The Financial Times Global Biotech Conference
was held in London, November 12-13 2003. There was a healthy
attendance, with representatives from the biotechnology
industry itself, 'Big Pharma', consultants, investors,
and many others with an interest in this dynamic sector.
In 2002, FT research suggests there were
4,300 biotech companies, 630 of them public, with $41 billion
in revenues, up from $36 billion in 2001. But net losses
doubled - to $12 billion. The trans-atlantic gap is also
widening: US biotechs raised $8.7 billion in equity financing
in 2002, up 10% from 2001, while the finance available
to European firms dropped 40%. This dichotomy between the
US and Europe was a recurring theme at the conference.
A lengthy, expensive business
One of the major problems for biotechs is
surviving long enough to develop products and get them
on the market. It has to be borne in mind that clinical
development takes five to eight years, launching two to
three years, and peak sales are unlikely to appear until
five years post-launch. Each product needs an average investment
of $800 million to develop, possibly up to $1.5 billion
to fund its entire lifecycle. There are three main options:
-
Raising finance, either privately (venture
capital firms) or publicly (initial public offerings
etc.)
-
Consolidate or cut costs
-
Licensing deals (the subject of a
separate article)
Jean-Paul Clozel, CEO of Actelion, stressed
that it was a tough road to commercialisation. It did bring
the most profits, but also high risks for small biotechs
lacking the necessary infrastructure.
Like other speakers, Dr Clozel believed many companies
made the basic mistake of trying to market the wrong
drug. For example, Actelion would probably avoid the
general practitioner market completely without a partner,
whereas specialised areas were easier to deal with.
Pre-marketing costs could be high, especially for very
innovative products, and Dr Clozel pointed out that
companies had to consider post-launch expenses, if
they made it that far, such as pharmacovigilance costs,
which could be high.
Merge or die?
Most speakers thought collaborations between biotechnology
companies, geographical clustering, and especially consolidation within
the industry were all necessary, particularly in Europe.
Peter Fellner, Chairman of both Celltech and Vernalis,
believes that of the 1,870 biotechs in the European
Union, only 20 have sustainable profitability. He pointed
out that 25-30% of the EU's biotechs had less than
one year's cash left, and identified a number of problems,
including:
-
sub-critical
R&D capabilities
-
high infrastructure costs and inefficiencies
-
poor business models and management
Dr Fellner is a strong believer in consolidation,
having built up both Celltech and
Vernalis this way. But he noted that management was often
reluctant and valuation expectations were sometimes unreasonable.
If successful, however, mergers and acquisitions could
strengthen pipelines by keeping only the best from both
companies, and create cost synergies (infrastructure and
facilities represent 30-45% of the cost base of small-cap
firms).
When
asked if Celltech could buy the UK's Alizyme, as an example,
Fellner said Celltech was more likely to look to the
US. Any acquisition would have to have strategic value,
and markets would probably penalise any buying of an
early-stage company - pipeline products were key - although
sentiment is improving. He also noted that many EU companies
were being bought by US firms, which found it easier
due to their higher valuations.
Major
biotech M&A - 2003
|
Larger
company/acquirer |
Smaller
company/target |
Resulting
entity |
|
Versicor |
Biosearch Italia |
Vicuron |
|
Protein Design Labs |
Eos Biotech |
PDL |
|
British Biotech |
RiboTargets |
British Biotech |
|
Celltech |
Oxford GlycoSciences |
Celltech |
|
Genaissance |
DNA Sciences |
Genaissance |
|
OSI |
Cell Pathways |
OSI |
|
Chiron |
PowderJect |
Chiron |
|
Genzyme |
SangStat |
Genzyme |
|
British Biotech |
Vernalis |
Vernalis |
|
Idec |
Biogen |
Biogen Idec |
Source: IMS Companies Information
Questioned about pharmaceutical 'mega-mergers' and their impact
on R&D, Fellner said 4-5,000 researchers wasn't an optimum level, even
split into smaller units, but on the other hand, 50-70 wasn't enough. He pointed
out that all companies, large or small, have the same 'client' - regulatory
authorities.
When to go public? ...if you can
There was a range of opinions about when
in their lifecycle companies should hold an IPO. Actelion's
Clozel thought
firms shouldn't go to the market too early - they could
not survive if they only had one or two products and
one failed - a decent pipeline was necessary and would
help companies meet the ultimate goal of "more and
more" profit.
Christopher Evans, Chairman of Merlin
Biosciences and the UK's biotech investment expert,
however, said there
was a funding gap between venture capital and IPOs, and
that criteria for the latter were often unreasonable
(e.g. good Phase II data, strong management). Early-stage
work needed to be funded, therefore companies should
have an IPO fairly early in their existence. Sir Chris
said a market capitalisation of £100 million was
OK, it didn't need to be £500 million.
Patrick Lee, of Advent Venture Partners, noted that
less than 25% of private biotechs meet the criteria for
either an IPO or major deal, and that achieving this
critical mass would be difficult for the remaining 75%;
he therefore reiterated that it was essential that rationalisation
and consolidation occurs. While only one recent IPO,
for Genitope, was viewed as being successful, biotech
market indices have risen 30% over the last 12 months,
thanks to positive trial results for products such as
Genentech's cancer drug Avastin, and efforts by the FDA
to speed the approval process.
Ann Hanham from Burrill & Co also noted this improvement,
stating that for the first time in seven years, in 2003
biotech overtook software as the number one industry
for VC investment, with a total of $873 million. But
one issue identified by several speakers was the lack
of analyst coverage for small biotechs - in the US, largely
stemming from changes to SEC regulations, and in the
EU due to a lack of interest from exchanges. This was
seen as problematical, even possibly leading to a "death
spiral", and one of the reasons for huge fluctuations
in share prices related to pipeline news.
Dr Hanham remarked that Burrill had only recently begun
investing in the EU again after a two year hiatus, and
that the biotech investment specialist expects the current
IPO window to close again from the second half of 2004.
Both Sir Chris and George Poste, Chair of the conference,
thought Big Pharma should help, being more generous with
licensing deals, and perhaps less timid about using,
for example, off balance sheet financing. Given that
$800 million was needed for each company to reach profitability,
and only $300 million was available for the whole sector
in London, relying on venture capital is clearly not
sustainable. Dr Poste remarked that many VCs have become
more risk averse, travelling in herds, which could lead
to a hiatus in the innovation stream in 7-10 years' time.
Government support in the UK
Although Sir Chris had some concerns about the control
of domestic companies from the US, the UK is nevertheless
seen as having the strongest biotech industry within
Europe, and the sector received a boost a few days later
when Prime Minister Tony Blair pledged his government's
support. Richard Sykes, former CEO of Glaxo Wellcome,
will head the Bioscience Leadership Council, a new body
charged with introducing measures to keep the UK's industry
second only to the US in terms of its success in finding
new drugs. A National Clinical Trials Agency has also
been proposed, utilising the National Health Service,
to help accelerate the approval process.
One of Dr Poste's closing remarks was that in the 1980s,
every biotech was aiming to become a fully integrated
company: of 1,824 firms in 1988, only 17 have achieved
this status. But, there is a new realism that it
takes up to $1.5 billion to get a drug on sale, and that
critical mass was therefore needed, probably involving
300-800 R&D employees. Poste foresaw deconsolidation
of the big, consolidation of the 'big enough', and crash
and burn for the rest. Many of the speakers thought poor
companies and products should be killed off, and a more
Darwinian approach to investing in both taken - leading
to survival of the fittest.
This article was written by Selena Class, Deputy Executive
Editor of IMS
Company Profiles.
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