G. Steven Burrill predicts what's ahead for biotech in 2009
January 02, 2009
- The worldwide financing environment in 2009 will be extremely challenging. Capital markets in the US will remain turbulent during the first half of 2009 although there will be an "uptick" in biotech's fortunes around the JP Morgan Healthcare Conference in early January. In the second half of the year the capital markets will stabilize and biotech will benefit from this. Biotech's elite companies will continue to maintain their momentum with financial returns meeting analysts' expectations. By year end, the Burrill Biotech Select Index will have once again outperformed the general markets and the DJIA and Nasdaq.
- The large universe of small public companies, and private companies looking for venture capital will face an extremely challenging 12 months as they try to find ways to extend their runway and stretch out the funds that they have remaining. Many will be forced to combine for survival and focus on the one key program between them that has the greatest opportunity for value creation and funding. In this respect, it will not be a 1+1=2 (combination) or 1+1=3 (synergy) but a 1+1=0.5.
- There will be reverse mergers, many of these will be into public shells or ‘burnout' companies, that have seen their product fail, but still with cash in which the mergee believes that this vehicle will increase their funding options and provide a pathway to liquidity for their vc/private equity investors.
- If not restructuring, biotech companies will be acquired at bargain basement prices. Big pharma and big biotech will certainly take full advantage of the fragile global economy to buy assets at a discount. These companies will have the luxury of sitting back and waiting for the right opportunity and then acquire biotech companies at what represents 1990 prices.
- The industry will consolidate in 2009 and the number of functioning public companies will be reduced to around 250.
- $10 billion will be raised by US biotechs, the same as in 2008; partnering/M&A will trump financings and in total $30 billion will be raised. The industry's market cap will grow to $500B, despite significant consolidation and attrition as valuation is "lost" through M&A's. There will be several marquee acquisitions of biotech companies by big pharma with Roche finally consummating its acquisition of Genentech.
- Both big pharma and big biotech will continue to compete for companies with advanced product pipelines, as well as important land grabs of technology. There will also be new players competing for technologies - such as major medical devices and instrumentation companies.
- There will be more pressure on drug prices in 2009, from employers and insurers, new generic drugs and the Obama administration possibly requiring discounts on drugs in the Medicare program.
- Evidence-based medicine and comparative effectiveness will be the "watchwords" of the new administration as part of their healthcare reform agenda.
- The growing use of biologics and their high price tag will put pressure on US legislators to establish a pathway to allow the FDA to approve generic versions of such drugs (biosimilars).
- Partnering deal making will remain robust, although expect to see more spin-outs and "newcos" build around technology platforms and product franchises rather than the usual model of "upfront" and milestone payments. The emphasis will be towards later stage product partnerships.
- There will be a clean tech boom in non-food crops. In 2009, President Obama will encourage major investments in solar power, wind power, and next generation biofuels. Clean technology companies will attract financing in record amounts.
- Ag/Animal Health will also see an increase in interest and funding - driven by the world food crisis.
- Internationally, China, India and other economies will continue to finance biotech companies, The global nature of biotech will put pressure on the US to maintain its dominance and we will see increasing evidence of other jurisdictions taking the lead in some technologies and business sectors.
- Biotech clusters will be redefined away from geography to more virtual build globally around diseases, pathways, markets, and unique industry segments.
In response, business models will continue to evolve more virtually.
- Overall, it will be a very tough year for the industry. Companies will be restructuring and refocusing as they try to come to terms with the sea change, both for the buy side and the sell side of Wall Street. By year end we will see a very different industry than exists today.
Burrill's Predictions and Outcomes for 2008
The Capital Markets
- Prediction: Capital markets in the US will remain turbulent during the first half of 2008 as investors "digest" year end earnings and Q1 results, especially a function of overall US market concerns about the continuing credit crisis and its impact on the economy. Biotech's elite companies will continue to impress with their financial returns and mid-cap and small-cap biotech companies will also keep pace. By year end 2008, the Burrill Biotech Select Index will have once again outperformed the general markets and the DJIA and Nasdaq and biotech's elite companies will outperform the DJIA and Nasdaq.
Outcome: The capital markets were choppy all year culminating in wild swings as a consequence of economic woes and the financial meltdown in October. The Burrill Biotech Select Index outperformed (-9.4%) both the NASDAQ (-43%) and the Dow (-35%) IPO Window
- Prediction: We will see biotech IPOs continuing to getting done, although valuations will still be problematic. Over 30 IPOs will be completed in the US in 2008 (the same as 2007), but mostly in the second half of the year.
Outcome: The IPO window closed early in the year and only one biotech IPO got out. US Financing & Market Cap
- Prediction: $50 billion will be raised by the US biotechs; and the industry's market cap will increase to $500B, despite continuing attrition as valuation is "lost" through M&As.
Outcome: The broader market collapse in 2008 severely affected the ability of biotechs to raise capital and $30 billion was raised with over $10 billion through financings and $20 billion in partnering capital. The 32 percent drop in funds raised in 2008 compared to 2007 was certainly reflective of the market conditions and the lower valuations of public companies in general. The industry's market cap closed at $404 billion (down 12 percent for the year) mainly due to the fall in valuations of a wide range of biotech companies. The industry did lose some valuation through M&A's with Japan's Takeda Pharmaceuticals buying Millennium Pharmaceuticals for $8.8 billion and Eli Lilly & Co. acquiring ImClone Systems for $6.5 billion M&A
- Prediction: The M&A trends that have been hot in biotech land during the past three years will not slow down. Pharma has come to rely on biotech to access pipeline and innovation. Both big pharma and big biotech will continue to compete for companies with advanced product pipelines, as well as important land grabs of technology.
