing environment. In February, following the start of a restructuring program a year earlier, Germany’s GPC Biotech announced its proposed merger with US-based Agennix. Pharma acquisitions In 2008, pharma’s attention was essentially balanced between public and privately held targets. A particularly interesting development is the emergence of acquisitions with success-based milestones. In Wyeth’s acquisition of UK-based private biotech Thiakis, for instance, the firm paid €20.4 million (£16.2 million; US$30 million) up front for a portfolio of synthetic oxyntomodulin peptides and could make a further €81.6 million (£65 million; US$120 million) in success-based payments depending upon the achievement of certain developmental milestones. In a similar transaction, Roche acquired Piramed, another privately backed UK business, for €119 million (US$175 million). The deal terms include a success-based payment of €10.2 million (US$15 million) upon the start of Phase II trials of Piramed’s lead oncology program. Another significant early-stage deal was Daiichi Sankyo’s acquisition of the privately backed German company U3 Pharma for €150 million (US$234 million), under which Daiichi Sankyo secured the rights to a pipeline of therapeutics targeting, among other indications, breast, lung and colorectal cancers. U3’s lead project (being codeveloped with Amgen), is a fully human monoclonal antibody and is due to enter the clinic in 2009. In a purer technology play, Bayer paid €210 million (US$300 million) in cash to buy Direvo Biotech, the German protein-engineering business which has a number of high-throughput platform technologies for optimizing the performance of proteins, including therapeutic antibodies and proteases. Bayer will integrate Direvo into its R&D organization as a center of excellence for bioengineering. Late-stage assets and marketed products The pressing need of pharmaceutical companies to replace end-of-lifecycle blockbusters was highlighted by the largest M&A deal of the year: Novartis’ acquisition of a controlling interest in Speedel Holding in September 2008 for €571 million (CHF907 million; US$840 million). The acquisition gives Novartis full ownership of revenues flowing from the hypertension drug Tekturna/Rasilez, a follow-up to Novartis’ blockbuster Diovan which generated €3.9 billion (US$5.7 billion) in 2008 and faces patent expiration in 2012. In addition to Tekturna, Novartis gained a pipeline of follow-on renin inhibitor targeted at cardiovascular disorders. The deal brings Tekturna full circle. Novartis spun out Tekturna to Speedel in 1998 and exercised its callback option to the product in 2002. Tekturna was subsequently approved and launched in Europe and the US. The other significant late-stage M&A deal of the year was the €328 million (US$517 million) acquisition of Germany’s Jerini by Shire. The all-cash deal added the orphan drug Firazyr to Shire’s growing human genetic therapies (HGT) portfolio. Having gained the HGT portfolio in 2005 through the acquisition of Transkaryotic Therapeutics, Shire has focused its Company Country Acquired or merged company Country Value (€m) Novartis Switzerland Speedel Holding Switzerland 571 Sanofi-Aventis France Acambis UK 347 Shire UK Jerini Germany 328 Ipsen France Tercica US 275 BTG UK Protherics UK 274 Bayer Healthcare Germany DIREVO Biotech Germany 210 Solvay Belgium Innogenetics Belgium 201 Daiichi Sankyo Japan U3 Pharma Germany 150 Intercell Austria Iomai US 129 Roche Switzerland Piramed UK 119 Source: Ernst & Young, Windhover Information, MedTRACK, BioWorld and company news via NewsAnalyzer Top 10 M&As involving European companies
- 98. 92 Beyond bordersGlobal biotechnology report 2009 strategy on building a portfolio of products which, like Firazyr, address rare, highly symptomatic and serious disorders. Shire’s offer was at a significant premium to Jerini’s share price at the time of the announcement. After the US Food and Drug Administration (FDA) issued a nonapprovable letter for Firazyr in April, Jerini’s share price dropped significantly amid concerns that the company would need to raise additional capital. Soon after the announced acquisition, Firazyr received European approval and Shire has expressed confidence that the issues raised in the FDA’s letter can be addressed. Building on a long-term relationship, the vaccines division of Sanofi-Aventis acquired the UK vaccines company Acambis for €347 million (£276 million, US$550 million). The deal highlights the recent resurgence of interest in the vaccines market by major pharmaceutical companies and follows a series of similar acquisitions by the major vaccine manufacturers. Strategic alliances After steady rises between 2005 and 2007, the total value of European strategic alliances decreased by twelve percent in 2008, to €8.8 billion (US$13 billion). Clinical-stage deals Novel clinical-stage projects continue to be in high demand, remain scarce and can command significant premiums. In 2008, a handful of European biotechs negotiated such deals. Of particular note was GSK’s August 2008 deal with Actelion for almorexant, which ranks as the largest development and commercialization deal in the history of the biopharmaceutical industry. GSK acquired the worldwide rights (excluding Japan) to codevelop and comarket almorexant, Actelion’s orexin receptor antagonist in Phase III development for primary insomnia. The deal, which covers additional indications, is structured to provide total contingent development and sales-related payments of up to €2.079 billion (CHF3.3 billion; US$3.058 billion). While the deal included a significant up-front payment of €92.5 million (CHF150 million; US$139 million) and potential milestone payments of up to €255.8 million (CHF415 million; US$384.6 million) for the insomnia indication, Actelion will lead the development program and registration of almorexant in insomnia with GSK contributing only 40% of development costs. For additional indications, all associated program costs and profits are to be shared equally between Actelion and GSK with total contingent payments to Actelion totaling €1.723 billion (CHF2.735 billion; US$2.534 billion). For GSK, almorexant adds a first-in-class compound to the pipeline of insomnia drugs it has been building. Meanwhile, Actelion gains not only GSK’s development expertise and primary-care commercialization muscle but also an income stream that will reduce its reliance on Tracleer, the pulmonary arterial hypertension drug that accounts for the vast majority of its revenues. In another significant late-stage deal, Cephalon signed a €10.2 million (US$15 million) option agreement to acquire the rights to Lupuzor, ImmuPharma’s treatment for Systemic Lupus Erythematosus, which was in Phase IIb development at the time of signing. In February 2009 and following positive results from the Phase IIb trial, Cephalon exercised its option, triggering a €20.4 million (US$30 million) license-fee payment, and Phase III development and commercialization responsibilities were transferred to Cephalon. In total, up-front fees and success-based payments to Immupharma could reach as much as €350 million (US$500 million). It is hoped that Lupuzor, which has a novel mechanism of action, will be the first therapeutic agent able to halt the progression of the disease in patients. Although the achievement of clinical proof of concept in Phase II trials has traditionally been a key inflection point for value creation and asset price, pre-proof-of-concept assets attracted favorable deal terms. Three of the five largest clinical deals involved assets in Phase I development. Indeed, the third-largest European deal of 2008 was struck between Roche and two European biotechs, Bioinvent International and ThromboGenics, for worldwide rights to TB-403, a monoclonal antibody against placental growth factor for the treatment of solid tumors. Other significant Phase I deals were GSK’s agreement with the Austrian biotech Company Country Partner Country Stage Value (€m) GlaxoSmithKline UK Actelion Switzerland Clinical 2,079 GlaxoSmithKline UK Cellzome Germany Early 1,055 Roche Switzerland ThromboGenics/ BioInvent International Belgium/ Sweden Clinical 500 Merck & Co. US Addex Pharmaceuticals Switzerland Early 477 GlaxoSmithKline UK AFFiRiS Austria Clinical 430 Cephalon US ImmuPharma UK Clinical 350 Janssen Pharmaceutica Netherlands Astex Therapeutics UK Early 343 Merck KGaA Germany Ablynx Belgium Early 335 AstraZeneca UK Biocompatibles International UK Early 327 Tibotec Belgium Medivir Sweden Early 277 Source: Ernst & Young, Windhover Information, MedTRACK, BioWorld and company news via NewsAnalyzer Leading alliances involving European companies
- 99. 93 AFFiRiS for itsAlzheimer’s disease vaccine program. Preclinical deals Preclinical deals provide the opportunity to gain access at an early stage to drug discovery platforms and technologies, biological targets and lock-in rights to novel candidates. In recent years, these partnerships have become more frequent, as pharmaceutical companies attempt to externalize more of their drug discovery and access novel technology platforms, particularly in areas where they have historically underinvested. The values of such deals have also increased, as they have become broader in scope — today, they often encompass more than one biological target, with multiple associated discovery programs and contingent payments linked to the commercialization of as many as ten therapeutic agents. In fact, 11 of the 15 largest European deals in 2008 involved discovery programs or assets in preclinical development. GSK’s discovery-stage alliance with Germany’s Cellzome was the year’s second-largest deal, albeit structured to provide GSK with little financial risk until achievement of clinical proof of concept. Focused on inflammatory disorders, the alliance gives GSK access to Cellzome’s Kinobeads platform technology. The transaction is broad in scope, giving GSK exclusive options to license drug candidates against a total of seven targets, three of which have yet to be identified. Cellzome could be eligible to receive a total of €1.055 billion (£840 million; US$1.552 billion) in addition to double-digit royalties. Another significant deal was AstraZeneca’s agreement with the UK’s Biocompatibles for the development of its GLP-1 analog for the treatment of obesity and diabetes. Big pharma pays for innovation Of the top 15 European deals by value, GSK’s deals with Actelion, Cellzome and AFFiRiS accounted for more than 50% of total value. Innovation is a key theme across these deals, showing that pharma will pay substantial sums for good innovation. The Actelion deal gave GSK rights to a first-in-class compound; the AFFiRiS deal, a clinical Alzheimer’s vaccine program and the AFFiRiS AFFiTOPE technology platform; and the Cellzome deal, the Kinobeads discovery platform. With so much emphasis placed on the therapeutic potential of biologics, it is interesting to note that 10 of the largest 15 European deals were focused on either small-molecule discovery programs or small-molecule compounds demonstrating the continued therapeutic relevance of small-molecule drugs. A two-way street Financing and economic conditions are making it difficult for many biotech firms to fund their pipeline development. At the same time, pharmaceutical companies, seeking to streamline operations and optimize product portfolios, are out-licensing noncore assets. This confluence of trends creates an opportunity for biotech companies to bring in revenue-generating assets, and a number of smaller European firms acquired rights to commercialized products from large companies in 2008. For example, in September, Sweden’s Biovitrum acquired the marketed biologics Kepivance and Stemgen from Amgen, as well as a worldwide license to market Kineret in its current indication — a portfolio of drugs which generated €48 million (US$70 million) for Amgen in 2007. Other pharma divestment deals included Meda’s acquisition of four European alliances by country, 2008 Switzerland UK Germany Sweden Austria Belgium Denmark Italy France Netherlands Ireland Israel Source: Ernst & Young, Windhover Information, MedTRACK, BioWorld and company news via NewsAnalyzer Chart shows potential value, including up-front and milestone payments, for alliances where deal terms are publicly disclosed Pharma-biotech deals include transactions in which biotech companies were buyers 2.0 1.5 1.0 0.5 0.0 Potential value (€b) 2.5 3.0 3.5 280 210 140 70 0 350 420 490 Average value (€m) Biotech-biotech Pharma-biotech Average value
- 100. 94 Beyond bordersGlobal biotechnology report 2009 marketed products from Roche for €120 million (CHF195 million; US$176 million). For smaller companies, acquiring products (or retaining rights to their own products) has always come with the risk that they will not have the resources and expertise to realize value from those assets. But now, companies also face increased uncertainty about being able to finance the transaction in the first place. In the case of the York/Solvay deal, product rights have since been returned to Solvay because of problems financing the deal. The road lengthens A core theme in last year’s Beyond borders was that the road to commercialized products has become longer. While companies have traditionally looked at product approval as the final destination, they now face considerable risks even after launching products, due to increased post-marketing safety surveillance and a fast-changing pricing and reimbursement environment. This reality is now being reflected in the structures of R&D alliances, with many of the 2008 deals containing contingent payments that are linked to commercial milestones such as sales performance rather than R&D milestones. Two deals highlight the extent to which payments are being back-loaded. In the case of AstraZeneca’s option-to-license agreement with Biocompatibles for a GLP-1 analog for use in type II diabetes and obesity, 78% of the total €327 million (US$444 million) deal value is contingent upon the achievement of sales-related milestones. Similarly, Onyx Pharmaceuticals and BTG’s deal over BTG’s preclinical anticancer compound, BGC 945, was structured so that 73% of the €218 million (US$320 million) deal value is contingent upon product approval and commercial performance. Outlook For many biotech companies, the biggest challenge nowadays is to remain sustainable. One way to deal with this challenge is through the creative use of strategic deals — dealing by dealing, so to speak. Biotech-biotech consolidation is likely to pick up as a survival strategy at a time when many firms will find themselves with dwindling cash reserves and limited financing opportunities. We are also likely to see biotechs pursuing sustainability by acquiring rights to commercialized products and/or divesting themselves of noncore assets and operations. While some large pharma companies are merging in a cost-cutting drive, they will still need strategic alliances with biotech to address their pipeline issues. In the current environment, the challenge will be to structure these transactions in ways that value assets appropriately and give both parties sufficient upside. There have been some notable transactions in the US and Europe with sizeable up-front payments in recent months, and the question is whether we are likely to see more of them going forward. (In addition to the strategic imperatives for large up-fronts, such deal structures can also have implications for companies’ bottom lines, depending on the accounting standards under which they file their financial returns — issues that could become more consequential over the next few years, as accounting standards converge and large companies come under growing earnings pressure. For more details, see “A closer look” on this page.) Ultimately, of course, structuring deals in ways that provide sufficient capital to advance assets and provide upside will help sustain not just individual companies but also innovation across the industry. The world of accounting is moving toward a single global standard, with many countries now on board to adopt International Financial Reporting Standards (IFRS) as their principal body of rules. In 2008, the United States made significant strides in this direction, although the ultimate date of adoption in the US remains uncertain. In the meantime, the governing bodies are cooperating and looking to achieve convergence of standards wherever possible — for example in the accounting for M&A transactions and through an ongoing project to harmonize revenue recognition rules. As more countries and companies adopt IRFS, financial statement readers will need to be aware of the differences between those rules and the Generally Accepted Accounting Principles (GAAP) that govern US registrants. One area of difference between the two standards that could be consequential for biotech companies is the accounting for up-front license payments in collaborative agreements. In the US, if such payments are for products that have not reached technological feasibility, they are charged as an expense. The same is true for ongoing R&D support payments and milestone payments. Under IFRS rules, on the other hand, companies can (and often do) record up-front and milestone payments as assets — which are periodically reviewed for impairment during development. If a product is approved, these payments are then amortized to expense over the commercial life of the product. Ongoing R&D support payments, however, are charged to expense, as they are under US GAAP. Thus, an IFRS-reporting company could make a larger up-front payment in lieu of making ongoing R&D support payments and potentially defer the earnings charge. Of course, this comes with a price — the assumption of more risk embodied in a higher (nonrefundable) up-front payment. Nevertheless, as big pharmaceutical companies face growing earnings-per-share pressure, this standard may allow an IFRS-reporting company more flexibility in closing transactions. Up-fronts and bottom lines: accounting for up-front payments under IFRS A closer look
