The global biotechnology industry may have recorded a second straight year of increasingly stable financial performance in 2011, but longer-term sustainability remains challenging, predicts Ernst & Young’s 26th annual biotech report, Beyond Borders: Global biotechnology report 2012 released recently, wit the traditional funding-and-innovation model for pre-commercial biotech firms under unprecedented strain and the industry’s efforts to date to “do more with less” uncertain to deliver significant productivity gains. Established biotechnology markets have registered more than 10 per cent revenue growth for the first time since the start of the global financial crisis.
Glen Giovannetti, Global Life Sciences Leader, Ernst & Young said, “In this capital-constrained environment, the inefficiency and duplication of the drug R&D paradigm is an indulgence we can no longer afford. Moreover, the industry needs to remove duplication, encourage pre-competitive collaboration, pool data and allow researchers to learn.”
| US biotechnology at a glance, 2010-11 (US$b) |
| Source: Ernst & Young and company financial statement data. Numbers may appear inconsistent because of rounding. |
A new model for industry R&D
The report finds that drug R&D needs a new approach that is iterative, fast, adaptive, cost-efficient and open. The report propose such a new model, the holistic open learning network (HOLNet). These networks of diverse entities — drug firms, providers, patient groups, social media networks, data analytic firms and more — would pool vast amounts of data, share real-time insights from across the health care ecosystem, and adapt rapidly. HOLNets would build on existing trends and, critically, connect information from across the value chain and cycle of care.
| Canadian biotechnology at a glance, 2010-11 (US$m) |
| Source: Ernst & Young and company financial statement data. Numbers may appear inconsistent because of rounding. |
India scenario
The biotech industry in India is at a critical juncture. While the industry has been growing at a double-digit rate over the last five years (CAGR 19.2 per cent, 2007–2011), it has concurrently been facing diverse challenges that have prevented the industry from transcending to the next level. The industry size stood at $4 billion for FY 2010 – 2011. The biopharma industry constitutes 60 per cent of the biotech industry in India and grew at 21 per cent y-o-y to reach $2.3 billion in 2010–2011, which is approximately 15 per cent of the Indian pharma industry. Vaccines, insulin, erythropoietin and monoclonal antibodies have been the mainstay of the biopharma segment.
| Australian biotechnology at a glance, 2010-11 (US$m) |
| Source: Ernst & Young and company financial statement data. Numbers may appear inconsistent because of rounding. |
Key concerns
Within the domestic market, companies have not been able to launch new products at a pace that they would have liked. Dealing with multiple regulatory bodies typically results in serious delays. To overcome this, the Government of India proposed to set up the Biotechnology Regulatory Authority of India (BRAI) through an act of the Parliament. Companies focused on innovation have not been able to make a sizeable impact on the industry. Many of them are facing funding constraints as the investor community has shied away from investing in early stage ventures. With the lack of funding, many innovative companies will be forced to shut shop or become service providers rather than innovators. The Government, on its part, has introduced several schemes to fund biotech start-ups. As an incentive for in house R&D, the government also provides 200 per cent weighted tax deduction, which has been extended till 2017 in this year’s budget. While India has a substantial number of graduates and post-graduates in biotech and related fields, they are not optimally trained to cater to industry demand. Companies therefore have to significantly invest in their training and development before they become ready to contribute to the business. There is a need to revamp the course structure and design of biotech education to improve the quality of graduating students. Towards this end, the Government of Karnataka has started biotech finishing schools to train and empower students to be equipped to address industry demand. There is a need for many more such biotech schools to come up across the country to plug the manpower gap that the industry is facing.
In terms of infrastructure, several biotech parks have been set up in India in the last five years with public private partnerships. The industry, however, believes that most of biotech parks are more congenial to biotech services and diagnostics firms rather than pure-play biotech manufacturing companies. To support bio-manufacturing activities, the government should evaluate the feasibility of making available land at subsidised rates, uninterrupted power at competitive prices, good quality water supply and effluent treatment facilities to improve the efficiency and productivity of pharmaceutical companies.
