CAMBRIDGE, Mass. -- At a breakfast roundtable here Thursdayon biotechnology mergers and acquisitions sponsored by publicaccountants Coopers & Lybrand, the 190 attendees heard aleading industry executive put forward four reasons "WhyBiotech Industry Will Consolidate."
James P. Sherblom, chairman and chief executive officer of TSIInc. of Worcester, Mass., and co-founder of the MassachusettsBiotechnology Council, told the audience that he would present"stuff you know but may not want to tell your investmentbanker." Here are verbatim excerpts:
There are some 1,100 biotech companies in the total industry,of which 200 are public. Of these, 50 have significant productsales; that's calling $10 million significant. ... You can count onone hand the biotech firms who have enough revenues to covertheir research infrastructure.
Hence, this industry has got to consolidate. All four of thefollowing reasons point to the same message:
-- Reason No. 1: You can only spend a certain percentage of thegross national product on drugs, ($68 billion in 1992), andbiotech can only have a fraction of it.
Even if that grows by 1997 to something on the order of $18-20 billion for biotech, which means a 30 percent compoundgrowth rate for our industry, which is great.
But that also means that of the 1,100 firms, fewer than 200will be able to emerge with significant revenues, (defined hereas averaging $100 million). And in fact most of those sales --probably over half -- will be concentrated in the 30 largestfirms. Which means that most of the industry will be too smallto count as pharmaceutical companies, even at the end of thisdecade.
-- Reason No. 2: FDA can't handle it. Last year they approved40 products. Let's assume they double their staffing. They'vejust got funding through user fees to do it, so they can go to 80products. Most of that's going to go to the big drug companies.Even if you wanted to put it into independent biotech firms,each would have to have at least three new drugs a decadeAnd if you achieve that level, you can only support about 50 to70 new companies in the U.S.
-- Reason No. 3: Even if FDA were to quadruple their currentstaffing rather than double it, Wall Street can't figure out howto handle it -- how to follow and fund 300 to 500 publiccompanies in this sector. And this isn't Wall Street's problem.This is our industry's problem, which is why the drive towardconsolidation. You pay your investment bankers an outrageousamount of money, but you're paying them for access to amarket to get money. You're not paying them for the next 10years of research coverage.
-- Reason No. 4: Ninety-eight percent of our industry isinternally cash-negative, and if you look at their projections,they plan to stay cash-negative. Each company needs about$150 million (even if we put in the fact that we're all 50percent more efficient than the big drug companies) in order toturn cash-positive. If you say, let's assume we'll make $15billion from Wall Street over the next five years, that's aboutenough money for 100 companies to get their products tomarket over the next five years.
When the Music Stops
But there are 10 times that number of biotechnology firms in agame of musical chairs to see who can get funded.
Now we've gone through an interesting last decade. We'vewatched a period where the music stopped every second orthird year, and we all scrambled for chairs. But every time themusic started again, more people joined the party, and morechairs were put out. So we felt it was all right.
Well, if you look at the last two years, there's been no newchairs, but a lot of new people have joined the party, and thenumber stayed constant about how many companies there aretotal in the industry.
Despite the conventional wisdom that no biotech firm everdisappears, I can't understand mathematically how the numbercan stay constant, if we keep adding more, and none everleave.
By the end of the decade there will be substantially fewerchairs.
The cash is going to run out. Fewer than 200 firms are going tobe bought up by the big drug companies or other biotech firms.There just aren't enough buyers out there to buy us all.
Those who don't have a plan where they're going in the futureprobably won't have a future.
-- David N. Leff Science Editor
(c) 1997 American Health Consultants. All rights reserved.