- 101. 95 The product pipelinesof European biotech companies demonstrated robust growth across all stages in 2008. Product approval success was less pronounced: only one new molecular entity (NME) received US Food and Drug Administration (FDA) approval, and two received approval from the European Medicines Agency (EMEA) for marketing throughout the European Union (EU) (as opposed to single-territory approvals). Moreover, product-approval success was dominated by specialty pharmaceutical companies such as Ipsen, Ferring and Shire. Approvals from “core” biotechnology companies consisted largely of new formulations of already-approved and marketed molecules. Therefore, while the European sector might be described as promising from a pipeline perspective and has made consistent progress in recent years, success did not translate into approvals of new and innovative medicines for smaller biotechs during the year. Pipeline The European pipeline grew across all phases of clinical development during 2008, continuing the success of previous years. More than 100 projects were added to the clinical pipeline of Europe’s biotech and specialty pharmaceutical companies, taking the total number of therapeutics to more than 1,000 clinical projects. Critically, Europe’s Phase II product portfolio grew 15% to more than 600 products, matching the success achieved in 2007. As we noted last year, Phase II trials are a critical make-or-break stage on the path to commercialization. This is where the first clinical proof of concept is typically achieved, and it is often pivotal for value creation. Growth in the number of therapeutics in this stage is a positive indicator of the health of the European sector. More positive still is the movement of projects from Phase II to Phase III development — the number of products in Phase III increased 11% to a total of 157. The United Kingdom continues to lead country rankings, accounting for 20% of the total clinical pipeline and 23% of Phase III assets. The UK does not, however, have the lead that it once had. In 2006, for example, the UK accounted for 35% of all products in development and 41% of Phase III products. Switzerland, which in 2006 occupied the number two spot behind the UK, has also seen its relative contribution diminish, falling behind Germany, Denmark and France in 2007 and holding this position in 2008. Ironically, the relative decline of the UK and Swiss pipelines is at least partially a reflection of the strength of these biotech clusters. A significant reason for the decline, for instance, is the acquisition of mature biotech companies from these countries by big pharma players. More than companies in other locations, mature British and Swiss biotechs have attracted buyers in recent years, including Acambis (acquired by Sanofi-Aventis in 2008), Speedel (Novartis in 2008), Serono (Merck KGaA in 2007) and Cambridge Antibody Technology (AstraZeneca in 2006). While these acquisitions may have hurt the pipeline rankings of Switzerland and the UK, the transactions themselves reflect pipeline strength rather than weakness. These biotechs were not struggling companies snapped up at bargain-basement prices, but robust firms valued for their mature pipeline assets. In addition, Switzerland’s ranking decline with respect to the number of Phase III items — the country fell from the number two spot in 2007 to fifth place in 2008 — was driven not just by acquisitions, but also by the success of a number of Swiss companies in securing regulatory approval for marketing in prior years. European products and pipeline A surging pipeline and a trickle of products European product pipeline by phase, 2006–08 Source: Ernst & Young, MedTRACK and company websites 800 600 400 200 0 Numberofproductcandidatesinstudies Phase I Phase II Phase III 2007 20082006
- 102. 96 Beyond bordersGlobal biotechnology report 2009 To some extent, the overall decline of leading countries is also driven by the growing strength of companies in up-and-coming second-tier markets. For instance, the UK, Germany, Denmark, France and Switzerland collectively accounted for about 70% of the total European pipeline and Phase III products in 2006. By 2008, their share had declined to about 64%. In addition to acquisitions, this reduced share reflects growth and maturity in the biotech industries of countries such as Israel, Sweden, Italy and the Netherlands, which saw their collective share of the European Phase III pipeline increase from 12% in 2006 to 23% in 2008. Indeed, Sweden had 13 products in its Phase III pipeline in 2008. The therapeutic composition of the European pipeline with regard to indications targeted changed very little in 2008. Oncology remains the dominant area of development activity, accounting for 21% of pipeline projects. This reflects the growing market opportunity created in this category by aging populations in traditional markets, high unmet need and an increased understanding of disease biology and new therapeutic approaches. Therapeutics addressing the neurology (15%), metabolic and endocrine (11%) and autoimmune and inflammatory (11%) segments follow. Product approvals The year 2008 was relatively lean in terms of new product approvals for the European industry. European biotech and specialty pharmaceutical companies achieved only a handful of major new approvals in the US and Europe. In addition to NME approvals, two biosimilar products became the first follow-on granulocyte colony stimulating factor (rG-CSF) products approved in the EU. Swiss specialty pharmaceutical company Ferring was the only European company to gain a product approval in the US market. Firmagon (degarelix), for the treatment of The Phase III share of the top five countries has shrunk, while other countries have advanced rapidly 2006 2008 Source: Ernst & Young, MedTRACK and company websites 100% 70% 40% 20% 10% 0 80% 90% 30% 50% 60% Switzerland, 23% France, 4% Denmark, 5% Germany, 12% UK, 30% Switzerland, 11% France, 11% Denmark, 11% Germany, 8% UK, 23% Netherlands, 2% Italy, 2% Sweden, 5% Israel, 3% Netherlands, 3% Italy, 6% Sweden, 8% Israel, 6% European clinical pipeline by country, 2008 0 50 100 150 200 250 Source: Ernst & Young, MedTRACK and company websites UK Israel Norway Belgium Austria Finland Italy Sweden Phase I Phase II Phase III Ireland Spain Netherlands Number of product candidates France Denmark Germany Switzerland
- 103. advanced prostate cancer,was approved by the FDA just before the end of the year. The product also went on to achieve EMEA approval in February 2009. The European biotech approval highlight of the year was Shire’s orphan and first-in-class medication Firazyr (icatibant) in July. Firazyr was developed by Jerini AG prior to its acquisition by Shire. Firazyr, which received EMEA authorization for the symptomatic treatment of acute attacks of hereditary angioedema in adults (with C1-esterase-inhibitor deficiency), is the first product to receive pan-European approval for this indication. Firazyr faces greater regulatory uncertainty in the US, where the FDA responded to its NDA submission with a “not approvable” letter in April. A placebo-controlled trial is planned for 2009 in an attempt to secure FDA approval. Shire estimates that Firazyr, which will enjoy market exclusivity in the EU until 2018, could achieve peak sales of US$350–400 million, conditional upon approval in the US. The other NME approved for marketing throughout the EU in 2008 was Ipsen’s Adenuric (febuxostat), which was approved in April for the treatment of chronic hyperuricemia in conditions such as gout. Europe’s population of smaller biotech companies had less success on the product approval front. Nevertheless, a small number of companies achieved approvals for NMEs in some European markets and Canada. Basilea Pharmaceutica of Switzerland received marketing authorization in Switzerland for Zeftera (ceftobiprole), and the product was launched in Canada. Zeftera, which was outlicensed and codeveloped with Janssen-Cilag (a Johnson & Johnson company), is the first approved broad-spectrum anti-MRSA antibiotic belonging to the cephalosporin class. The product also received an approvable letter from the FDA in March, and in November, the EU Committee for Medicinal Products for Human Use (CHMP) issued a positive opinion for use in the treatment of complicated skin and soft- tissue infections. However, following the FDA’s letter, the agency conducted additional inspections of investigator sites and later concluded that study-monitoring deficiencies had arisen. In November, the FDA indicated in a complete response letter that further resolution of specific deficiencies in study conduct would be necessary. Subsequently, in February 2009, Basilea was informed that European approval would be delayed pending good clinical practice inspections by the EMEA. Basilea has since filed a claim against Johnson & Johnson for damages incurred due to the delay of approval and lost milestone payments. Basilea also had success in 2008 with Toctino, an oral formulation of alitretinoin, which was recommended for regulatory approval under the European decentralized procedure as a therapy for severe refractory chronic hand eczema and subsequently received approval in Denmark, Finland, France, Germany and the UK. Santhera Pharmaceuticals, another Swiss company, achieved approval for Catena (idebenone), a treatment for the rare neuromuscular disease Friedreich’s Ataxia, and subsequently launched the product in October. Oralair Grasses, Stallergenes’s sublingual “desensitization” product for the treatment of rhino-conjunctivitis symptoms, received German approval in June. The remaining 2008 approvals were for reformulations and line extensions of molecules already approved for marketing. In the US, Sular — SkyePharma’s Geomatrix reformulation of Sciele Pharma’s nisoldipine for hypertension — was approved by the FDA, as was Antisoma’s oral fludarabine as a second-line treatment for chronic lymphocytic leukemia. In Europe, Orexo AB’s Abstral (a fast-dissolving tablet for sublingual administration of fentanyl) received marketing authorization for the European Phase III pipeline by indication, 2008 Source: Ernst & Young, MedTRACK and company websites Neurology 15% Inflammation and autoimmune 11% Metabolic and endocrine 11% Infectious 9% Dermatology 7% Cardiovascular and hematology 6% Gastrointestinal 6% Other 14% Cancer 21% 97
- 104. 98 Beyond bordersGlobal biotechnology report 2009 treatment of acute breakthrough cancer pain in the UK, Germany and Sweden, via Orexo’s licensing partner, ProStrakan. Biosimilars Progress was also made in the biosimilar market, which has been emerging in recent years. In 2005, Sandoz’s Omnitrope (somatropin) became the first biosimilar to receive marketing authorization in the EU, followed in 2007 by the first erythropoietin biosimilars. Continuing this trend, the first rG-CSF biosimilars received marketing authorization in 2008. Referencing Amgen’s originator product Neupogen (filgrastim), CT Arzneimittel’s Biograstim, Ratiopharm’s Ratiograstim (developed by subsidiary BioGeneriX) and Teva’s Tevagrastim were approved by the EMEA in September for the treatment of neutropenia. Early in 2009, rG-CSF products from Hexal (Filgrastim) and Sandoz (Zarzio) were also approved. Zarzio is the third biosimilar that Sandoz has successfully steered through the abbreviated approval process. Outside of the EU, Mepha was granted marketing authorization for Filgrastim-Mepha in Switzerland, becoming the first biosimilar to be approved in this market. The biosimilars market is still in relatively early stages, however, and remains fraught with uncertainty. (See “A closer look” on this page for more details.) Orphan drugs In February 2009, in an attempt to encourage the development of orphan medical products, the EMEA revised the fee structure payable for preauthorization activities such as protocol assistance, as well as for products using the centralized procedure, application for marketing authorization, inspections and post-authorization activities. Companies qualifying as micro, small and medium-sized enterprises (SMEs) no longer have to pay fees for submission of orphan drugs for approval, and fees for post-approval activities have, in most cases, also been eliminated. Fees for non-SMEs have also been reduced considerably. Crossing the fourth hurdle While European companies have new opportunities related to biosimilars and orphan drugs, companies looking to sell in European markets must also contend with growing regulatory risks. In a climate of increasing pricing and safety concerns, securing marketing approval is no longer the end of the road for drug manufacturers. In Europe, pricing pressures have been particularly visible in the UK market, where the National Institute for Health and Clinical Excellence (NICE) uses cost-utility methodologies in its coverage decisions. In recent years, NICE has not recommended several While the European biosimilars market is still in its infancy, these products are facing tough market conditions and have yet to match the success of small-molecule generics. Concerns about comparative efficacy and safety have limited uptake with patients and physicians, who are often reluctant to switch from better-known originator products. National rules that prevent automatic substitution — common in many countries, including France, Spain and the UK — have further restricted adoption. Since patients and physicians do not bear the cost of product procurement, they have little incentive to opt for cheaper biosimilars. Over time, governments will need policies to increase biosimilars adoption. Until then, companies launching biosimilars will need to address business planning and forecasting challenges that arise from this near-term uncertainty and adopt a sales and marketing model that actively promotes products. Even with an abbreviated regulatory pathway, demonstrating similarity to a reference product is more onerous and costly for biosimilars than for small-molecule generics. Biologics are highly heterogeneous and regulatory guidelines are likely to be developed case-by-case. To date, only biosimilars of relatively simple and well characterized hormones and therapeutic proteins have been approved, and more complex biologics, such as monoclonal antibodies, might pose significant challenges to regulators and companies. Facing potentially high development costs, comparability challenges and a difficult market environment, some companies might opt to pursue a traditional full development route, bypassing the abbreviated pathway. This option might be particularly attractive for companies for which cost and/or time differences between approval routes are narrow or where there is reason to believe that a product might have a superior safety or efficacy profile to the originator. Indeed, some companies are likely to abandon biosimilars in favor of “bio-betters” — enhanced versions of originator products. Looking forward, originator, biosimilar and enhanced bio-betters will likely compete against each other on the merits of relative safety, efficacy and value. The global regulatory landscape will remain fragmented. Even within a single jurisdiction, the regulatory approach to products and classes of biologics will vary on a case-by-case basis. In the European Union, policy decisions have so far been made at the member-state level, further fragmenting the marketplace. Growing pains in the European biosimilars market A closer look
- 105. 99 of the leadingbiotech cancer drugs for reimbursement, often generating controversy in the process. In 2007, these trends resulted in the industry’s first-ever money-back guarantee, when Velcade was approved for treatment of multiple myeloma only after Janssen-Cilag promised to refund the cost of treating patients who did not show improvement based on predetermined decision points. These trends continued in 2008. In August, NICE rejected four drugs under consideration for the treatment of kidney cancer — Sutent, Avastin, Nexavar and Torisel — based on its cost-effectiveness criteria. In February 2009, however, the agency reversed course on Sutent after the denial-of-coverage decision generated considerable public outcry and Pfizer offered to reduce the cost of the drug by paying for the first cycle of treatment. Under the terms of the agreement, the National Health Service (NHS) will pay for subsequent treatment cycles if the drug appears to be working. Bayer made a similar offer, agreeing to pay for the first pack of Nexavar, but has so far failed to secure coverage. Interestingly, Pfizer received independent confirmation of the effectiveness of Sutent exactly one month later and, in reaction, announced that it was prematurely ending a Phase III trial of the drug. While trials are typically halted because of poor results, this decision was made because patients with pancreatic islet cell tumors were showing a significant increase in progression-free survival, and the company wanted to let other patients switch from a placebo to Sutent. These creative risk- and cost-sharing arrangements were not limited to cancer drugs. In September, NICE approved Lucentis for the treatment of wet age-related macular degeneration under an arrangement where the NHS will pay for the first 14 injections of Lucentis, with the manufacturer picking up the bill for any more that are needed. NICE has announced some changes in its methodologies over the last year and plans to revisit issues related to the value of innovation in 2009. (For more information, see the article “Valuing innovation” by Andrew Dillon and Sarah Garner in this issue of Beyond borders.) Company Country Brand name Generic name Type Disease category Indication Approved/ registered in Antisoma UK Oral fludarabine fludarabine New formulation Oncology Chronic lymphocytic leukemia (CLL) US Basilea Pharmaceutica Switzerland Toctino alitretinoin New formulation Dermatology Severe refractory chronic hand eczema Denmark, Finland, France, Germany and the UK Basilea Pharmaceutica/ Janssen-Cilag Switzerland/ Netherlands Zeftera ceftobiprole New molecular entity Infectious disease MRSA skin and soft tissue infections Switzerland Santhera Pharmaceuticals Switzerland Catena idebenone New molecular entity Neurology Friedreich's ataxia Canada Ferring Pharmaceuticals Switzerland Firmagon degarelix New molecular entity Oncology Prostate cancer US Ipsen France Adenuric febuxostat New molecular entity Metabolic Chronic hyperuricaemia European Union Jerini/Shire Germany/ UK Firazyr icatibant New molecular entity Cardiovascular Hereditary angioedema (HAE) European Union Orexo/ ProStrakan Sweden/UK Abstral rapinyl New formulation Neurology Breakthrough cancer pain UK, Germany Sweden SkyePharma/ Sciele Pharma UK/US Sular nisoldipine New formulation Cardiovascular Hypertension US Source: Ernst & Young, EMEA, FDA and company websites Selected European products approved, 2008
- 106. 100 Beyond bordersGlobal biotechnology report 2009 Outlook European companies made solid pipeline progress during 2008, but product approvals from European companies still lag behind those from the more developed and mature US sector. In a tight financing environment, companies will need to focus on continued pipeline progress and particularly on advancing compounds into Phase IIb and Phase III trials. Positive news from larger companies is helpful, as it tends to move investor sentiment toward the sector as a whole. Encouragingly, the start of 2009 provided positive late-stage news for some of Europe’s more mature biotech companies. In March, the EMEA accepted Genmab’s marketing authorization application for its HuMax-CD20 antibody Arzerra (ofatumumab) for the treatment of chronic lymphocytic leukemia, triggering a milestone payment from marketing partner GSK. Arzerra was also submitted for FDA approval in late January. Actelion’s Zavesca (miglustat) received EU approval in January for the treatment of progressive neurological manifestations in patients with Niemann-Pick type C disease, making it the first product approved in this indication and expanding its use outside of Gaucher’s disease. In April, the European Commission granted approval for Germany-based TRION Pharma’s Removab (catumaxomab) for the intraperitoneal treatment of malignant ascites in patients with EpCAM-positive carcinomas. The European Commission also approved Austria-based Intercell’s IXIARO vaccine for the prevention of Japanese Encephalitis. A number of companies are awaiting results for important late-stage trials and product-approval submissions in 2009, and more good news would certainly help attract investors in what promises to be a challenging year financially.