Ajit Mahadevan, Partner, Ernst & Young said, “India is already facing stiff competition from China, Korea, Singapore, and more recently Malaysia, in terms of attracting investments from MNCs. This has been enabled due to better technological and scientific competence, better infrastructure, tax and duty exemptions, and easier regulatory procedures as compared to India. Thus, there is strong call for action for the government to act swiftly to carry out regulatory reforms, develop infrastructure and provide more incentives to the biotech industry to remain competitive and spur growth in the industry. The industry, on its part, needs to come up with a concerted action plan to utilise the available infrastructure and resources more efficiently and focus on nurturing innovation to take the biotech industry to new heights.”
| European biotechnology at a glance, 2010–11 ($m) |
| Source: Ernst & Young and company financial statement data. Numbers may appear inconsistent because of rounding. |
Global biotech scenario
US: Revenues dip but R&D spend up
As always, since the US accounts for a large majority of the industry’s revenues, the US story is very similar to the global one. The revenues of US publicly traded biotech companies declined in 2011, but this was driven by the acquisitions of Genzyme, Cephalon and Talecris by non-biotech acquirers. After normalising for these large acquisitions, the US industry’s revenues increased by 12 per cent, outpacing the 10 per cent growth rate seen in 2010 and 2009 (adjusted for the Genentech acquisition). R&D increased by nine per cent on a normalised basis, after having declined sharply in 2009 and increasing by a modest three per cent in 2010. The number of companies held steady and employees grew by five per cent on a normalised basis — identical to the increase in headcount in 2010.
Europe: Net profits up, R&D spend up
In Europe, as in the US, publicly traded biotechnology companies increased their top lines by 10 per cent, compared to 12 per cent in 2010 and eight per cent in 2009. R&D expense, which had declined by two per cent in 2009 and increased modestly by five per cent in 2010, grew by a much more robust nine per cent in 2011. A significant difference from the US performance, however, was on the bottom line. While US companies’ net profit decreased in 2011, European companies went in the other direction, essentially bringing the industry to the brink of aggregate profitability for the first time in its history. However, this was essentially driven by a single event at a commercial leader: Elan’s sale of its drug technology to US-based Alkermes for $500 million. The number of employees increased by four per cent, compared to one per cent in 2010 and 2009 — another positive indication.
Canada: Overall 53 per cent increase in financing
The financial performance of Canadian publicly traded biotech companies continued to decline in 2011. Revenues decreased 21 per cent to $998 million. R&D expenditures fell for the third consecutive year, to $431 million, driven largely by continued cost cutting measures. This drive to achieve efficiencies and cut costs also resulted in a fall in employment in the sector. There are, however, some signs of hope. After the financial crisis in 2008, the Canadian biotech sector responded with cost-cutting and efficiency measures. The drive to do more with less has in turn led to some successes on the product development front, and many Canadian biotech companies announced positive clinical news in 2011 — a trend not seen for a while. Some companies obtained clinical and regulatory successes and others announced that they successfully advanced their products. These promising results were rewarded with an overall 53 per cent increase in financing in 2011. However, despite this significant increase in financing over 2010, the sector is still below financing levels of 2005, 2006 and 2007.
Australia: Robust improvement
The performance of Australian publicly traded biotech companies showed robust improvement in 2011. Revenues grew by six per cent, R&D expenses by 13 per cent and the collective bottom line improved by 15 per cent relative to 2010. The 2011 numbers were affected by transaction-related events at a couple of other Australian firms. Melbourne-based Mesoblast saw a significant improvement in its top and bottom lines thanks to a $263 million up-front payment from US-based Cephalon as part of a strategic alliance in which Cephalon acquired global rights in three treatment areas to products derived from Mesoblast’s adult mesenchymal precursor stem cell technology. Similarly, results at Acrux were considerably boosted by a milestone payment of $87 million from US-based Eli Lilly and Co after the FDA issued marketing approval for Axiron.
| FDA product approvals, 1996–2011 |
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| The FDA approved 24 new molecular entities and 6 biologic license applications in 2011 — the second-highest total in the last dozen years. |
Products and pipeline
For much of its history, the biotech industry has attracted researchers, entrepreneurs, investors and strategic partners because of its promise — the game-changing potential of innovative platforms and targeted, vastly efficacious therapies. In recent years, however, investors have been less allured by biotech’s promise and more concerned about paths to commercialisation and returns on investment. This has, at least in part, been driven by concerns about an uncertain regulatory environment.
