Biotech business model unsustainable in current economic crisis

19 May 2009

The global biotechnology industry delivered a solid financial performance in 2008 despite worldwide economic turmoil, according to Ernst & Young's 23rd annual report on the biotech industry, Beyond borders: Global biotechnology report 2009.

However, the prolonged and systemic funding drought is placing the business model that fuelled biotech growth for the past 33 years under unprecedented strain.

The report says that four sweeping, 'paradigm-shifting' trends should lead to new, more sustainable ways of funding drug development: a wave of generic drugs based on today's top blockbusters, the expansion of personalized medicine, fundamental healthcare reform in the United States, and the continued globalization of the industry.

"This is not business as usual for the biotech industry," said Glen Giovannetti, Ernst & Young's Global Biotechnology Leader. "Unlike prior funding droughts, this crisis is systemic, deep and protracted. To thrive in this environment, firms will need to bring the creativity that has long been the industry's hallmark to establishing more durable models for funding innovation."

Key financial results

  •  revenues of publicly traded biotech companies grew 12% to US$89.7 billion in 2008. The global industry's net loss improved 53%, from US$3 billion in 2007 to US$1.4 billion in 2008. The US industry reached aggregate profitability for the first time;
  •  capital raised declined sharply in 2008. Companies in the Americas and Europe raised US$16 billion in 2008, a 46% decline from 2007. IPO funding fell 95% to US$116 million;
  •  biotech venture financing remained relatively strong, falling only 19% from 2007's all-time record to about US$6 billion in 2008; and
  • industry deal making remained brisk. The total value of M&As involving US biotechs reached more than US$28.5 billion — a record high when adjusting for 'megadeals' that took place in prior years. In Europe, M&A transactions totalled US$5 billion.

"Like firms in most markets, European biotechs were clearly impacted by the financial crisis," said Jurg Zurcher, Ernst & Young's Biotechnology Leader for Europe, Middle East, India and Africa. "Many are scrambling to raise capital, restructure operations and use deals creatively to survive. Consolidation seems inevitable."

New pathways to sustainability

The challenge for the industry, according to Beyond borders, is turning an existential threat into a Darwinian opportunity. The potential solution lies in four paradigm-shifting trends that promise to accelerate the transition to sustainable business models:

  • Generics: generics based on today's top blockbusters should loosen governments' and insurers' budgetary constraints and mitigate pricing pressures on innovative drugs, permitting better margins;
  • US healthcare reform: the potential shift toward universal healthcare coverage in the world's largest drug market will likely incorporate pay-for-performance in reimbursement decisions. Incentives for true innovation should help biotechs sustain returns;
  • Personalized medicine: personalized medicine will increase the relative value of research and early development — biotech's traditional strengths — giving biotechs more bargaining power and better valuations. Meanwhile, more efficient drug development will lower R&D costs, making it easier for firms to make the journey to self-sufficiency;
  • globalization: growing strengths in emerging markets will facilitate creative solutions — from new 'win-win' ways of allocating increasingly valuable ex-US rights to creative alliances and new sources of capital. Meanwhile, Asian business models could provide solutions for struggling Western firms.

"But these trends will also bring new market pressures — from a higher bar on reimbursement to new sources of competition. To seize the opportunities in these four drivers, companies need to be proactive," says Giovannetti. "Firms should understand how these trends impact them, prepare for them, and where possible, help shape them."

Key regional findings

United States

  • revenues of US public biotechs grew by 8.4% in 2008, down from 11.3% in 2007;
  • the US publicly traded industry posted an aggregate net profit for the first time — US$0.4 billion; and
  •  despite the crisis, venture capital raised in the US reached US$4.4 billion in 2008 — the second-highest total in history, behind only the record US$5.5 billion raised in 2007.


  • revenues of European public biotechs increased 17% to 11.2 billion; and
  • capital raised by European biotechs fell from 5.5 billion in 2007 to less than 2 billion in 2008.


  • Asia-Pacific biotech revenues grew by 25% in 2008, led by strong growth in Australia; and
  • in Australia, public-equity funding fell to levels not seen since
    2002. There were a handful of IPOs in Japan and China and strong private-equity funding growth in India.

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