- 107. 101 Roundtable on industrialbiotechnology Evolution, progress and sustainability Ernst & Young: Has industrial (white) biotechnology developed differently in Europe and the United States? Wubbolts: Historically, the differences in the development of industrial biotechnology between Europe and the US have not been significant. On both continents, early processes made use of fermentation such as for alcohols (e.g., ethanol and butanol), organic acids (e.g., citric acid), vitamins (e.g., biocatalytic step for Vitamin C), amino acids (e.g., Lysine and MSG) and the production of antibiotics (e.g., penicillins and cephalosporins). Early adopters included both US and European companies, including the likes of Archer Daniels Midland, Bristol-Myers Squibb, Cargill, Roche, Eli Lilly, Novo Nordisk and Gist-Brocades (now DSM). In recent periods, Europe has specialized more in the application and production of industrial and specialty enzymes. European companies have also focused on higher-value-added molecules (semi-synthetic antibiotics, vitamin B2 and biocatalysis for active ingredients in pharmaceutical applications). More traditional processes (e.g., amino acids, organic acids, penicillin and MSG) have remained strong in the US, but have also found a new haven in Asia. The US, of course, has become dominant in bioethanol production as a result of strong governmental support for biofuels to supplement gasoline — even to the point where the US has overtaken Brazil. Zinke: Historically there was a strong scientific base on both sides of the Atlantic in areas such as strain development, molecular evolution and biocatalysis. But when the biotechnology industry took off — during the late eighties in the US and a decade later in Europe — this scientific base was rarely visible. So industrial biotechnology attracted relatively little interest at the large investor conferences or, for that matter, in the capital markets. Despite the fact that there have been very prominent examples of dedicated industrial biotech companies, for example Genencor (now a division of Danisco), these companies were not the primary focus of attention. Maurer: In Europe, industrial biotech developed largely in collaboration with the chemical industry and therefore targeted process improvements in chemical production, rather than focusing on developing alternatives for specific raw materials such as oil. Industrial biotech in Europe is a core competence in a wide array of companies, ranging from pure-play companies such as Novozymes and Genencor to midsized and small biotech entities. White biotech is also widely distributed throughout industries such as chemicals, consumer goods and food. And lastly, academic research in industrial biotech has always been a strong asset. In the US, biotechnology has been primarily associated with red (health) applications, and industrial biotech has traditionally had less focus and attention. Companies such as Maxygen and Diversa (now Verenium) have pursued industrial applications and there have been US Department of Energy-funded projects focused on energy and new-platform chemicals from renewable sources. I agree with Marcel that at the moment the industrial biotech arena in the US is dominated by primary and secondary biofuel initiatives. Ernst & Young: What major business and public-policy trends are driving industrial biotechnology today? Zinke: The situation has changed today. As already mentioned, the visibility of industrial biotechnology efforts in the US has been influenced by the objective of achieving energy independence. The political spotlight on industrial biotechnology as part of the solution has increased investor interest in the past few years. In Europe, established industry players adopted biotech on a case-by-case basis, resulting in a relatively dense network of diverse efforts. Remarkably, despite the different focus of the companies and the diversity of the applications and markets, a small but coherent industrial-academic community has been established. Holger Zinke, Ph.D. BRAIN AG CEO Karl-Heinz Maurer, Ph.D. Henkel AG & Co. KGaA Director Biotechnology, Global R&D: Chemistry, Laundry and Home Care Marcel Wubbolts, Ph.D. DSM Innovation Center Program Director, White Biotechnology
- 108. 102 Beyond bordersGlobal biotechnology report 2009 Interestingly, the political efforts as well have resulted in diversity. While there are several European and national initiatives using the industrial or white biotech label, many are aimed in different directions. This would seem to be ineffective at first glance, but the multifaceted situation creates room for entrepreneurial activities and academic clusters. We see groups of newly founded companies in technologies ranging from biocatalysis, bioinformatics and metabolic engineering to product-innovation-driven concepts. At this time, one can only speculate as to whether having so many emerging companies pursuing different applications is a strength or a weakness for Europe. Maurer: I agree completely that in the US the main drivers come from the political area and the focus is biofuels, as well as platform chemicals. In Europe there is almost no political motivation visible beyond an interest in starting new companies. The focus in Europe is on the application of biotechnology for innovation that meets the needs of customers, and on sustainability. If the transformation of the industry is the consequence, it will occur because it makes sense in the market and not because there is a political motivation. Ernst & Young: Can you point to some significant examples of industrial processes that have been transformed through the use of biotechnology? What advantages or efficiencies do these applications create? Wubbolts: There are certainly many instances where the use of biotechnology has transformed industrial processes. Prominent examples in the European industry include processes for vitamins C and B2, amino acids, and food and feed additives such as alpha-amylase, glucose oxidases, pectinases, proteases, (phospho)lipases and fytases. In many cases, biotechnology has been the enabling technology. In most cases, cost reduction has been the main advantage, combined with an increase in product quality and lower usage of raw materials and energy — which has direct environmental benefits and indirect cost advantages as well. Capital expenditures for these new processes, in many cases, have been lower than for traditional alternatives. Maurer: I believe that the transformation of laundry-detergent products is an important example. We have seen a move from products that required the use of high quantities of detergent and high temperatures in the 1970s, to today’s laundry detergents which can work in small amounts over a temperature range from 20°C to 100°C and which contain up to seven different enzymes. We have seen similar progress in automatic dish-washing detergents, in which enzymes were used for the first time in the early 1990s. Since then, the amount of chemicals used in these detergents has declined significantly. The role of enzymes in the performance of many of today’s products cannot be overestimated. New and improved enzymes will demonstrate improved performance that allows for differentiation between competing products. At the same time, we may also see further reduction of chemicals used in the process. Replacing substances with biocatalysts also allows for more concentrated product and packaging material, and as a consequence, the amount of fuel needed for transport can also be reduced. To some extent, enzymes can also be used to balance the volatility of petrochemical raw material costs. Zinke: Industrial biotechnology can be defined as using the toolbox of nature for industrial production. This is fine, but most discussions tend to focus on the production of standard chemical products or intermediates by means of fermentation or biotransformation. The biology competes with established and mostly large-scale chemical processes. If we regard the toolbox of nature as a resource for new functionalities, the scope of industrial biotechnology is wider. We are absolutely convinced that new products will result, including cosmeceuticals, nutraceuticals, functional biomaterials and adhesives. Nature has invented solutions, and it is our task to translate the resulting functionalities in technical use. Process innovation is the main area of interest for the larger, integrated companies. However, I think there is potential for true value creation by entrepreneurial companies in the field of novel functionalities. Given that most speciality chemicals target biological structures, I would not be surprised to see novel classes of specialty biologics. We are currently in a situation of mining
- 109. 103 the biological inventory,securing intellectual property positions and developing prototypes. We can also profit from the technologies originally developed for biopharmaceutical development and apply them for cosmetics and nutrition. Collaborations between dedicated industrial biotech companies and established industry players can be of significant value, since they will permit the creation of novel noncommodity products. Ernst & Young: Does this industrial transformation lead to advantages beyond product and process innovation? Maurer: The so-called industrial transformation is only just beginning. I agree that the major impact is on product efficiency and performance, and this performance is based on sustainability, a key fact for us at Henkel. All new products are evaluated in this light, taking into account every aspect of the product life cycle, from production to use. Apart from that, there are new suppliers, new business models and new business opportunities that result from industrial transformation. Zinke: Industrial biotech products are being boosted by a major societal trend: consumer preferences are shifting toward sustainable products. Remarkably, this trend has not been disrupted by the financial crisis; to the contrary, the demand for sustainability is stronger than ever, even in the investment community. Sustainability does not mean reduced convenience, innovation or performance. It means premium products for a quality-oriented consumer. Wubbolts: Besides product innovation, process innovations that are part of this industrial transformation have led to higher product efficiencies for specialty and technical enzymes in food, feed, textiles and paper/pulp. In addition, lower energy consumption through processing at ambient temperatures, reduced solvent use and solvent recycles, and reduced use of hazardous intermediates and reagents has occurred. As a consequence, fermentation and enzyme-catalyzed processes can be performed at sites that are not linked to crude oil pipeline networks or that have lower risk standards than some chemical plants. Ernst & Young: What’s the outlook for industrial biotechnology? In which segments or applications are we likely to see significant growth? Zinke: Today we are in a position where a technology push is meeting a societal trend toward sustainable living and sustainable products. Look at breakthroughs such as the meta-genome technology that allows us to work with millions of genomes which are valuable resources for new biocatalysts. Look at the minimal genome initiatives, where we will see highly efficient producer organisms. Or look at the metabolic engineering or in vitro evolution technologies we can use today. We have had an explosion in recent years in technology portfolios and corresponding throughput, enabling the use of nature’s toolbox in new ways. Maurer: Pragmatically speaking, the driving factors are always cost, performance, convenience in application and a “natural” or “green” message that can be linked to the product. Apart from these factors, there is always the hope for new innovations branching out from an initial discovery — mostly there is greater opportunity for this to occur with enabling technologies than with product innovations. My belief is that with respect to second-generation biofuels, we still have a long way to go. But if successful, this progress will certainly lead to further innovation opportunities in the industrial biotech area. Wubbolts: “Omics” and other high-throughput technologies, including synthetic biology, are critical to ongoing innovations. Enzyme optimization and cell engineering to adapt to industrial conditions are imperative. Biorefineries may be driven by a focus on energy, but they will not achieve the desired sustainable profitability unless by-products are used at a level of efficiency similar to the oil-based refineries’. Food and feed uses are less likely outlets for biomass-based processes, and therefore alternatives will need to be implemented. Complex feed streams are likely to be fractionated and used in a variety of large-scale applications. Lignin, as an example, will be available in vast amounts and can mostly be used for energy generation, but more valuable applications are likely to emerge.
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- 111. The Asia-Pacific perspectiveTheAsia-Pacific perspective
- 112. 106 Beyond bordersGlobal biotechnology report 2009 In 2008, the global economy underwent changes on an unprecedented scale: dizzying stock market volatility, a fundamental restructuring of global finance, economies struggling with deep recessions, and major public policy responses. The seeds of these changes, it is fair to say, were sown in the West. The crisis started, after all, in the US mortgage markets; but it spread rapidly beyond national borders as it touched a series of industries around the world. Biotech industries in the West certainly felt these changes. Small-cap companies in most markets now face a much tougher environment for raising capital. They are scrambling to raise funds, cut costs and lower cash burn. Much of this year’s Beyond borders discusses these impacts and the outlook for biotech industries in Western economies. But the seeds of change have also been carried to the shores of Asia, where the crisis is clearly having consequences. Since Asia’s rapidly growing biotech industries are fundamentally different from those in the West, it is quite likely that the fallout in this region will be unlike that in the West. Some of the likely effects are described below. Seeking cost efficiency: outsourcing and services As discussed in recent issues of Beyond borders, the biotech industries of many Asian economies have developed competitive niches in specific industry segments. One of these is contract services, where Asian companies have attracted increasing amounts of work from the West. While Asian contract research organizations (CROs) and contract manufacturing organizations (CMOs) may have seen some immediate backlash from the crisis as Western companies cut back defensively in reaction to tremendous market uncertainty, the next iteration of responses carries considerable promise. As Western companies navigate an environment where capital is scarce, they are under increasing pressure to lower cash burn and contain costs. Many Asian CROs and CMOs expect that this should lead to an increase in outsourcing of clinical trials and manufacturing to Asia. But this crisis is also unlike anything else in recent memory. Because of “the interconnectedness of all things” (refer to the Global introduction article for more details) there are many hidden sources of risk lurking beneath the surface that Asian contract service providers will need to monitor. As they enter or expand contracts with Western firms, they will need to watch for increased counterparty risk. Rapid growth could also increase reputational risk, if firms are unable to keep up with the work and deliver high-quality services. Indeed, in anticipation of these changes, a number of companies are investing in developing their infrastructure and controls. Seeking markets: inward investment Western companies have been investing significantly in Asia in recent years, and many larger companies have included the growing economies of Asia in their long-term plans. As Western markets mature, these firms recognize the tremendous potential for higher growth in Asian economies, where vast numbers of people with medical needs do not have access to healthcare. Yet these plans are predicated on assumptions of growing middle classes and rising incomes. If growth slows substantially in these markets because of the global recession — while meanwhile big pharma companies are becoming more selective about their investments — there is the risk that some companies could move more slowly on their Asia strategies. Seeking sustainability: business models and partnering As discussed in this year’s “Global introduction” article, the current environment is putting the biotech industry’s business model under unprecedented stress. As the industry searches for a path to a sustainable business model, there may be opportunities for Asian companies to sow seeds of change in the other direction — by providing examples and solutions that make sustainability possible. In many Asian countries, for instance, companies have had to evolve without the benefit of success factors that are typically considered critical for the emergence of biotech clusters in the West — strong university research, technology transfer laws that support commercialization, experienced venture capitalists and adequate funding. Consequently, companies have developed different business models. For example, the absence of sufficient capital has led many Asian companies to hybrid models that combine contract services activities with innovative drug development. At a time when Western companies face similar constraints, there could be models to borrow from Asian companies. Asia-Pacific introduction Seeds of change?
