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Financial crisis to take toll on fledgling US biotech sector

(Agencies)
Updated: 2009-05-06 09:45

NEW YORK: The US biotech industry became profitable for the first time in 2008, a new report says, but the global financial crisis has led to a funding drought that could make the road ahead more difficult.

Those are just some of the findings from Ernst & Young's global biotechnology report 2009, its 23rd annual look at the industry.

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The report by Ernst & Young said US profit for the industry totaled $800 million. Globally, the still-developing industry lost $1.4 billion.

But young biotechnology companies are feeling the pinch from less venture capital as the financial crisis has quickly trickled down to them, the report said.

Meanwhile, the stock market declines of the past year have cut public investors' appetite for risk - and biotech has always been a relatively risky neighborhood for investors.

"It's certainly difficult to see the public investors return the levels we've seen in recent years," said Glen Giovannetti, Ernst & Young's Global Biotechnology Leader.

Instead, many companies will have to start rethinking how they raise capital in a market where attracting investment is already highly competitive. More creative development partnerships or buyouts with long-term financial incentives could be one change. Also, innovation will count for a lot more as companies place their buyout bullseye on targets that have solid market prospects or development programs that mesh with their own plans.

"What we won't see is just wholesale consolidation, gobbling up companies just because they are cheaper," Giovannetti said.

In the latest report, Ernst & Young said the characteristics of the current financial crisis make it a threat unlike any other for the industry. Public capital is constrained, which in turn means less companies that go public through initial public offerings, while there is lower value in buyouts and less debt financing available.

Without funding, the long and expensive process of testing new drugs isn't possible.

Still, ongoing trends such as the expansion of personalized medicine, a wave of generic drugs and the continued globalization of the sector should usher in more sustainable ways of financing drug development, according to the report.

Many key blockbuster drugs will soon face generic competition, which could remove some pricing demand facing the broader drug industry. The introduction of generic drugs could allow for better margins on truly innovative products, putting a premium on biotech, the report says.

"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," the report said.

Despite the downturn, Giovannetti said, it's not a "gloom and doom" situation for the sector, considering how necessary the many of the treatments are to a growing, and aging, population. In 2008, revenue at publicly traded biotech companies grew 12 percent $89.7 billion in 2008, while the global industry's net loss improved to $1.4 billion from $3 billion, the report said.

Capital raised fell sharply, though, down 46 percent for the Americas and Europe combined to $16 billion. IPO funding all but disappeared, falling 95 percent to $116 million.