By John Dodge
July 11, 2002 | TORONTO – Research reports released in June paint a bleak financial picture for biotechnology and illustrate the steep uphill battle regions face attempting to create bio-clusters.
Ernst & Young’s Beyond Borders: The Global Biotechnology Report 2002 found brisk merger and acquisition activity, but sinking private investment and a moribund IPO market that shows few signs of improving.
“If 2001 was a marathon, 2002 is a triathalon. It’s becoming an incredibly difficult market,” said Stewart Hen, Warburg Pincus LLC vice president, who blames flawed business models and the recent series of drug setbacks. “That’s not going to spark a rally.”
Hen was one of several analysts on a panel who participated in the release of the report at last month’s Bio 2002, which didn’t show any signs of decline, drawing a record 15,635 over three days, according to show sponsor BIO (Biotechnology Industry Association).
Andreas Wicki, another panelist and CEO of HBM BioVentures AG, was just as glum.
“We’re two years into the downturn,” he said, adding that signs of turnaround in such cycles are usually seen in the third year. “We have another 12 months of some sort of darkness.”
Ernst & Young’s numbers would seem to back up the sentiments of the analysts. In 2000, $32.7 billion of public and private investment flowed into biotechnology companies. The number last year dropped 75.8 percent to $7.9 billion, largely attributed to a dearth of IPO activity, which in biotech fell off a cliff, going from 58 in 2000 to 4 in 2001.
In addition to investor skepticism, a major contributor to the decline can be traced to a fundamental shift in the industry from money-losing research to real products.
“U.S. biotechnology companies focused their comments on products and pipelines rather than the potential of the technology platforms supporting them. …This verbal shift reflected real progress by the U.S. biotech sector in developing new drugs,” the Ernst & Young report states. However, only a handful of biotechs have real, revenue-producing products at this time.
From a financial perspective, Nasdaq vice president Chris Spille was the only panelist to offer even a glimmer of optimism. He said deal flow suggests a “mild increase” so far this year versus 2001. “Knock on wood, it’s getting a little better,” he said.
But none of the panelists were panicking. Rather, they said companies able to get private investment, which is tough to get but still available, will be ones with “clear” business models and a “product,” according to Ansbert Gadicke, founding partner of venture capital firm MPM Capital. “[We want to hear] the low risk stories [that] get to break even quickly.”
A report released by the Brookings Institution called Signs of Life: The Growth of Biotechnology Centers in the U.S. was especially poignant at Bio 2002 because the biggest single category of exhibitor was development officials from areas as diverse from Norway to North Carolina trying to lure biotech companies.
The report concluded three quarters of the industry is concentrated in only nine of the 51 metropolitan areas the report examined. And five of those – co-leaders Boston and San Francisco, along with Raleigh-Durham, San Diego and Seattle – have 75 percent of the venture capital invested in biopharmaceuticals during the past six years and 74 percent of the lucrative contracts from big pharmaceutical companies.
Why such a concentration of activity?
“The present analysis suggests that the critical factor in the development of a biotechnology industry is not only the availability of pre-commercial medical research, but also the availability of continuing private sector investment in product development,” the report says.
The other 42 metropolitan areas in the report have no significant bio-clusters because they lack one of both of these conditions.
What’s more, biotechnology has only returned “modest” economics gains where it is present -- only 44 biotech companies nationally have more than 1,000 employees. In the Boston area, for instance, no biotechnology company ranks as one of the area’s top 25 employers, the report said.
But these obstacles have not discouraged development agencies, the report says. In surveying 113 state and local development agencies, the report’s researchers found that 83 percent had targeted biotechnology as the No.1 or 2 industrial priority.
“The historically low odds of success and the extended stretch of time associated with developing and securing regulatory approval for commercial biotechnology products mean the metropolitan areas seeking to develop a biotech industry will need to invest a significant amount of time and resources,” the report states.
The report was written by Joseph Cortright and Heike Meyer with Brookings’ Center on Urban and Metropolitan Policy.