- 113. 107 The dream ofthe sea turtles: can China offer a new model for Western biotech companies? Biotech companies in the West have been hit hard by the financial crisis. Traditional funding sources have dried up. Many firms have less than a year of cash on hand and prospects for raising more capital look bleak. It could be argued that the biotech business model is now truly broken. At the least, critical aspects of that model are under unprecedented strain — there is a complete mismatch between investors’ appetite for risk and the long product-development time frames and relatively low success rates for drug R&D. This threatens the survival of firms in the short run and the ability to fund innovation over the long term. There are two basic ways for companies to work around this mismatch. In an environment where capital has become scarce, they can lower costs to make their limited means go further. Alternately, they can increase research productivity to lower R&D risk and make the biotech business model more attractive to investors. On both fronts, China offers the opportunity to do things differently. Chinese models By now, the West has become habituated to an organizational model in which most biotech companies are lean organizations. While this is often necessitated by bare-bones operating budgets, it fragments knowledge into far-flung pockets, which often inhibits the integration of expertise. But life sciences activities are complicated and interdependent, and integration across diverse disciplines is critical. In contrast, by leveraging some of the country’s comparative advantages, Chinese companies are starting to build enterprises that are more integrated than Western firms. It is no secret, for instance, that China has a vast supply of affordable human capital. The country produces more than six million college graduates each year. These resources are now being supplemented by a growing pool of Western-educated and experienced returnees (nicknamed “sea turtles” in China) drawn back by explosive economic growth and the opportunity to make substantive contributions to China’s blossoming biotech industry. This combination of abundant human capital, lower business costs and experienced returnees is allowing entrepreneurs to build Chinese biotech firms that are far more integrated — with significant capabilities in disciplines ranging from discovery research through clinical development — than their counterparts in the West. And this integrated approach can produce more efficient and productive R&D. Western companies can exploit these advantages by leveraging China’s capabilities in their business models or partnering with Chinese firms. For instance, at Hutchison MediPharma — an integrated biotech company led by sea turtles and employing more than 200 scientists — we are not only driving internal programs to clinical development but also entering into risk-sharing alliances with Western majors. The firm’s partnerships with Eli Lilly and Merck AG, initiated in 2007, bore fruit in 2008, when Hutchison delivered discovery milestones for both partners and expanded its alliance with Lilly. In late 2008, Hutchison and Johnson & Johnson announced a collaboration in which J&J selected a project on inflammation from Hutchison’s internal program. The risk-sharing business model focusing on a specific disease target can not only mitigate R&D risks for biotech firms but also produce deeper knowledge and mutual learning. It also enables multinationals to access China’s capital efficiencies, human resources and, eventually, the fast-growing domestic market. Outlook Of course, there are challenges to be met. The local talent base lacks specialized experience, although this is at least partially compensated for by passion, the ability to learn and the contributions of sea turtles. The industry will need supportive policies and regulations, and the Chinese government is helping on this front. The government is actively investing and has designated biotech a high-priority “pillar industry.” In January 2009, the SFDA implemented a fast-track “green channel” to accelerate first-in-man studies — a measure that should boost Chinese clinical trial activities. While China’s economy is not immune to the financial crisis, the economic devastation in the West could prompt talent and capital to flow to emerging markets. The movement of returnees could accelerate from a steady stream of sea turtles swimming up to China’s shores to a much larger mass migration. And for Western companies straining against a challenging business model, the China advantage might offer new approaches to boost R&D productivity, to the benefit of the global biotech industry and patients everywhere with unmet medical needs. Samantha Du, Ph.D. Hutchison MediPharma Limited Chief Executive Officer
- 114. 108 Beyond bordersGlobal biotechnology report 2009 M.K. Bhan, M.D. Secretary to the Government of India, Department of Biotechnology Ernst & Young: Could you give us a brief update on the state of the Indian biotech industry? Bhan: The Indian biotech industry is spread over several sectors, including healthcare, agricultural biotechnology, contract services, bioinformatics and others. According to the 2008 ABLE-BioSpectrum survey, the industry is growing at an impressive annual growth rate of about 20%. A large chunk of this activity is in generics, contract services in the early stages of drug discovery, clinical development, and manufacturing of clinical supplies. However, we are seeing that several Indian companies are now engaging in product innovation and are developing their own novel molecules. To support this core biotech space, the National Biotechnology Development Strategy has been implemented by the Department of Biotechnology. Ernst & Young: What role is the government playing in boosting the Indian biotech industry? What measures are you taking to spur innovation and develop a supportive regulatory structure? Bhan: Indian companies have traditionally been risk averse when it comes to new product development. To a large extent, this has resulted from the Patents Act of 1970, which did not provide patent protection for products (the act instead protected the process used to make a product). As a result, there was no incentive to develop new products and India did not develop considerable skills in the area of innovation. This was visible not only in the scientific arena but also in the areas of finance and government regulation. Indian bankers never developed a deep understanding of the risk-reward nature of drug innovation, and the regulatory system was never challenged with having to regulate new drug innovation, especially in the early stages, where the risk is highest. With the reform of the Patents Act in 2005, India fully enforces product patents. This has inspired many Indian companies to go the innovation route, but the industry lacks sufficient risk capital to fund this increase in R&D. The Indian government has responded with a host of programs to fill the gap. A new government program, the Biotechnology Industry Partnership Program, specifically recognizes this aspect and provides funds for industry to undertake high-risk research. It provides support in the form of grants and soft loans to innovative projects within companies, both at early stages as well as late-stage clinical trials. Similarly, the Pharma Fund supports innovation at companies, while the New Millennium Indian Technology Leadership Initiative program assists public-private partnerships. The government has provided early-stage funding through the Small Business Innovation Research Initiative — a measure that has been well received and has initiated industry platforms in biopharmaceuticals, vaccines, cell therapy and agricultural biotechnology. The Union Cabinet has approved a bill for the public funding of R&D to boost innovation and technology transfer; the bill has since been introduced in the parliament. In addition to funding, the government is actively developing a supportive regulatory framework. The National Biotechnology Regulatory Authority is close to receiving final endorsement — this would create, for the first time, a single regulatory body overseeing all aspects of biotech drug regulation. Meanwhile, the various agencies currently charged with regulating the industry — the Genetic Engineering Approval Committee, the Review Committee on Genetic Manipulation and the Drugs Controller General of India — have also improved and streamlined their procedures. A recently approved National Science and Engineering Board will become operational in April 2009 to give a boost to science and technology. The majority of commitments made in the National Biotechnology Development Strategy have already been included in budgetary allocations, resulting in a nearly five-fold increase in the biotech budget in India’s Eleventh Five-Year Plan — one-third of which will be focused on industry innovation. Ernst & Young: What potential risks or challenges could the global financial crisis produce for Indian biopharmaceutical companies? What potential opportunities could it produce? Bhan: The global economic crisis has the potential to create both positive and negative impacts for India’s biotechnology industry. Though small, the Indian biotech sector is integrated into the global industry, with nearly two-thirds of its revenues A conversation with M.K. Bhan Changing realities “With the reform of the Patents Act in 2005, India fully enforces product patents. This has inspired many Indian companies to go the innovation route, but the industry lacks sufficient risk capital to fund this increase in R&D. The Indian government has responded with a host of programs to fill the gap.”
- 115. 109 coming from exportsof products and services. In the short term, there could be some decline in export orders for India’s biotech products due to liquidity constraints in importing countries. In addition, the majority of Indian products are imported by a number of multilateral agencies, which could delay placing new orders in the current environment. However, as organizations in the West adjust to the recession, there could be new opportunities for Indian firms. As Western firms move to reduce their costs, they are more likely to turn to Indian biotech companies to source their products. Multilateral agencies may place more orders with Indian companies to cover more patients with limited resources at a time when fundraising and endowments are down. Outsourcing of a number of activities in the drug-development value chain to Indian companies may also accelerate in the next few years. India’s contract research organizations are anticipating increased business, and we are likely to see them upgrade infrastructure and expertise to cater to surging demand over the next few years. Ernst & Young: In the current climate, many Western companies will need new models for funding R&D, structuring strategic transactions and approaching commercialization and pricing. But Indian firms have often followed a different path over the years, driven by market conditions that are different from those in the West. What lessons, if any, could Western firms learn from their Indian counterparts? Bhan: In both geographies, the business models that have evolved have been driven primarily by the macro environment — financial backing, legislation, regulatory frameworks and other factors. Whether or not companies in India and the West can learn lessons from each other, the important question is really how they can capitalize on each other’s strengths in the current situation. If we can all do that, we would be better equipped to face today’s tremendous challenges in ways that provide affordable healthcare for patients around the world. Ernst & Young: What advice would you give Western biotech companies looking at opportunities in India? What sorts of creative approaches and thinking will Indian and Western firms need? Bhan: It is our view that India offers Western companies highly competitive, cost-effective alternatives for research and manufacturing work. But for the partnership to evolve further, both sides will need to think progressively. Indian institutions will need to make sure they are geared to meet the demands of Western organizations, by upgrading their infrastructure, adhering to timelines, attracting and retaining top-quality human resources and maintaining global quality standards with government support. A few dozen Indian biopharmaceutical companies have started to look at the industry from a new perspective and are investing heavily in innovation. These organizations have excellent human resources, are run by people who have worked extensively in Western markets, are highly quality-conscious and are open to collaborating with the best in the world. Western companies should take a close look at the facilities of these Indian firms and engage them at a deeper level to understand their immense capabilities for partnership in a variety of segments. The willingness to learn is an inherently Indian trait, and India is a changing country. To Western companies considering India, I would say: don’t let yesterday’s perceptions cloud your assessment of today’s changing realities. “Whether or not companies in India and the West can learn lessons from each other, the important question is really how they can capitalize on each other’s strengths in the current situation. If we can all do that, we would be better equipped to face today’s tremendous challenges in ways that provide affordable healthcare for patients around the world.” “The willingness to learn is an inherently Indian trait, and India is a changing country. To Western companies considering India, I would say: don’t let yesterday’s perceptions cloud your assessment of today’s changing realities.”
- 116. 110 Beyond bordersGlobal biotechnology report 2009 After a strong financial performance in 2007, the Australian biotechnology industry has been hit hard with funding challenges caused by the global economic crisis. However, financial performance remained strong — largely because of product sales at CSL — and the sector’s pipeline looks very robust, with a sizeable group of companies approaching commercialization. Financial performance The financial performance of the Australian biotech sector continued to improve steadily in 2008 — revenues grew 26% relative to 2007 and R&D increased by 32%. The industry also continued to remain profitable in aggregate, with both Celletis and Cogstate joining the growing list of profitable biotech companies. As in prior years, however, the financial performance of the industry was driven by the largest firm, CSL, which posted a profit of A$702 million (US$626 million) on revenues of A$3.6 billion (US$3.2 billion), a 30% increase from 2007. This gain, which was tempered by negative foreign-exchange swings, was due primarily to the continuing demand for CSL’s plasma products as well as increasing royalties from Gardasil, its cervical cancer vaccine. While CSL’s market capitalization increased only 4% to A$20 billion (US$17.9 billion) at year-end, this is in stark contrast to the rest of the sector, which lost 57% of its market value in 2008. Financing trends Australia’s publicly traded biotech companies are divided into haves and have-nots. At the top of the list are companies with advanced pipelines and solid financing, followed by firms that raised venture funding at an early stage and continue to enjoy support from venture-capital backers. After these two groups, however, come the have-nots — companies that were compelled to go public prematurely because of a lack of venture capital, and which often continue to struggle. The Australian Stock Exchange (ASX) has traditionally been used for early-stage financing by relatively immature companies, and more than 70% of IPOs over the last six years raised less than A$10 million (US$8.9 million) each. At the other end of the spectrum, more than half of the follow-on capital raised over this same period went to the 15 largest drug-development companies. The financing totals for the year, as in most parts of the world, were down. The IPO market was essentially closed, with only two IPOs getting off the ground. Meanwhile, funds raised in the “follow-on and other” category fell sharply. These funds, which tend to significantly exceed capital raised through IPOs, fell from a record-breaking A$483 million (US$380 million) in 2007 to A$112 million (US$99.8 million) in 2008. Follow-on funding plummeted to levels not seen since 2002, and consisted primarily of small financings — notable exceptions were Peplin, which raised A$27.1 million (US$24.0 million), and Chemgenex and Neuren, which raised about A$12.9 million (US$11.5 million) respectively. “Other” financings — including private placements, rights issues and convertible debt — were primarily small, with most transactions under A$2 million (US$1.79 million). Unfortunately, this lack of access to capital was exacerbated in May 2008 when the Australian federal government terminated the Commercial Ready Grant Scheme, a program that used to provide direct financial assistance to both private and publicly listed biotech companies on a “one dollar for every two dollars spent” basis. Bioshares, Australia’s leading independent biotech investment stock report, estimates that this program and two other programs that it replaced together invested over A$300 million (US$268 million) in the life sciences industry between 1996 and 2008. With commercial funding essentially dried up, the federal government’s timing could not have been worse. Continued public-sector funding could have allowed many companies to sustain their R&D activities and ultimately improve their ability to attract commercial investment when the markets open up. With government grant money unavailable and the window to the public markets firmly closed, there is added pressure for private companies that Australia year in review Haves and have-nots Public company data 2008 2007 % change Revenues (US$m) 3,602 2,857 26% R&D expense (US$m) 499 377 32% Net income (US$m) 134 102 31% Number of employees 10,480 9,770 7% Market capitalization (US$m) 21,519 21,450 0% Total assets (US$m) 6,541 5,431 20% Number of public companies 84 85 -1% Australian biotechnology at a glance Source: Ernst & Young analysis of company financial statement data
