Biotech industry crisis deepening, says report

The depth and virulence of the financial crisis means that the funding model for the biotechnology industry will have to change, leading to a period of increased consolidation, according to the latest annual biotechnology report issued by leading global intellectual property firms Marks & Clerk.

Based on an international survey of 365 executives across the biotechnology and pharmaceutical sectors, the study also reveals a widespread belief that President Obama's recently announced initiatives and reforms will strengthen the position of the US as a centre for the industry, providing a further threat to Europe and the UK in particular.

The research finds that 93% of biotech executives believe that conditions have become more challenging over the last 12 months, and that the terms for funding have become more onerous. Nine out of 10 cite a lack of appetite for risk among investors as the principal problem, while 87% believe it is the more speculative, early-stage companies that will bear the brunt of the funding squeeze.

More than half (60%) believe that the outlook will start to improve for industry within the next 12 months, but almost the same proportion (58%) expect it will take at least a year for investors to start to reappraise the sector.

The present funding squeeze, combined with the emergence of larger pharmaceutical companies hoping to take advantage of current valuations, looks set to change the model of the biotech industry, with 83% of respondents believing the combination of constricted investment and a more aggressive play from big pharma will lead to the independent biotechnology sector shrinking before the recession ends.

But 89% believe this consolidation could prove advantageous, with traditional pharmaceutical companies bringing to the table their experience in the manufacture and large-scale commercialisation of drug development. And 79% believe that the appetite among big pharma companies has already increased in the last 12 months, be that to form strategic alliances or to make outright acquisitions.

Overall, however, the industry is divided on the benefits of consolidation, with a slim majority of 59% believing it is a good thing for the industry.

"Our research clearly signals that the next 12 months represent a critical watershed for the industry, before conditions and investor appetite begin to improve," said Mike Gilbert, partner at Marks & Clerk Solicitors, and a co-author of the research. "In that time, we can expect to hear some bad news among the biotech's minnows but also witness much greater consolidation."

There is concern among the biotech industry that innovator firms do not receive enough reward within the current system. Nearly three-quarters (72%) believe incentives to reward the r&d of innovator companies is "insufficient", with 68% arguing that the patent system ought to be more generous for innovators to reflect the increased time and difficulty of bringing complex biotech products to market.

Overall, 89% of respondents believe policymakers should strengthen the rewards for innovator firms in the current climate, not weaken them.

"Already, biotechs are expressing their frustration with the systems that reward their endeavour - 59% of those surveyed complain that timescales for granting patents have lengthened in the last year, while 71% are already struggling with the lack of certainty surrounding the marketing approval process," Gilbert commented.

"The likely contraction in the number of biotech companies coupled with a shortfall in investor cash could mean that patent rights are held by a small number of cash-rich companies. Policymakers need to ask themselves if this scenario best serves society's needs for developing tomorrow's discoveries, or whether they need to recognise the contribution of originator firms more fully, while helping bring generic competition to market."

The research reveals a stark contrast among industry regarding the fare of US biotech companies over their UK and European rivals in the wake of President Obama's reforms, and in particular the lifting of the stem cell funding ban. Almost 60% of respondents believe that the proactive measures taken by the US Government will help restore a more benign climate, while only 15% believe that European governments have done enough to help the biotech sector recover.

Overall, respondents express the most confidence in the prospects of a US recovery, and least confidence in the UK (which lags behind both Europe and Asia).

"While the global outlook remains finely balanced for the industry, the US is undeniably signalling that it is once again a friendly environment for the industry," said Paul Chapman, partner at Marks & Clerk and a co-author of the research. "Europe and the UK cannot afford to watch from the sidelines, and should move speedily in terms of policy to ensure they are not left behind."