The biotech industry's accounting books could change from red to black by 2008, according to the Ernst & Young 2004 Global Biotechnology Report series released last week.
Like a young doctor fresh out of medical school, the biotech industry has packed itself with information and padded itself with loans and grants. Now barely 25 years old, the industry is ready to show the fruits of its labor and make some money.
"It is not a mature industry yet," said Steve Buckley, New England director of life sciences practice at Ernst & Young in Boston. "But we think this year's data again show it is continuing on its path to become a mature industry."
Biotech has evolved from a technology-based industry to one that now is creating new, first-in-class drugs, vaccines and diagnostics. More than 190 biotech products already have reached the market, the E&Y report states. The industry has a critical mass of products on the market and in late-stage development that places it at a more stable, predictable level, making it more attractive to investors.
"Productivity, the need to do it quicker and cheaper, is also being driven home by the biotech industry," Buckley told BioWorld Today. "Some statistics would show that research dollars are not growing as fast as in the past, but the product pipeline is growing as fast or better than in the past."
As the industry accelerates that productivity, it pushes itself closer to profitability. E&Y said the biotech industry will achieve a modest profit of less than $1 billion in 2008, based on an estimated $90 billion in revenues.
"Obviously, people have said that you can't lose money forever, and they're absolutely right," Buckley said.
Despite the troubled times of 2001 and 2002, investors have shown a renewed interest in biotech stocks and financings. New York-based Eyetech Pharmaceuticals Inc., the first biotech company to conduct an initial public offering this year, had a market capitalization of an astonishing $600 million when they went public, Buckley said. Most biotech companies conducting IPOs have market caps of about $250 million or $300 million, he added.
U.S. biotech stocks outperformed the overall market in 2003, and E&Y expects that trend to continue through 2005. Several U.S. and European companies experienced their second-best financing year in 2003, with U.S. firms raising $14.4 billion in total equity financings and European firms raising $2.6 billion. Canadian companies brought in 155 percent more in equity financing in 2003 than they did in 2002, for a total $1.3 billion.
Another reason the industry might reach profitability in 2008 is the trend of rising revenues and decreasing net losses. Three years in a row, global biotech revenues have achieved double-digit increases, while net loss has decreased, according to the report. The U.S. and Canada have done better than Europe, with market capitalization surging nearly 60 percent, 56 percent, and a more modest 17 percent, respectively.
In terms of cash on hand, the U.S. is doing better than its foreign counterparts, as well. European and Canadian biotech firms are threatened by a cash shortage - 56 percent of firms in Canada and 43 percent of them in Europe have less than two years of cash, while for American firms the figure is 31 percent. Last year, 55 percent of American firms had less than two years of cash.
"We have more companies now in the U.S. with a lot more money than they had a year ago," Buckley said. "The people with more than adequate money have gone up dramatically. Those with too little money have dropped dramatically."
The renewed interest in biotech stocks might have to do with smart business decisions and product advances, as well as improved collaborations, the E&Y report states. The industry saw an influx of biotech and pharmaceutical collaborations in 2003. Almost half of the 25 biotech drugs approved by the FDA were partnered products from the two industries. Buckley said the industries likely would continue to work together, although biotech companies have fewer pharmaceutical partners from which to choose.
"Large pharmaceutical companies are fewer and fewer," Buckley said. "Their rate of mergers has been significant, which has been a problem for biotechs. As those large pharmas merged, there were fewer competitive bidders in the marketplace."
Unfortunately, the report also predicts that product review and approval times, as well as the reimbursement policies of the Centers for Medicare and Medicaid Services, might hold the industry back from reaching that profitability milestone. Specifically, the Medicare Modernization Act, which added a prescription drug benefit to Medicare, might pressure the federal government to suppress drug costs.
As for the future, the industry will see not only profits, but also possibly more personalized medicine products and continued partnerships with pharmaceutical companies.
"Personalized medicine seems to be an area now that has some great hope," Buckley said.
"Having the ability to understand better the individual blueprint of a person from a health standpoint now is pushing companies to more accurately develop products that might work well for you, but not quite as well for me, because of our genetic makeup," he said.
The E&Y series includes three reports: Resurgence, The Americas Perspective; Refocus, The European Perspective; and On The Threshold, The Asia-Pacific Perspective.