- 117. 111 would previously haveturned to the ASX to raise early-stage capital. Times will also be challenging for listed companies that did not tap the markets for follow-on financing over the last few years while money was comparably easy to raise. In spite of the challenging markets, a pair of venture-capital firms (VCs) managed to close funds during 2008. Starfish Ventures closed a A$185 million (US$165 million) fund for investment in cleantech, information technology and life sciences, and GBS Ventures closed a A$100million (US$89.3 million) fund dedicated to life sciences. However, VCs that did not close funds in the past few years and need to go back to raise new funds in 2009 will likely find it very difficult. This, coupled with VCs’ need to focus relatively limited uncommitted capital on sustaining existing portfolio companies, will make raising venture capital challenging for many biotechs. Exits have become more difficult as well. Data collected by the Australian Private Equity & Venture Capital Association shows that only 16 exits occurred in 2007–08, in contrast to 44 in 2006–07. CM Capital, a leading Australian venture fund, noted that several Australian venture-backed biotech companies are now close to market and could become profitable relatively soon. This could, in turn, boost investor sentiment toward the sector and permit VCs to exit their investments and return to fund new companies. Deals The biggest M&A transaction of 2008 was the one that was not completed (at least not yet.) In August, Australian giant CSL announced an agreement to acquire US-based Talecris Biotherapeutics for A$3.5 billion (US$3.1 billion) in cash. The merger seeks to combine the second- and third-largest firms in the global market for medical products derived from human plasma. Privately held Talecris — which had been purchased from Germany’s Bayer in 2005 by US-based venture fund Ampersand Ventures and private-equity firm Cerberus Capital Management — had initially tried to go public in 2007 before agreeing to be acquired a year later. The deal would give CSL greater access to the North American and European markets while giving Talecris a reliable supply of products for its customers and helping it build its plasma supply platform in a measured, quality-compliant way. As this publication goes to press, the deal has not yet been approved by regulators, and the companies are complying with requests for additional information from the US Federal Trade Commission. Other significant deals include Sigma Pharmaceuticals’ acquisition of privately held specialty pharmaceuticals company Orphan Holdings for A$130 million (US$116 million) in cash in February 2008. The deal, which gave existing owners such as AMP Capital Investors an exit, will allow Sigma to diversify its interests and expand in certain niche specialty pharmaceuticals markets. Also in February, Progen Pharmaceuticals acquired privately held US oncology firm CellGate. The transaction expanded Progen’s pipeline in oncology, and Progen gained platform technologies in the areas of epigenetics and polyamines that will form the foundation for new compound development. Progen issued new shares worth A$1.7 million (US$1.5 million) and assumed CellGate’s net liabilities of A$1.1 million (US$1 million). The deal also includes additional earn-out payments totaling up to A$21.8 million (US$19.5 million) if certain clinical and regulatory milestones are achieved. At a time when cash is king and many companies are finding it difficult to raise capital for their long-term needs, activist shareholders in some US biotech companies have started to demand that companies with failed clinical trials return their remaining capital instead of funding more R&D. These trends were mirrored 700 100 Source: Ernst & Young, Bioshares and company annual reports 2002 2003 2004 2005 2006 2007 2008 0 Follow-on offerings 600 500 400 300 200 Australian biotech public equity raised, 2002–08 IPO A$m Number of transactions 70 10 0 60 50 40 30 20
- 118. 112 Beyond bordersGlobal biotechnology report 2009 in the failed merger between Progen and Avexa. Avexa, a company with Phase III HIV studies in progress, intended to merge with Progen, a well-financed oncology company with over A$70 million (US$62.5 million) in cash and a failed Phase III trial. However, a block of Progen shareholders, attracted by the company’s healthy cash balance, sought a larger return of capital than the A$20 million (US$18 million) proposed in the Avexa merger. To mollify these shareholders, Progen announced a A$40 million (US$36 million) voluntary share buyback at a price of A$1.10 (US$0.96) per share. Before this plan could proceed however, the board was required to face another general meeting, this time instigated by the Cytopia Shareholder Group where the shareholders were asked to vote on the removal of all current board members and the appointment of three new directors. The Cytopia Shareholder Group indicated that the new board, if elected, would implement a share buyback and consider a merger of Progen with Cytopia Limited (an ASX-listed biotech company), a deal that had already been rejected by the Progen board in favor of the Avexa transaction. The shareholders voted against the appointment of the Cytopia Shareholder Group nominees. However, they also voted out four of the six Progen directors. The remaining Progen board members are now focused on rebuilding the company and implementing the previously announced A$40 million (US$36 million) voluntary share buy-back. The need for sustainable models The daunting financing environment raises questions about sustainability — not just for individual companies struggling to survive, but also for the Australian biotech sector as a whole. As of December 2008, approximately 36% of listed biotech companies had less than six months of cash on hand, up from 13% a year earlier. Not surprisingly, this has led to corporate restructuring initiatives. Many companies are shelving early-stage R&D programs for at least the short term to concentrate on their lead drug candidates and reduce cash burn. Alchemia initiated a broad program of cost-reduction measures to maintain sufficient capital for near-term projects until revenues from its lead product, fondaparinux, begin. These steps included suspending several projects, reducing headcount by 60% and restructuring the board of directors. Cytopia took similar steps by capping staff, trimming expenses and focusing on later-stage trials. Circadian Technologies, a long-standing investor in biotech companies, sold many of its shareholdings and refocused its business model to become a developer of anticancer drugs. The refocus has given Circadian more than three years’ worth of cash. Others were not as lucky. Apollo Life Sciences and Chemeq appointed administrators to initiate bankruptcy proceedings, and Diversa Limited exited the biotech space after acquiring a retail superannuation (pension) fund. Of course, the challenging circumstances will also likely produce an uptick in acquisitions as companies consolidate to survive or are taken out by competitors. Unfortunately, many of these transactions will happen at distressed valuations and unattractive terms. In an ideal world, M&A deals would be initiated to achieve cost efficiencies and clinical effectiveness, secure top-notch management teams and deepen pipelines, while financing transactions would happen at optimal pricing when capital was not necessarily needed. While the global economic crisis was created by factors far beyond the control of Australian biotech companies — it had its genesis half a world away, in US subprime mortgage markets — the Australian sector’s long-standing models for company formation and financing have left firms ill-equipped to withstand these challenges. The problem begins with how new start-ups are formed. Most Australian universities and research institutions have incentives tied to the number of start-ups they generate rather than the quality of those companies. Consequently, the industry has a large number of companies formed around a single compound rather than a complimentary group of compounds, resulting in a larger group of companies competing for the same small pool of funds. Australia’s biotech funding model — both private and public investment — has historically been based on “drip feed” financing that gives firms small injections of capital to fund operations for 6–12 months to avoid shareholder dilution. Unfortunately, this also forces companies to run very lean operations, which prolongs product-development times, makes retaining high-quality management challenging and — in difficult economic times — creates a real risk of insolvency. Australian companies have traditionally resisted consolidation, whether for reasons of board/management egos or shareholder dilution. In addition, they have often avoided making the difficult decisions to terminate projects that fail to meet milestones or have questionable commercial viability. These factors have contributed to the quandary facing many public and private companies today. More than 52% of listed companies have a market cap under A$10 million (US$8.9 million), and about 36% of companies have less than six months of cash left. Many of these companies could have benefited from consolidation prior to going public, making them more attractive to investors. As such, they might have raised venture capital, giving them access to a wider, more sophisticated, shareholder base. There are lessons in all of this that could help build a strong, sustainable biotech industry after the downturn is over. The sector needs to restructure university incentives and focus on cutting-edge, readily commercializable technologies. Companies should not be built around single products, which should help them raise adequate funding and make them
- 119. 113 more resilient. Whenneeded, companies must make the tough decisions to terminate projects that do not show early commercial viability. Building a sustainable industry is not about avoiding shareholder dilution at all costs. It is about ensuring that the company and the technology are as well funded as possible to either reach commercialization quickly or demonstrate sufficient value to attract a licensor. It is only through measures such as these that Australia will develop a truly successful and sustainable biotech industry that can provide consistent financial returns to patient shareholders. Promising pipelines The good news on the sustainability front is that a number of prominent Australian companies are currently in or getting ready to launch pivotal Phase III trials, including Chemgenex, Pharmaxis, Acrux, Alchemia, Peplin, Clinuvel, Avexa, Halcygen and QRxPharma. Certainly, the odds are that not all of these trials will succeed. The year 2008 brought two disappointments. Progen announced the termination of its pivotal Phase III clinical trial in liver cancer in July 2008, and Neuren announced the failure of its Phase III trial of Glypromate to reduce cognitive impairment in patients undergoing cardiac surgery with cardiopulmonary bypass. While such setbacks are inevitable in the high-risk endeavor that is drug R&D, if several of the leading companies in late-stage trials receive positive results in the months ahead, it could rekindle investor interest in the sector. Looking ahead In the current risk-averse and capital-constrained financing environment, the chasm between the haves and have-nots is widening, and not everyone will have access to capital. Early-stage funding will be limited. Investors will instead continue to fund lower-risk companies that are on the cusp of commercialization. Unfortunately, companies approaching Phase II trials and in need of significant capital injections may also find few good options. Many companies will not survive the downturn, and we expect significant consolidation to leave us with fewer companies. Still, if this proves to be a Darwinian moment for the industry, companies that do survive are likely to emerge stronger on the other side. The Australian biotech industry has yet to experience sustained commercial success from a broad group of profitable firms. If many of the sizeable cohort of companies in late-stage trials can successfully bring new products to market, the sector will gain much-needed momentum. And if biotech firms and their investors are willing to develop new models for company formation, R&D and financing, the sector could gain not just strength but sustainability. Small capital injections Talent-retention challenges Lean operations Prolonged development times Insolvency risk in downturns Will Australian biotech wean itself off the “drip-feed” model?
- 120. 114 Beyond bordersGlobal biotechnology report 2009 India’s biotechnology industry has grown rapidly in recent years. Patent reforms have exposed domestic companies to foreign competition and spurred innovation. Western companies, attracted by a large base of skilled manpower and lower-cost research, have boosted the local contract-services industry. And supportive government officials are responding with reforms to encourage innovation and streamline regulations. (For more details, refer to “Changing realities,” our interview with Dr. M.K. Bhan, Secretary to the Government of India, Department of Biotechnology.) These trends continued over the last year. Regulators have been quick to anticipate the huge potential of India’s biotech industry. In late 2007, the government approved the National Biotechnology Development Strategy (NBDS), which aimed to strengthen the industry’s human resources and infrastructure while promoting growth and trade. To further support the NBDS, the Indian government has allocated Rs18 billion (US$351 million) for biotech R&D in fiscal year 2009. This forms about 30% of the total budget allocation for this sector. Moving toward standardized approvals Most significant is the development of far-reaching legislation to standardize regulatory approvals. Currently, the authority to approve biotech products rests with various agencies: the Review Committee on Genetic Manipulation, the Genetic Engineering Approval Committee and the Drugs Controller General of India (DCGI). Ad hoc committees are also convened on a case-by-case basis, resulting in a lack of uniformity. Consequently, the NBDS proposed to establish an independent and autonomous statutory body, the National Biotechnology Regulatory Authority (NBRA), to provide a consistent mechanism for regulatory approvals. In July 2008, India’s Department of Biotechnology (DBT) drafted new legislation, the National Biotechnology Regulatory Act, which would establish and empower the NBRA. The latter would have the authority to approve genetically modified (GM) crops, food, recombinant biologics such as DNA, vaccines, recombinant gene therapy products, and recombinant and transgenic plasma-derived products such as clotting factors, veterinary biologics and industrial products. The DCGI would still retain the rights to approve recombinant therapeutic proteins. While the new legislation would consolidate biotech regulations and improve the business environment for both domestic and global players, the proposed bill faces stiff opposition, especially from the anti-GM-crop lobby. Nevertheless, the reforms are widely regarded as a breakthrough in advancing India’s global position in biotech. Furthermore, the government of India is planning to upgrade the DBT to the status of a separate ministry, in recognition of biotech’s emergence as a thriving sector. Improved monitoring of clinical trials India’s growing clinical-trials industry is also moving toward a streamlined regulatory set-up. On the agenda are guidelines for better monitoring of clinical trials conducted in India. A newly launched clinical-trials registry and a plan to introduce e-governance for clinical trials — including fingerprint mapping — of volunteers by 2013 is expected to boost clinical-research outsourcing and the health sciences sector in general. The government is also planning to relax its ban on carrying out early-stage clinical trials for drugs developed outside India. All these steps are likely to attract more investments in India from the major pharmaceutical and biotechnology innovators across the globe. For example, Merck is planning to initiate clinical trials of its cervical vaccine Gardasil in India and has sought approval from the DCGI for this trial to be conducted in four major Indian institutes over a period of three years. Growing clusters and biotech parks Domestic biotechnology companies such as Bharat Biotech and Biological E have announced large investments in biotechnology parks to be set up in partnership with state governments or major corporate conglomerates. Various state governments, such those of Karnataka, Orissa, Assam, Kerala and Andhra Pradesh, have announced new proposals for setting up biotechnology parks and Special Economic Zones. While India’s biotech sector continues to show strong growth and attract interest from Western companies, the field of biotech parks has certainly become more crowded, and park developers and prospective tenants will need to focus on differentiating offerings to stand out in the crowd. (For more information, see “A closer look” on the next page.) Mounting interest and investments in biotech have given rise to many new biotech clusters in India. Bangalore has emerged as a leader in this trend, with around 200 diverse companies present in the area. Other cities, including Hyderabad, Chennai, Pune and Mumbai, also have materialized as preferred destinations to set up new biotech facilities. India year in review Nurturing growth
