BioWorld International Correspondent
LONDON - The European biotechnology sector in 2002 saw revenues and employee numbers fall for the first time in a decade, according to Ernst & Young's 10th annual survey of the sector.
After 10 years of 30 percent to 40 percent year-on-year growth and 10 percent to 20 percent increases in the number it employs, the sector stalled in 2002. Revenues fell by 2 percent to €12.9 billion and the number of employees fell by 6 percent to 82,100.
Ernst & Young has christened the report "Endurance." Author, Glenn Crocker, head of biotechnology at Ernst and Young, told BioWorld International, "We chose the title Endurance' because this is what it feel like at the moment. It's like running a marathon or surviving a storm."
The UK remained the dominant player with 43 percent of total market capitalization and 37 percent of revenues. Of the public companies in the sector 45 percent are in the UK.
The current hostile environment is forcing companies to radically rethink their strategies, and the report predicts that as the divide between haves and have-nots continues to widen, further fallout in the sector can be expected over the coming 12 months.
Overall, the amount of investment fell from €6.7 billion in 2000 to €1.2 billion in 2002.
Crocker said, "To get funding in the first place companies have got to be more mature. Venture capitalists are not interested in early stage companies. You have to have products in development. This is turning into a Catch-22 because you can't get further down the road without funding."
But although the amount of money going into start-ups has dropped, it has not gone completely. "The barrier is high and in some respects this is not a bad thing because it produces quality, not quantity," Crocker said.
Meanwhile, the collapse in the public markets is forcing quoted companies to focus on revenues and profits. There were only three biotech IPOs in 2002, compared to nearly 40 in 2000, and overall only €123 million was raised by European companies in public markets during 2002, compared to €5.5 billion two years earlier.
"The days of the long-term loss-making biotech business are over," Crocker said. "In order to become less subject to the whims of the equity markets, biotech companies must develop strategies based on early revenues and profits. Investors will now rarely fund a business with a five- to 10-year delay until it receives its first income."
The 50 percent to 60 percent decline in biotech company valuations over the past year has had dramatic knock-on effects throughout the industry, and at some point private companies also will have to face up to the fall in their valuations. Crocker said the takeover by British Biotech plc of RiboTargets Holdings plc was a watershed in this respect. RiboTargets had raised £45 million, and had £19 million of cash, but the British Biotech takeover valued it at £25 million.
"This is first deal to match public and private, and creates issues for all peer companies of RiboTargets," Crocker said.
There were 29 M&A deals in 2002, the lowest level since 1998. Transatlantic deals suffered the sharpest decline, down 50 percent. Despite the funding pressure, Crocker does not believe there will be widespread consolidation of the sector. "Consolidation won't happen because it is still incredibly difficult to put two biotech companies together," he said. "They are so specialist, and there are not actually that many combinations that work."
Instead, there will be fallout, as companies reduce to the very bare bones and limit spending to the couple of products that have the best chance of generating revenues.
Crocker said that although the current environment is painful for individual businesses, the toughest will survive and the industry will emerge stronger as a result.
Europe's public biotech companies now have 53 products in Phase III trials, and a potential tidal wave of product success is building up that could transform the industry.
Indeed, the number of profitable companies is increasing and the average loss per public company has been halved over the past four years to €7 million.