CHICAGO--(BUSINESS WIRE)--Research and development (R&D) expenditures in the biotechnology industry have declined for the second straight year as companies narrow their focus to only the most promising products and initiatives. On average, biotech companies in the NASDAQ Biotechnology Index (NBI) spent $54 million on R&D in 2010, reflecting a 7 percent decline from 2009. This follows the 9 percent decline in spending seen in 2009 and is consistent with the global drug industry, which cut research spending for the first time ever in 2010, according to Thomson Reuters.
R&D efforts are a mission critical activity for biotech companies, but according to new report by BDO USA, company performance is not always directly linked to the level of R&D efforts undertaken. For companies that decreased their R&D spend in 2010, the effect on performance (measured by total annual shareholder return) was polarized: 57 percent experienced a positive shareholder return of 71 percent on average; 43 percent experienced a negative shareholder return of 34 percent on average. Return on R&D investment remains difficult to measure given the lack of a well defined industry matrix and the significant risk of new drugs and devices not securing FDA approval.
"Biotech companies have demonstrated a resilient ability to manage resources during tough economic times," said Ryan Starkes, Partner and Leader of the Life Sciences Practice at BDO USA, LLP. "The costs and challenges in obtaining FDA approval have made it more important than ever for biotech companies to focus their R&D efforts. Decreasing R&D spend in favor of preserving cash is a strategic move for many biotechs and will provide a competitive advantage as opportunities for investment arise."
The 2011 BDO Biotech Briefing examined the most recent 10-K SEC filings of the publicly traded companies listed on the NASDAQ Biotechnology Index (NBI). Companies reporting more than $300 million in revenue were excluded as outliers, and the remaining 86 companies were divided into smaller (less than $50 million in revenue) and larger (greater than $50 million in revenue) classes.
Further findings from the 2011 BDO Biotech Briefing include:
Revenues on the Rise, Small Biotechs Booming. Despite R&D cutbacks, the biotech sector enjoyed a robust 2010. Average revenues for all companies rose 11 percent to $77 million, up from $69 million in 2009. Small biotechs with less than $50 million in revenues took the lead in this jump, reporting a healthy 42 percent increase. The demand for more innovative products has helped smaller, more flexible biotechs increase average revenue to $41 million, a notable jump from $24 million in 2009. Larger biotech companies, however, reported average revenue of $124 million, a 3 percent decline from 2009. The overall increase in revenue has been spurred by strategic partnerships with large pharmaceutical companies who increasingly rely on biotechs to fill potential gaps in the pipeline of drugs. These partnerships have afforded biotech companies additional product and licensing revenue opportunities.
Small Biotechs Remain Focused on R&D Investment Despite Cutbacks.R&D spend per employee decreased by almost 10 percent to $188K in 2010 for all companies included in the BDO report. Smaller companies cut back more severally than larger companies at 21 percent and 7 percent, respectively. Despite larger cuts, smaller companies still spend significantly more on R&D per employee than larger companies at $249K, compared to $149K. Although the industry is moving toward increased focus and careful management of cash as a strategic asset, smaller biotechs ultimately develop more products, leading to higher R&D spending on a per employee basis. Overall, 70 percent of revenues were spent on R&D expenses in 2010, down from 2009 (84%) and 2008 (117%). Average R&D expense as a percentage of revenue was 108% for smaller companies, compared to 206% in 2009 and 353% in 2008. This is a stark difference from larger companies whose average R&D expense as a percentage of revenue was 54 percent and more consistent with 2009 levels (55%).
Equity Remains Top Source of Financing. Biotech companies have historically relied on capital markets to raise funds to invest in product development. In 2010, 51 percent of smaller companies were able to raise an average of $64 million equity financing. This shows a promising rebound as companies are approaching pre-recessionary levels -- 61 percent of smaller companies raised financing in 2007 and the average value was also $64 million. "Despite the turbulent economy, small biotechs have shown a remarkable ability to access capital markets and raise funds," said Aftab Jamil, Partner and National Director of the Technology and Life Sciences Practice at BDO. "This shows that investors continue to have an appetite for investments in this sector, but have become more selective." Just 13 percent of companies with more than $50 million in revenues raised equity financing which indicates that larger companies rely significantly more on cash generated from operations to fund their activities.
Liquidity is Stable Despite Tough Economic Climate. On average, biotech companies had $142 million in cash and short-term investments in 2010, a 3 percent decrease from 2009. Still, larger companies took the brunt of the decline, reporting a 10 percent decrease. Smaller companies saw a more favorable 6 percent increase in cash, following a much more drastic decrease in R&D expenditures to preserve cash as a strategic asset. Overall, biotech companies maintained financial liquidity fairly consistently and companies of all sizes are relatively flush following the 26 percent increase in cash reported in 2009. Overall, cash reserves are equivalent to approximately 2.64 years of R&D spending in 2010, up slightly from 2.54 years in 2009.
Losses Prevalent, but Less Severe. Biotech companies reported an average loss of $37 million for 2010. This is a 6 percent improvement compared to 2009 and a considerable upgrade from 2008 ($48 million) and even pre-recessionary 2007 ($40 million). Further proof of progress: 73 percent of companies in the study reported losses, a continued decline from 2009 (78%) and 2008 (86%) and an improvement over 2007 (81%). Losses will likely continue to decline as biotech companies sharpen their focus on and identify additional revenue streams through strategic and collaborative partnerships with big pharma.
About the Technology & Life Sciences Practice at BDO USA, LLP
BDO has been a valued business advisor to technology and life sciences companies for over 100 years. The firm works with a wide variety of technology clients, ranging from multinational Fortune 500 corporations to more entrepreneurial businesses, on myriad accounting, tax and other financial issues.
About BDO
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