- 121. 115 Deals A number ofIndian companies entered deals with foreign biotech companies. Continuing a trend seen in recent years, domestic players were active in grabbing new opportunities arising out of Western markets, especially for generic biotechnology products. In the past year, Indian biotech companies increasingly focused on investing in Western companies to strengthen their research capabilities and develop a foothold in US and European markets. India’s largest biotechnology company, Biocon, and another big player, Panacea, acquired stakes in Western companies to strengthen their distribution base in these markets. By acquiring Etna Biotech, a subsidiary of Dutch pharmaceutical company Crucell, India’s Cadila Pharmaceuticals expects to obtain a research platform to develop new vaccines and biologicals. Etna is focused on the research and development of vaccines for hepatitis, using the virosome vaccine technology platform, and for malaria and HPV, using the measles technology platform. With the aim of enhancing its core biotech capabilities, contract research and manufacturing services provider Intas Biopharmaceuticals acquired California-based Biologics Process Development. The year also saw several noteworthy developments on the strategic-alliance front. In June, US-based Itero Biopharmaceuticals entered into a partnership with Biological E concurrent to raising US$21 million in a first-round venture financing to develop and commercialize biopharmaceuticals. Under the terms of the agreement, Itero will finance drug development, while Biological E will be responsible for global manufacturing of resultant products. Itero retains commercial rights in the Biotech parks have played a prominent role in providing specialized infrastructure for India’s growing biotech industry. India’s first “knowledge” park, focused primarily on R&D, was the Hyderabad-based ICICI Knowledge Park, set up in 2000. The country’s first biotech-specific park, S.P. Biotech Park, was established soon after in close proximity to ICICI Knowledge Park. Since then, a number of parks have sprung up across the country, with the aim of attracting biotech companies and boosting emerging clusters. The early biotech parks covered a broad swath of activities, servicing companies across the value chain. But over the last two years, new generations of parks have tried to differentiate themselves by focusing on niche segments within the biotech sector, including agricultural biotech, marine biotech and nanobiotechnology. And while government support was initially instrumental in creating parks, many of the recent developments are being backed by private infrastructure developers. With growing competition from a larger group of parks and the onset of a global economic downturn, these facilities could face more challenges in attracting the right kinds of tenants. As a result, it is even more important for the parks to create differentiated offerings, as some have begun to do, through measures such as: Arrangements with investment banks for seed and development funding• Stepped rentals that grow with the maturity of the enterprise• Arrangements with equipment manufacturers to provide pooled equipment at• affordable costs Collaborations with universities for internships• Focusing on building all elements of the value chain, even if it means bringing in• key anchor tenants across the value chain at differentiated rates As Western companies consider setting up Indian operations to cut costs, India’s parks could benefit. But as they select the right parks for their needs, companies will need to consider a number of factors, including: The amount of area available for future growth• The existence of centers of learning, universities and research institutions• Access to clients and customers and proximity to international airports• Proximity to regulatory agencies and ease of obtaining regulatory clearances,• especially from an environmental perspective The existence of other stakeholders in the value chain• Whether local governing institutions are business-friendly• The vibrancy and responsiveness of local industry associations• If sales will be predominantly exports, companies should also consider setting up facilities in tax-advantaged Special Economic Zones. If you build it, will they come? A closer look
- 122. 116 Beyond bordersGlobal biotechnology report 2009 US, Europe and Japan, while Biological E will have rights in all other markets. Biological E also signed a development agreement with US-based Heparinex and Choncept to produce heparin- and chondroitin-based compounds. India’s Jubiliant Biosys, a subsidiary of Jubiliant Organosys, inked a deal with biotechnology giant Amgen to carry out preclinical studies of drugs discovered by Amgen. Amgen will take over the compounds once they reach late-stage preclinical and clinical development, and will retain marketing rights. Genzyme Corporation formed an alliance with two Indian organizations, Advinus Therapeutics and the International Centre for Genetic Engineering and Biotechnology, to develop antimalarial medicines. Financing India does not have a pool of venture capital sufficient for the needs of its relatively new, rapidly growing biotech industry. In recent years, the government has stepped in with a number of funding programs to foster R&D. (See the interview with Dr. M.K. Bhan for a discussion of some of these programs). Encouragingly, private-sector funding from venture capitalists, private equity and banks has also been increasing in recent years. In 2008, the Indian industry raised over US$120 million, up sharply from the prior year. Sources of funding included not only Indian government and private funds and banks but also a number of US venture funds which have made inroads into the Indian market. As biotech companies around the world reel from the impact of the financial crisis, time will tell whether these trends will be sustained in 2009. Outlook: poised for growth? India’s biotech sector remains poised for growth, spurred by increased competition, a focus on developing innovative drugs and the prospect of growing markets at home and in the West. Governmental efforts to reform the regulatory regime and provide supportive infrastructure and funding should help address some of the gaps and challenges confronting the sector. So far, it is not clear what impact the global financial crisis will have on the Indian biotech sector. In the short run at least, many Indian companies could see new opportunities as Western firms seek to lower costs by shifting operations and activities to emerging markets. Indian companies, which have been vigorously acquiring Western firms, are likely to actively seek undervalued assets in the current environment. Many Indian firms also see opportunities in the healthcare-reform debate in the United States, particularly from the prospect of increased coverage and the emergence of a market for biosimilars. There are certainly risks. In the immediate term, there is the issue of exchange-rate risk. The rupee devalued significantly in 2008 — good news for Western companies looking to outsource activities to India, but making Indian companies’ efforts to expand overseas more costly. And while the economic slowdown in the West may create new opportunities for Indian companies in the immediate future, things could conceivably change if the financial crisis devolves into a prolonged and deep recession. For instance, the shelving of a large number of drugs in development because Western companies are focusing on their most important pipeline candidates — or worse, going out of business — could hurt clinical-trials work in India. And job losses and slower income growth around the world could mean reduced opportunities for Indian companies looking to tap Western markets as well as a change in Western companies’ perceptions of the growth potential of the Indian market. For the time being, though, these second- and third-order effects are relatively distant. While Indian firms will need to monitor these developments and include comprehensive risk assessments in their plans and strategies, many companies are gearing for increased activity in the months ahead. 2006 2007 2008 Source: Ernst & Young 140 120 60 40 20 0 80 100 10 8 3 2 1 0 4 5 6 7 9 Number of deals Indian biotechnology venture and private-equity funding, 2006–08 US$m Amount raised (US$m) Number of deals
- 123. 117 While the Chineseeconomy has been impacted by the global financial crisis, the prognosis for China’s biotech industry may not be as grim as in Western markets. In the current environment, China could be an increasingly viable development partner for Western firms that are looking to reduce budgets and eliminate fixed costs. Meanwhile, as the Chinese industry tries to increase its presence in the development of innovative products, it is increasingly turning to deals and benefiting from government attempts to reform. The global financial crisis China was not spared the impact of the chain of events that began in the US financial markets and rippled to every corner of the globe. The ChinaBio Stock Index, which is comprised of 15 US-listed biopharmaceutical companies, declined 57% during 2008, after rising 70% in 2007. The IPO market slowed significantly as well, both for domestic new issues and for listings in the West. Despite the financial market turmoil, China has cause to remain optimistic. Stimulus activities on the part of the Chinese government, a key investor in the life sciences industry, could give biotech and pharmaceutical concerns enough of a boost to sustain growth. A burgeoning middle class with greater access to medical care is also driving revenue growth for domestic and multinational companies. China is also positioned to be part of the solution for companies in the West that wish to continue to innovate and advance their pipelines but must trim costs either due to expected revenue declines (many pharmaceutical companies) or to extend capital resources (many biotechs). Despite increased wages in the larger commercial cities, there are significant cost advantages to conducting preclinical development and clinical trials in China, which should drive growth in outsourcing to the multitude of Chinese contract research organizations (CROs) and other service providers. China’s increased openness to global business, an enlarging pool of qualified researchers and clinicians, and improvements to intellectual property and product safety regimes may further help China’s biotech during the current economic turmoil. Financing The venture-capital community investing in China is still relatively small, and sums raised are modest compared to those in the more mature markets of the West. Investments in 2008 were made by a handful of local firms as well as established Western players, and recipients included a mix of CROs, active pharmaceutical ingredient (API) manufacturers, distribution companies, research-tool companies, traditional Chinese medicine (TCM) firms, specialty-pharmaceutical companies and novel-drug developers. Investors active in China continue to favor companies with existing or very near-term revenue streams. However, as the industry matures, the expectation is that earlier-stage innovative technologies will draw interest. Companies that raised venture capital in 2008 included NovaMed Pharmaceuticals, which secured US$14 million from Atlas Ventures and Fidelity Asia Ventures. NovaMed, based in Shanghai, provides a range of services from clinical development through distribution. Also attracting capital from Western investors was API supplier Futaste Pharmaceutical, which raised funds from 3i Group. Taking the international angle one step further was ProGenTech, which is based in both Emeryville, California, and Shanghai. The company China year in review On the road to innovation In 2008, overseas-listed Chinese biotech companies fell along with broader market indices Source: Ernst & Young, finance.yahoo.com and ChinaBio Today +20% -40% -60% -80% 0% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan -20% ChinaBio Today IndexNasdaq Hang Seng SSE Composite
- 124. 118 Beyond bordersGlobal biotechnology report 2009 secured US$21 million to further the development of its automated nucleic acid purification system from US-based Bay City Capital and China-based DT Capital. While several Chinese healthcare companies have successfully completed IPOs in the West in recent years, there were no new market debuts outside China (including Hong Kong) in 2008. Mirroring venture investment trends, the companies seeking to raise funds through public offerings are more mature than their IPO peers in the West, with significant infrastructure and product sales. However, there were still a few IPOs on Chinese exchanges, including Jiangsu Nhwa Pharmaceutical and Bloomage BioTechnology Corporation. Jiangsu Nhwa completed its IPO in July 2008, before the worst of the market turmoil, raising RMB 178 million (USD$25 million) on the Shanghai exchange. The company develops and distributes drugs for central nervous system disorders. Bloomage BioTechnology, which operates in China but is incorporated in the Cayman Islands, manufactures hyaluronic acid used as an ingredient in various pharmaceutical and cosmetic products. The company successfully completed its IPO in Hong Kong, raising HK$78 million (US$10 million) in October. In the absence of an IPO market, a reverse merger into a publicly traded company has become a mainstream strategy in the West in recent years. Kun Run Biotechnology followed a similar strategy in its November 2008 merger into Nevada-based Aspen Racing Stables. Kun Run, which develops and sells polypeptide drugs, now has access to US investors through an over-the-counter listing. It remains to be seen whether the China market will sustain new issues in 2009 and when, if ever, a market for innovative precommercial companies will emerge. In the meantime, such companies are wise to seek alternate sources of revenue through collaboration or service arrangements. Deals and infrastructure investments Chinese firms continued to seek deals, both with other domestic firms as well as with companies beyond Chinese borders. Much of the activity occurred in the first half of the year, prior to the full impact of the financial crisis. WuXi PharmaTech, which went public in the US in 2007, acquired AppTec Laboratory Services for US$151 million. AppTec is a contract testing, R&D and biologics services company based in St. Paul, Minnesota. WuXi, which announced plans to seek other acquisition targets, had an active year of deal-making. The company also entered into a collaboration agreement with AstraZeneca, providing the pharmaceutical giant with compounds for specific products. Simcere Pharmaceutical Corp., another 2007 IPO, agreed to acquire a 70% stake in Wuhu Zhong Ren Pharmaceutical Co., a producer of branded cancer drugs, for US$9.3 million. In October, American Oriental Bioengineering (AOBO) completed the acquisition of pharmaceutical wholesaler and distributor Nuo Hua Investment Co. for US$39.5 million. AOBO also completed the acquisition of R&D firm GuangXi HuiKe R&D Co. for US$13.6 million. Western companies continued to invest in infrastructure in China during 2008. Genzyme committed to build a new R&D center in Beijing, and Charles River Labs announced that it would set up a new good-laboratory-practice preclinical screening facility in Shanghai. US-based Crown Bioscience announced plans to expand its CRO presence in China, and Toronto’s Microbix Biosystems announced a joint venture with the Hunan provincial government to build an influenza vaccine facility. Product safety After a steady stream of reforms geared at improving product safety in China, the Chinese government continued its focus on product-safety issues in 2008. In March, it announced that the State Food and Drug Administration (SFDA) would be moved back under the Ministry of Health to improve overall efficiency and oversight. Despite these reform measures, two high-profile scandals arose. One issue that gained international media attention was tainted infant formula that reportedly stemmed from an industrial chemical used to fool quality-control tests that measure milk protein. The other notable issue involved a tainted supply of heparin, a widely prescribed anticoagulant distributed by Baxter International, which resulted in numerous adverse reactions and deaths. The heparin situation highlighted the need for multinational companies to manage the increased risk of a global supply chain and the need for global regulatory cooperation. In response to the heparin incident, the US FDA announced the opening of China branch offices. The China branches are tasked with certifying third-party inspectors and working with Chinese agencies to inspect US-bound products. Intellectual property Critical to the development of innovative products is a strong intellectual-property (IP) regime that recognizes and protects novel discoveries. China’s “third amendment” to its IP law, approved in December 2008, institutes several reforms that are slated to go into effect in October 2009. Under the amendment, in order to file a patent, an idea must be not only new to China but new globally as well. The amendment also contains a provision concerning genetic material, requiring that applicants who submit inventions that rely on genetic resources must disclose their direct sources and prove that the material was lawfully obtained. For the moment, the significance of this change is unknown; its implications will depend largely on how the law works in practice and how it is interpreted over time.
- 125. 119 Outlook Despite trying economictimes, prospects for China’s biotech industry appear to remain positive. The Chinese government has made the development of scientific industries a major priority, and is investing heavily. By 2020, the government plans to invest 2.5% of GDP in R&D, up from 1.3% in 2005. The country is also implementing a series of healthcare reforms. This includes building more health clinics in rural areas, a zero markup policy on drugs prescribed by government hospitals and clinics and a goal of providing universal healthcare by 2020. Universal healthcare for a population as large as China’s would significantly expand the Chinese market, benefiting not only the fledgling Chinese biotech industry but multinationals as well. More and more Chinese citizens are gaining access to higher education. In recent years, China’s population of researchers has increased to 926,000 — placing it second behind the US. Every year, 40,000 Chinese students receive doctorates. In addition, the “sea turtles” — Chinese-born nationals who spent their early careers in Western countries and are now returning with advanced degrees and relevant industry experience — are boosting entrepreneurship and innovation. As Western companies grow more comfortable with offshore research and clinical development, China continues to enhance its infrastructure and the education and development of a skilled workforce. The focus on moving beyond generic drugs and services to developing innovative new products will need time to pay dividends, but given China’s infrastructural and educational commitment, and its market size, this transition could be significant in realizing China’s potential to introduce treatments for local, as well as global, medical needs.