Outcome: Although M&A's continued their momentum slowed in 2008. Big pharma bought 20 companies but big biotechs were not a major part of the mix as they were in 2007. European companies were also more acquisitive in the US. Major deals in the year included: Big pharma/biotech Takeda Pharmaceuticals/Millennium Pharmaceuticals ($8.8B) Eli Lilly & Co./ImClone Systems ($6.5B) Roche/Ventanaa ($4.3B) GlaxoSmithKline/Sirtris ($720) Galderma SA/CollaGenex ($420M) Partnering
- Prediction: Partnering deals will remain at record levels and a significant portion of the $25 billion raised in "bioworld" dollars will be directed at gaining access to technology at an earlier stage in its development as companies strengthen their product indication franchises.
Outcome: Partnering generated $20 billion for US biotechs. Strategic partnering continues to be recognized as a key ingredient for the lifeblood of the biotech industry, and has become essential to maintaining a competitive edge.
- Prediction: We will continue to see US biotechs accessing capital overseas... especially on the public side...with Euronext and AIM leading the pack.
Outcome: The financial crisis was global in scope and this kept companies from exploring options to raise capital on foreign exchanges where IPOs were few and far between.
- Prediction: The presidential campaign in 2008, will keep healthcare issues at the top of the political agenda. Along the campaign trail drug safety and the costs of medicines will continue to be a major issues.
Outcome: President-elect Barrack Obama has signaled that he intends to tackle the enormous task of containing healthcare costs and providing affordable services for all Americans. The appointment of Tom Daschle as the head of the Department of Health and Human Services was well received. He has been given a strong mandate for reform.
- Prediction: In the wake of PDUFA IV, drug approvals will remain slow and pharmacovigilence will be the story.
Outcome: The bar continued to be set high on drug approvals. 2007 was the single worst year for new drug approvals in a quarter century and 2008 proved to be only slightly better. FDA's new mandatory post-marketing safety tools that allow it to compel labeling changes, Phase IV studies, and--most significantly--Risk Evaluation & Mitigation Strategies allowed for a slightly faster pace for approvals.
- Prediction: Stem cell progress will continue, with more funding emanating from both public and private sources. There will be increased activity at the state level as they encourage stem cell development locally. However, during election year we will continue to see discord driven by opposing views on the morality of embryonic stem-cell research.
Outcome: The climate for embryonic stem cell research will change since Obama promised on the campaign trail that he would provoke an immediate change in federal policy on stem cell research. Once he has acted to ease the restriction on federal funding, researchers across the United States will be free to request funding from the National Institutes of Health (NIH) and to collaborate with colleagues conducting experiments with private or state-government money and those working abroad.
- Prediction: Biosimiliars will become more prevalent in Europe and pressure to approve biogeneric pharmaceuticals will increase in the US although establishing a legislative and regulatory path for the approval of biosimilars will have a hard time gaining any traction during 2008.
Outcome: Europe remained well ahead of the US, which is still outlining the details for biosimilars approval. So far, there is no legislative pathway for the approval of follow-on biologics or biosimilars (as they are called in Europe) in the US.
- Prediction: Progress in biofuels will continue, as will the use of biotech in industrialized settings. The Energy Independence and Security Act will help catapult the US biofuels industry to the next level of commercial development.
Outcome: Biofuels and clean tech continued to flourish in 2008. Venture capital flowed into clean technology companies in record amounts. -- those that can enable new sources of energy, clean water and sustainable agriculture--and the promise of government support will be crucial in the year ahead. To date, venture capital investment in clean technology has focused on new sources of energy generation.
- Prediction: Biotech will continue to become more global as companies, particularly in the US, look to India and China for their manufacturing needs and to conduct clinical trials...and ultimately for access to large markets.
Outcome: The ‘globalization" of biotechnology/life sciences is now well established and major government economic initiatives to attract biotechnology investment and trade are underway in all parts of the globe. Medical tourism has become a multi-billion dollar industry.
- Prediction: Overall, biotechnology in 2008 will be a good one for biotech, especially in the second half of the year. The initiatives that are now in place will continue to drive the industry towards a "personalized" healthcare world - one that emphasizes earlier disease detection, more targeted treatments, and adjunctive support through enhanced nutrition.
Outcome: A sea change occurred in the industry. After having 40-plus years of relatively easy access to cheap capital, the "rules of the game" changed with the permanent restructuring of the capital markets making access to capital more difficult and expensive. Although the year will be remembered for the ugly events surrounding the financial markets and economic downturn, behind the numbers the industry continued to advance. Interest in clean technologies accelerated and the sector attracted significant investment. With the focus of attention being on the presidential race throughout the year there were no major regulatory or policy changes enacted that would cause concern for the industry. [A detailed analysis and perspectives on the performance of the industry in 2008 and projections for 2009 and beyond are published in Biotech 2009-Life Sciences: Navigating the Sea Change - the 23rd annual report on the life sciences industry, available in January. Details: www.burrillandco.com/resources] ### About Burrill & Company Founded in 1994, Burrill & Company is a San Francisco-based global leader in life sciences with activities in Venture Capital, Private Equity, Merchant Banking and Media. The Burrill family of venture capital funds has over $950 million under management and its merchant banking business is one of the industry leaders in life sciences transactions. Burrill is also the creator, sponsor and facilitator of over a dozen leading industry conferences worldwide and publishes a range of bio-intelligence reports including the monthly Burrill Biotechnology Report and annual "State of the Industry" report.