In 2011, there were signs of a different kind of promise. The US FDA approved more new drugs than at any time since 2004, when the recalls of Vioxx and other COX-2 inhibitors spawned the current environment of heightened concerns about drug safety. The agency also reported progress on the speed with which these new medicines were approved — all but one of the drugs approved in fiscal year 2011 were approved on or before their target dates, and 70 per cent of them were approved in the US before they received approval anywhere in the world.
These are certainly encouraging developments, and continued progress on this front will be a critical part of the answer to the challenge of sustaining biotech innovation. While the FDA pointed out that “over half” of the drugs approved in FY2011 were approved on the first cycle of review (i.e., without requests for additional information) the industry remains concerned about the unpredictability of the requests for additional information, adding to the cost, time and risk of drug development.
Ultimately, an approval process that is more transparent, predictable and timely is not just important for sustaining biotech innovation. With aging populations and large unmet medical needs, an efficient regulatory regime will be required to develop cures for neurodegenerative diseases such as Alzheimer’s disease and Parkinson’s disease and more targeted and efficacious treatments for chronic ailments such as diabetes. By making such changes, regulators will help the industry fulfill another promise — its commitment to bring patients better treatments and cure to address the most critical ailments.
| Key results |
| Revenue stabilises: Companies in the industry’s established biotech centres (US, Europe, Canada and Australia) achieved revenues of $83.4 billion in 2011, a 10 per cent increase from 2010 on a normalised basis (after adjusting for the acquisition of three large US-based biotechs by non-biotech buyers)
R&D rebounds: After slashing R&D spending in 2009 and increasing it modestly by two per cent in 2010, the industry grew R&D by a healthy nine per cent (on a normalised basis) in 2011. Overall funding explodes, but “innovation capital” stays flat: Biotech companies raised a staggering $33.4 billion in 2011, second only to 2000, when the genomics bubble was at its height. However, this increase was driven by a handful of commercial leaders with revenues in excess of $500 million that took advantage of low interest rates to raise large sums of debt. Importantly, capital raised by the rest of the industry (innovation capital) remained largely unchanged from the previous four years at $16.8 billion. IPO buyers remained selective, with only 16 IPOs and aggregate proceeds of $857 million, compared to $1.3 billion in 2010. M&As up, but big pharma largely absent: Mergers and acquisitions involving European or US biotechs increased from 49 deals in 2010 to 57 deals in 2011. However, big pharma was the buyer in only seven of these 57 deals, a potentially troubling trend given pharma’s critical role in supporting biotech innovation. Ernst & Young estimates that the “firepower” of the top 28 drug companies to support biotech innovation declined by 30 per cent between 2006 and 2011 — a situation that is not expected to improve with more patent expiries and investor pressure ahead. |
FDA product approvals, 1996–2011
There were a number of noteworthy drugs approved in 2011, including two new medications for hepatitis C, a viral infection that affects an estimated 130 million–170 million people, or approximately three per cent of the world’s population. Massachusetts-based Vertex Pharmaceuticals’ much-anticipated Telaprevir was approved in May, and sales of the new product soon catapulted Vertex into the ranks of the industry’s commercial leaders. Earlier that same month, Merck & Co gained approval for its competing drug, Victrelis (boceprevir), setting up a contest between the two products.
Reflecting the strength of the industry’s pipeline in oncology, a number of the new approvals were for various types of cancer. One of the promises of applying genetic engineering techniques in this area is, of course, the potential for personalised medicine approaches that are many shades more efficacious in specific cancer subtypes. In this regard, it is worth noting that two of the year’s cancer approvals were approved with companion diagnostics: Genentech/ Roche’s Zelboraf (vemurafenib) for late-stage melanoma and Pfizer’s Xalkori (crizotinib) for late-stage lung cancer.