- 126. 120 Beyond bordersGlobal biotechnology report 2009 While Japan is one of the world’s leading industrial powers, its biotechnology industry has long lagged behind its peers in the West. Traditionally, much of the biotech sector has been housed within the walls of large pharmaceutical, chemical, brewery and food companies, and despite recent efforts to encourage innovation, the country has had little success generating large numbers of start-ups or growing new commercial- stage companies. One reason for this is Japan’s regulatory and legal framework, which is often faulted for failing to encourage biotech innovation. To its credit, the Japanese government has been taking steps in recent years to improve this and promote the development of a globally competitive drug-development industry. In 2004, the government implemented extensive reforms in its university system, including rewriting intellectual property laws to give universities increased incentives for commercializing their research. Related to these reforms, the government made start-up formation a key goal of its biotechnology strategies. That same year, three government organizations were merged to create a new regulatory body, the Pharmaceuticals and Medical Devices Agency (PMDA), which is charged with streamlining, accelerating and increasing the transparency of the country’s drug approval process. Financing A major reason for the lack of a vibrant community of Japanese biotech start-ups is the lack of venture capital. It’s no secret that venture capitalists (VCs) have played a vital role in the development of successful biotech clusters in the West. VCs provide not just financial capital, but also valuable strategic and management guidance based on years of experience operating and building similar companies. And while public investment has ebbed and flowed over the years, VCs have generally remained steady investors in the biotech sector. Japanese VCs have not played a similar role. Unlike VCs in the United States and Europe, Japanese venture investors tend to be far more hands-off. Many Japanese VCs tend to be subsidiaries of banks or security companies and most do not focus on biotech. In addition, the amount of capital provided is very small compared to venture investments in the West. According to JETRO (Japan External Trade Organization), the average “A Round” biotech investment in Japan is about US$100,000–500,000 (¥10-50 million), a small fraction of the size of a similar financing in the West, and very small relative to the cost of bringing a new product to market. With less access to the capital required for truly innovative R&D, Japanese start-ups have often gravitated to activities that are less capital-intensive and lower-risk — but also offer less potential upside. In addition, raising money in such small tranches makes it difficult to build the multi-disciplinary teams needed for successful discovery and development. In 2008, Japanese capital markets, like those in most parts of the world, were hit by the tsunami of the global financial crisis. The world’s second-largest economy shrank by 2.9% in 2008, and is forecasted to drop 4% in 2009 — its worst quarterly contraction in more than three decades, exceeding even the stagnation seen during the worst of Japan’s infamous “lost decade.” The Nikkei 225 Index lost 42%, its worst performance ever. The market for IPOs shrank dramatically — data from the Venture Enterprise Center, created by Japan’s Ministry of Economy, Trade and Industry (METI), shows that the number of companies that went public in 2008 declined by 60% relative to 2007, while the amount raised fell by more than 70%. Despite these conditions, there were three biotech IPOs in 2008 — all of them in the first four months of the year. NanoCarrier, a company developing technologies to deliver drugs directly to cells using nanoparticles called micelles, went public on the Mothers Market in March. The company’s offering priced at ¥20,000 (US$200), at the bottom of its range, and raised ¥600 million (US$6 million). Later that month, Carna Biosciences listed on the Jasdaq’s NEO market in a transaction that raised ¥957 million (US$9.57 million). In April, R-Tech Ueno listed on Osaka’s Hercules market for total proceeds of ¥670 million (US$6.7 million). Deals Japan’s big pharmaceutical companies face pipeline productivity pressures similar to those faced by pharma companies in the West, and they have responded with aggressive deal-making. In 2005, the industry underwent a wave of large-company mergers, akin to the mega-merger activity currently occurring in the West. Since then, Japan’s pharma companies have been actively purchasing innovative assets to boost their pipelines and product offerings, frequently reaching beyond their borders to do so. These trends continued in 2008. The year kicked off with Eisai’s acquisition of US-based MGI Pharma for US$3.9 billion Japan year in review Seeking investors, seeking innovation
- 127. 121 (¥390 billion). Thedeal will serve to strengthen Eisai’s presence in oncology, which is one of three major areas of focus for the company. In February, Takeda Pharmaceuticals announced an exclusive collaboration under which Takeda will develop and commercialize for the Japanese market up to 13 experimental therapies from Amgen’s pipeline in a deal that may be worth over US$1 billion. In addition to the Japanese rights on these molecules, Takeda gained worldwide rights to another product by becoming Amgen’s worldwide partner for motesanib diphosphate (AMG 706). In addition to up-front and milestone payments, Takeda agreed to pay 60% of ongoing clinical development expenses outside Japan for AMG 706 and split profits outside Japan with Amgen. The deal helps Amgen realize value from pipeline assets that are lower strategic priorities while helping fill Takeda’s pipeline with early to mid-stage clinical-stage candidates in the areas of oncology, inflammation and pain. The deal also gave Takeda control of Amgen’s Japanese subsidiary, Amgen KK, which was relaunched as Takeda Bio Development Center. In total, the deal has a potential value of more than US$1.1 billion (¥110 billion), with a whopping US$300 million (¥30 billion) exchanging hands in up-front payments — among the largest up-fronts of the year. Takeda also entered a deal with US-based Alnylam Pharmaceuticals that gave it nonexclusive access to Alnylam’s platform. The transaction, which has a potential value of up to US$1 billion (¥100 billion), included an up-front payment of US$100 million (¥100 billion). Daiichi Sankyo aggressively pursued expansion of its global footprint with two major deals. First, in May, Daiichi announced its purchase of a privately held German biotech, U3 Pharma, for €150 million (US$234 million, ¥23.5 billion). The purchase gives Daiichi a pipeline of novel antibody therapeutics focused on various cancers. In June, the Japanese firm increased its ownership stake in India’s largest generic pharmaceutical company, Ranbaxy Laboratories, to nearly 64%. The deal expands Daiichi’s global presence in the generics market. Ranbaxy continues to operate independently, with the CEO of Daiichi joining the company’s board of directors. A fourth Japanese pharma, Astellas, was also active on the deals front. The company signed deals with US-based CoMentis for up to US$760 million (¥76 billion) and with Maxygen for up to US$180 million (¥18 billion). In early 2009, the company made a hostile takeover bid for US-based CV Therapeutics, but was ultimately bested by US-based Gilead. Regulatory reforms The Japanese government continued efforts to reform its regulatory structure in order to increase the competitiveness of the Japanese drug industry. To speed up drug approvals, which currently lag those in other parts of the world, the PMDA increased staff levels from 341 employees (206 of which were reviewers) in fiscal year 2007 to 426 employees (277 reviewers) by the end of fiscal year 2008 (April). The agency also reformed regulations covering clinical trials. In the past, restrictions regarding the ethnicity of subjects in clinical trials conducted outside Japan have hampered companies’ ability to use data from such trials when seeking drug approvals in Japan. The PMDA has attempted to change this situation by formalizing the requirements for acceptance of clinical trial data and stating that multinational trials do not have any requirements regarding the minimum number of Japanese subjects. To increase efficiencies and facilitate information sharing with major foreign regulatory agencies, the PMDA created the Office of International Programs (OIP) in November. The OIP is tasked with increasing Japan’s collaboration with other countries on clinical trials. Outlook Japan’s biotech and pharma companies continue to wrestle with challenges they have faced for some time, but the global financial crisis has added pressure. For biotech companies operating in an environment where capital has been less accessible than in the West, the search for investors could become still more difficult as capital markets reel under the weight of the crisis. For companies of all sizes, the challenge will be to focus on developing innovative products. Japan’s big pharma companies have been looking for innovation overseas in recent years. The financial crisis, which has led the Japanese yen to strengthen against the US dollar and has resulted in the devaluation of assets in the West, could bring new buying opportunities — and increased cross-border deal activity — for Japan’s big pharma companies.
- 128. 122 Beyond bordersGlobal biotechnology report 2009 While New Zealand is considered an emerging market in the biotechnology industry, it is maturing in terms of its ability to work within its constraints. New Zealand-based companies are embracing creative approaches to overcome traditional obstacles: geographic isolation, limited sources of funding and a small domestic market. Venture funding: a perfect storm A significant challenge facing the New Zealand biotech industry is access to capital. The sector has not received funding from local public equity markets in the past, and has instead had to rely primarily on venture capital to fund R&D. According to data collected by Ernst & Young and the New Zealand Venture Capital Association, the biotechnology/health sciences segment has attracted an impressive 52% of total venture-capital investment over the last five years. Unfortunately, venture funding fell sharply in 2008, due to the confluence of two setbacks. The first of these, not surprisingly, is the global financial crisis, which has had a dampening effect on biotech venture capital in most parts of the world. The crisis has made venture capitalists (VCs) more risk-averse, forced venture-capital firms to allocate more funds to sustaining existing portfolio companies and made it more challenging to close new funds. In New Zealand, the financial crisis hit precisely when VCs were going out to raise new capital — an unfortunate coincidence that resulted from the funds’ origins. New Zealand’s venture funds were mostly created several years ago, spurred by a government program that provided a dollar-for-dollar public-money match. Since the funds were all created around the same time, they have reached the end of first vintage simultaneously. They have been unable to demonstrate significant returns for their limited partners, which is further impeding their fundraising, particularly in the current environment. As a result, there was a 75% reduction in venture capital raised by the biotech sector in 2008. While the number of deals remained roughly consistent with prior years, there was a heavy skewing toward seed rounds — which represented a staggering 85% of the deals done during the year — leading to a decline in overall funding amounts. Funding continues to be challenging, and this is forcing New Zealand biotech companies to increasingly look offshore for capital. Since companies raising seed capital will need follow-on rounds to be sustainable, the lack of new venture funds could be an ongoing challenge. Government support The biotechnology sector has been an economic-development focus for the New Zealand government for some time. In November 2008, the newly elected New Zealand year in review Strong research and creative approaches As of May 2008, New Zealand has a limited-partnership (LP) regime. The LP regime was introduced following lobbying from the venture-capital industry, and has been modeled on the Delaware Limited Liability Partnership structure that is familiar to offshore investors. The New Zealand LP provides for a separate legal identity for the partnership, limited-liability status for limited partners and minimal public-disclosure requirements. The tax treatment is similar to that in other limited-partnership regimes: partners are subject to tax or can access losses from the partnership in proportion to their capital contributions. There are, however, limitations on the levels of losses that can be utilized by New Zealand limited partners for tax purposes, and these are based on the level of the limited partners’ funds at stake in the LP. For overseas limited partners, there may be no New Zealand tax obligations arising from an investment in an LP, subject to the extent of business activities of the LP. This, together with the absence of a capital-gains tax regime in New Zealand, means the LP is an attractive vehicle for overseas investors. The LP regime also allows for more tax-effective structures for angel investors than were previously available, with angels being able to access tax losses arising from their investments in LPs. Since the introduction of the LP regime, we have already seen spinoffs from established biotech companies looking to make use of the LP structure. In addition, a number of ventures have established new LPs as an investment vehicle as well as a means of preserving some benefit from historic tax losses that might be forfeited because of shareholder dilution. Attracting new investment: New Zealand’s new LP structure A closer look
- 129. 123 National-party government abolished therecently introduced R&D tax-credit regime. The credit would likely have helped New Zealand biotech companies, since firms in a tax-loss situation would have been eligible for the incentive. The new government was concerned that the credit would reward companies for their existing activities rather than spur an increase in new R&D. To this end, the government is calling for industry to develop targeted solutions to boost R&D investment, and companies are actively engaged in a dialog to develop an alternative. Developing a solution that would provide appropriate incentives for R&D is critical. Developing innovative drugs and technologies is an expensive, R&D-heavy undertaking, and companies will be challenged to finance these activities at a time when funding sources are strained. Interestingly, because of the timing of its repeal, companies will still be able to claim the R&D credit in the 2008–09 income year — potentially providing some temporary relief in the current market environment. Creative approaches While the New Zealand market is not an efficient market for commercialization, there is a wealth of intellectual property in the country’s research institutes, much of which may not currently be noticed by foreign companies. At the same time, the relative paucity of domestic funding is driving New Zealand firms to seek other sources of capital to achieve sustainability. In response, some domestic firms are outlicensing their technologies at an early stage to larger companies through noncompetitive partnerships, which provides New Zealand firms with funding and gives their partners early access to new technologies. For instance, KODE has formed R&D partnerships with firms such as CSL, Immucor and MediCult. KODE’s platform is a novel range of synthetic molecules which can harmlessly and accurately “paint” functional molecules onto the surface of cells. Similarly, Living Cell Technology (LCT), a New Zealand company listed on the Australian Securities Exchange, has licensed its patented encapsulation technology to a noncompeting partner to help fund ongoing trials. LCT is perfecting a treatment for a range of conditions including diabetes, stroke and Huntington’s disease. Emerging local companies such as LanzaTech and KODE Biotech have also utilized the new limited-partnership regime to facilitate investment. (See “A closer look” on the previous page for more details.) Food technology company EnCoate’s approach is to identify partners in the food industry with which it will codevelop commercial applications of its proprietary bacteria-stabilization technology. This will involve an ongoing process of experimentation that is intended to develop EnCoate’s technology to the point where it can be licensed for production — an approach that the company thinks will accelerate the commercialization pathway. EnCoate is developing its technology in the fields of probiotics, biocontrol agents and seed coatings. Outlook New Zealand companies are betting that these creative approaches will make them more competitive by bringing in revenues to fund R&D, accelerating commercialization and providing access to European and US markets. If they are successful, this could in turn spark increased interest from international investors. It is encouraging that new legislation has made it easier for offshore investors to invest in New Zealand.
- 130. 124 Beyond bordersGlobal biotechnology report 2009 Singapore has had success attracting investment from Western biotechnology and pharmaceutical companies and is a destination of choice in the region for manufacturing operations and headquarters because of its access to talent, a modern healthcare system, sophisticated infrastructure and strong regulatory framework. Like other Asian economies, the country remains optimistic that cost-cutting in Western companies could create further outsourcing opportunities. However, with the growth of other biotech outsourcing hubs in Asia, Singapore is also focused on innovation. Inbound investment In October 2008, Eli Lilly opened the city-state’s largest drug research facility. The company plans to spend S$150 million (US$100 million) on the center over the next five years. In January 2009, Abbott Pharmaceuticals opened an R&D facility — its first in Asia. Schering-Plough expanded its presence with a new multimillion-dollar R&D facility in February 2009. At the time, the company, which has since announced plans to merge with Merck & Co., indicated it was also planning to open a Singapore-based translational medicine unit in the future. Finally, Quintiles, a global leader in outsourced clinical research services, announced plans to expand its presence. On the biotechnology front, seven new biologics facilities are expected to open in 2009, joining those opened in recent years by Genentech, Codexis, Novartis, Qiagen, GlaxoSmithKline, Lonza and others. Local financing Singapore has established itself as a biotech center through significant and strategic government investment over many years. This was evident in 2008, when the government announced the launch of a S$180 million (US$120 million) research center to be shared by the National University Hospital and the National University of Singapore. The facility is modeled after several that exist in the United States that house research institutions near universities and hospitals to foster collaboration. But given the significant sums necessary to bring a biotech product candidate from discovery to the market, the real lifeblood of an entrepreneurial and innovative biotech cluster is a vibrant (and experienced) venture capital community. Singapore’s local venture community is still quite small, so that companies must look overseas for investments. Currently these companies also have little access to additional capital through IPOs on a local exchange. This situation is a significant constraint for the goal of growing an innovation-based industry. However, local companies did manage to secure investment from funds based overseas in 2008. Moleac raised US$3.5 million in a first round in April from Hunza Ventures and several private Asian and European investors. The company is currently developing NeuroAid, a traditional Chinese medicine marketed in more than 30 countries, for use in the recovery of stroke patients. In October, S*BIO received US$26 million in venture capital funding to conduct human trials of two potential cancer drugs. The financing round was led by Aravis, a European venture firm with operations in Singapore. The company continued to make news on several fronts. In May, it received orphan-drug status from the US Food and Drug Administration for SB1518, which is intended to treat a group of rare blood diseases known as myeloproliferative disorders (MPD). In January 2009, S*BIO entered into a license and option agreement with Onyx Pharmaceuticals for SB1518 and a second product, SB1578. Under the terms of the agreement, S*BIO is eligible to receive up to US$550 million, including an up-front payment and equity purchase totaling US$25 million, plus royalties. S*BIO will perform all the clinical development activities for SB1518 and preclinical to clinical development activities for SB1578 during the option period. Onyx can elect to exercise its options for the products at predetermined stages of development. In another example of carving up geographic rights to the benefit of both partners, the Onyx option converts into an exclusive license for development and commercialization in all indications in the US, Canada and Europe, while S*BIO retains rights to develop and commercialize the products in the rest of the world. Outlook By necessity, the Singapore economy has been built on trading and collaborating with others. It has been no different for its biotech industry, which has been very successful attracting capital and talent from around the world. To succeed in building companies focused on discovering and developing novel products, however, local companies will need continued creativity to access capital and expertise in the current economic environment. Singapore year in review Looking beyond borders
- 131. 125 Acknowledgements Project leadership Glen Giovannetti,Ernst & Young’s Global Biotechnology Leader, provided overall strategic vision for this project and brought his years of experience to the analysis of industry trends. Glen’s perspective and insights helped define many of the themes we explore in the book. Beyond leadership, Glen brought a hands-on approach, writing articles and helping to compile and analyze data. Gautam Jaggi, Managing Editor of the publication, directed the project, wrote or edited all of the articles and managed the data collection and analysis for the Canadian and Asia-Pacific sections. Gautam developed several new themes and elements for this year’s book, including the global introduction, and had responsibility for the entire content and the quality of the publication. Siegfried Bialojan, Germany Biotechnology Leader and Julia Schueler, Editor of the European section, led and managed the development of the European section. Their high-quality analysis of European data and deep understanding of the science and business trends in Europe were invaluable in producing this book. Strategic direction Special thanks to Scott Morrison, Jürg Zürcher and Chris Nolet, who continued to play a key role in the development of this publication, by providing invaluable strategic insights based on their long experience and a feel for the pulse of the industry. Data analysis Julia Schueler led the collection and analysis of US and European data, assisted by Natalie Prib, Nadine Rauh, Anne Scholz and Ulrike Trauth. Nina Hahn, Eric Duhaime and Jimmy Zhong provided assistance with data collection and analysis. A number of colleagues were instrumental in helping collect private company financial data, compile company lists and conduct follow-ups with survey respondents, including Lisa Almen and Christian Trautner (Denmark), Anne-Charlotte Bernard (France), Warren Singh and Ruth Flynn (Ireland), Keren Dahan (Israel), Enrico Ronchi and Valentina Urbano (Italy), Christine Aardal and Hege Urdahl (Norway), Jacob Hellman (Sweden) and Jörg Schmidt (Switzerland). The collection of private company data was based on a survey implemented by Ulrike Trauth. Eric Duhaime, Amir Hakakha, Jason Hillenbach, Susan Jones, Kim Medland, Mike Spencer and Richard Yeghiayan helped with fact checking and quality review of numbers throughout the publication. We wish to thank Matthew Chervenak of General Biologic for providing data on China. Writing and editing assistance Andrew Jones led the writing and analysis for the European deals, financings and products articles. Andrew contributed the “A closer look” text box on biosimilars, and this year’s report has benefited from his knowledge of European biotechnology trends. Sue Carrington led the writing of the US public policy article, and Scott Sarazen led on the US products article. Country overview articles were drafted and written by professionals in numerous countries, including Winna Brown (Australia), Rod Budd (Canada), Hitesh Sharma (India), Utkarsh Palnitkar (India), Priya Pradeep (India), Gaurav Narang (India), Mike Spencer (Japan), Jon Hooper (New Zealand) and Michael Vukcevic (New Zealand). Stephanie Nickerson helped edit some of the guest articles. Heath McKay provided research and writing assistance. Rama Ramaswami helped edit the India article. Numerous contributors helped draft and write “A closer look” text boxes, including Bruce Bouchard, David Johnson, Glen Giovannetti, John Babitt, Ron Xavier, Michael Vukcevic and Utkarsh Palnitkar. Russ Colton brought his incomparable skills as a copy editor and proofreader to this project. His patience, hard work and careful attention to detail make this book a richer product. Lisa Pease proofread the report in layout. Design and layout This publication would not look the way it does without the creativity and hard work of John Fogarty and Heather McKinley. As the lead designer, John was responsible for managing and implementing the publication’s design and layout. As design consultant, Heather provided creative advice and designed the special two-page spreads that grace this year’s report. Oliver Voigt helped with layout and related marketing materials. Marketing and support Public relations efforts related to the book and its launch were led by Mike Spencer along with Samantha Sims, Morten Hussmann and Michelle Wolf. The PR firm of Feinstein Kean Healthcare served as an integral partner, led by Dan Quinn, Greg Kelley and Shelley Jazowski. Gautam Jaggi conceptualized and composed the copy for advertisements for the book.
- 132. 126 Beyond bordersGlobal biotechnology report 2009 Data exhibit index This is neither the industry’s first IPO drought, nor (so far) its longest 2 Enlight corporate structure 9 The year in financing: US, Europe and Canada 2007 and 2008 24 Global biotechnology at a glance in 2008 25 Growth in global biotechnology, 2007-08 27 In 2008, the biotech industry outperformed the market … 30 … but smaller companies fared considerably worse 30 Ernst & Young survival index 31 Quarterly breakdown of Americas biotechnology financings 31 Selected 2008 US biotechnology public company financial highlights by geographic area 32 US biotechnology at a glance 34 Genentech has accounted for an increasingly large share of US industry revenues … 35 … and the industry’s profitability will likely be very different after Genentech’s acquisition 35 The number of biotechs trading below cash ballooned … 36 … as more and more companies restructure to survive 36 US yearly biotechnology financings 48 US IPOs essentially dried up in 2008 ... 49 … and follow-on offerings disappeared in the fourth quarter ... 49 … but venture capital has not declined dramatically 49 Capital raised by leading US regions, 2008 50 Increased selectivity: venture investors gravitated toward later rounds in Q4 2008 51 The potential value of strategic alliances set a new record 53 Adjusted for megadeals, M&As reached new highs in 2008 54 Selected 2008 US biotech M&As 54 Lowered expectations? 2008 US public company acquisition premiums 55 Selected 2008 US biotech alliances 57 Funding for scientific research in the stimulus package 61 Selected US product approvals, 2008 64 Canadian biotechnology at a glance 2008 66 In 2008, the Canadian biotech industry underperformed the market ... 67 ... while Biovail did better than the rest of the industry 67 Canadian yearly biotechnology financings 68 Capital raised by Canadian province, 2008 68 Capital raised by leading Canadian biotech clusters, 2008 69
- 133. 127 European exchange rate (Eurosper national currency) 2008 2007 Denmark 0.1341 0.1342 Iceland — 0.0114 Israel 0.1890 0.1777 Norway 0.1216 0.1247 Poland 0.2847 0.2643 Sweden 0.1040 0.1081 Switzerland 0.6300 0.6088 UK 1.2558 1.4613 US 0.6799 0.7297 Scope of this report Biotechnology firms are defined as companies that use modern biological techniques to develop products or services for human healthcare or animal healthcare, agricultural productivity, food processing, renewable resources, industrial manufacturing or environmental management. Medical devices, large pharmaceutical, large agribusinesses and large manufacturing companies are outside the scope of this project. 4.19.09 Canadian biotech industry indicators, 2000-08 70 Canadian biotech companies by province, 2008 71 European biotechnology at a glance 74 Ernst & Young survival index: Europe 75 European yearly biotech financings 84 Public investors have been cool to biotech since the second half of 2007 ... 85 … while there has been no significant decline in venture funding 85 Quarterly breakdown of European biotechnology financings 2008 86 European venture funding by round class 86 Top European venture funding in 2008 87 European venture capital by country, 2007 and 2008 87 Select restructuring programs announced by European biotech companies in 2008 and early 2009 88 European M&A activity remains strong 90 European alliances by year 90 Top 10 M&As involving European companies 91 Leading alliances involving European companies 92 European alliances by country, 2008 93 European product pipeline by phase, 2006–08 95 European clinical pipeline by country, 2008 96 The Phase III share of the top five countries has shrunk, while other countries have advanced rapidly 96 European Phase III pipeline by indication, 2008 97 Selected European products approved, 2008 99 Australian biotechnology at a glance 110 Australian biotech public equity raised, 2002–08 111 Indian biotechnology venture and private-equity funding, 2006–08 116 In 2008, overseas-listed Chinese biotech companies fell along with broader market indices 117
- 134. 128 Beyond bordersGlobal biotechnology report 2009 Global biotechnology contacts Global Boston Glen Giovannetti glen.giovannetti@ey.com +1 617 585 1998 Biotechnology Richard Ramko richard.ramko@ey.com +1 617 585 1805 Center Scott Sarazen scott.sarazen@ey.com +1 617 585 3524 Gautam Jaggi gautam.jaggi@ey.com +1 617 585 3509 Austria Ernst & Young Vienna Erich Lehner erich.lehner@at.ey.com +43 1 21170 1152 Wirtschaftsprüfungsgesellschaft m.b.H. Australia Ernst & Young Brisbane Winna Brown winna.brown@au.ey.com +61 7 3011 3343 Melbourne Don Brumley don.brumley@au.ey.com +61 3 9288 8340 Sydney Gamini Martinus gamini.martinus@au.ey.com +61 2 9248 4702 Brazil Ernst & Young São Paulo Jose Francisco Compagno jose-francisco.compagno@br.ey.com +55 11 2112 5215 Auditores Independentes S.S. Belgium Ernst & Young Bedrifsrevisoren Brussels Thomas Sileghem thomas.sileghem@be.ey.com +32 2774 9536 Canada Ernst & Young LLP Montréal Rod Budd rod.budd@ca.ey.com +1 514 879 2605 Sylvain Boucher sylvain.boucher@ca.ey.com +1 514 874 4393 Edmonton Darrell Jensen darrell.r.jensen@ca.ey.com +1 780 441 4230 Toronto John Goudey john.goudey@ca.ey.com +1 416 943 2336 Thornhill Mario Piccinin mario.piccinin@ca.ey.com +1 905 882 3065 Vancouver Nicole Poirier nicole.poirier@ca.ey.com +1 604 891 8342 Winnipeg Tanis Petreny tanis.l.petreny@ca.ey.com +1 204 933 0251 China Ernst & Young (China) Beijing Cherrie Che cherrie.che@cn.ey.com +86 10 581 53533 Advisory Limited Shanghai Francis Lai francis.lai@cn.ey.com +86 21 222 82933 Czech Republic Ernst & Young, s.r.o. Prague Petr Knap petr.knap@cz.ey.com +420 225 335 582 Denmark Ernst & Young Statsautoriseret Copenhagen Peter Fredløv peter.fredlov@dk.ey.com +45 3587 2513 Revisionsaktieselskab Benny Lynge Sørensen benny-lynge.soerensen@dk.ey.com +45 35 87 25 25 Finland Ernst & Young Oy Helsinki Timo Virkilä timo.virkila@fi.ey.com +358 207 280 190 France Ernst & Young et Associés Lyon Philippe Grand philippe.grand@fr.ey.com +33 4 78 17 57 32 Paris Pascale Auge pascale.auge@fr.ey.com +33 1 46 93 77 23 Germany Ernst & Young AG Mannheim Siegfried Bialojan siegfried.bialojan@de.ey.com +49 621 4208 11405 Wirtschaftsprüfungsgesellschaft Julia Schüler julia.schueler@de.ey.com +49 621 4208 11414 Steuerberatungsgesellschaft Munich Elia Napolitano elia.napolitano@de.ey.com +49 89 14331 13106 India Ernst & Young Private Limited Bangalore Murali Nair murali.nair@in.ey.com +91 22 6665 5000 Hyderabad Utkarsh Palnitkar utkarsh.palnitkar@in.ey.com +91 40 2789 8850 Mumbai Hitesh Sharma hitesh.sharma@in.ey.com +91 22 6665 5000 Ajit Mahadevan ajit.mahadevan@in.ey.com +91 22 4035 6300 Ireland Ernst & Young Dublin Nick Redmond nick.redmond@ie.ey.com +353 1 221 2322 Neil Byrne neil.byrne@ie.ey.com +353 1 221 2370 Israel Kost Forer Gabbay & Kasierer Tel Aviv Yoram Wilamowski yoram.wilamowski@il.ey.com +972 3 623 2519 Italy Reconta Ernst & Young Milan Lapo Ercoli lapo.ercoli@it.ey.com +39 02 7221 2546
- 135. 129 Japan Ernst &Young ShinNihon LLC Tokyo Hironao Yazaki yazaki-hrn@shinnihon.or.jp +81 3 3503 2165 Cedric Halvorson halvorson-cdrc@shinnihon.or.jp +81 3 3503 1784 Netherlands Ernst & Young Accountants LLP Amsterdam Jules Verhagen jules.verhagen@nl.ey.com +31 88 40 71888 New Zealand Ernst & Young Limited Auckland Jon Hooper jon.hooper@nz.ey.com +64 9 375 2670 Norway Ernst & Young AS Trondheim Willy Eidissen willy.eidissen@no.ey.com +47 73 54 68 80 Poland Ernst & Young Sp. z o.o. Warsaw Mariusz Witalis mariusz.witalis@pl.ey.com +48 225 577950 Singapore Ernst & Young LLP Singapore Swee Ho Tan swee.ho.tan@sg.ey.com +65 6309 8238 South Africa Ernst & Young Inc. Johannesburg Sarel Strydom sarel.strydom@za.ey.com +27 11 772 3420 Sweden Ernst & Young AB Uppsala Björn Ohlsson bjorn.ohlsson.uppsala@se.ey.com +46 18 19 42 22 Switzerland Ernst & Young AG Basel Jürg Zürcher juerg.zuercher@ch.ey.com +41 58 286 84 03 United Ernst & Young LLP Bristol Matt Ward mward@uk.ey.com +44 11 7981 2100 Kingdom Cambridge Cathy Taylor ctaylor@uk.ey.com +44 12 2355 7090 Edinburgh Mark Harvey mharvey2@uk.ey.com +44 13 1777 2294 London Chad Whitehead cwhitehead@uk.ey.com +44 20 7951 4425 Les Clifford lclifford@uk.ey.com +44 20 7951 8600 Reading Ian Oliver ioliver@uk.ey.com +44 11 8928 1197 United Ernst & Young LLP Boston Michael Donovan michael.donovan1@ey.com +1 617 585 1957 States Bruce Bouchard bruce.bouchard@ey.com +1 617 585 6890 Chicago Susan Jones susan.jones01@ey.com +1 312 879 5275 Dallas Kenneth Bernstein kenneth.bernstein@ey.com +1 214 969 8903 Houston Carole Faig carole.faig@ey.com +1 713 750 1535 Los Angeles Abdul Lakhani abdul.lakhani@ey.com +1 213 977 3070 Don Ferrera don.ferrera@ey.com +1 213 977 7684 New York/New Jersey Keith Brownlie keith.brownlie@ey.com +1 732 516 4269 Tony Torrington anthony.torrington@ey.com +1 732 516 4681 Tony Masherelli anthony.masherelli@ey.com +1 732 516 4719 Orange County Dave Copley david.copley@ey.com +1 949 437 0250 Kim Letch kim.letch@ey.com +1 949 437 0244 Palo Alto Scott Morrison scott.morrison@ey.com +1 650 496 4688 Chris Nolet chris.nolet@ey.com +1 650 496 1620 Philadelphia Steve Simpson stephen.simpson@ey.com +1 215 448 5309 Raleigh Michael Constantino michael.constantino@ey.com +1 919 981 2802 San Antonio David King david.king02@ey.com +1 210 242 7108 San Diego Dan Kleeburg daniel.kleeburg@ey.com +1 858 535 7209 Jodi Hernandez jodi.hernandez@ey.com +1 858 535 7292 Seattle Michael Gibson mike.gibson@ey.com +1 206 654 7478 Washington, DC Rene Salas rene.salas@ey.com +1 703 747 0732 Chris Caffrey chris.caffrey@ey.com +1 703 747 1318
- 136. Ernst & Young Assurance| Tax | Transactions | Advisory About Ernst & Young Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 135,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential. For more information, please visit www.ey.com. Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global and of Ernst & Young Americas operating in the US. www.ey.com/beyondborders © 2009 EYGM Limited. All Rights Reserved. EYG No. CW0064 Ernst & Young is committed to reducing its impact on the environment. This document has been printed using recycled paper and vegetable-based ink. This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither Ernst & Young LLP nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor.