Global Biotechnology Makes Historic Advances Strong product pipelines and revenue drive march toward profitability, new technologies fuel soaring deal values, according to Ernst & Young's 2007 Global Biotechnology Report LONDON and BOSTON, April 16 -- Strong product pipelines and product success, record-breaking financing totals, unprecedented deal activity and impressive financial results mark historic industry advances, according to Beyond Borders: Global Biotechnology Report 2007, Ernst & Young's 21st anniversary report on the biotechnology industry. "The industry in the U.S. has never been stronger and we're seeing its success story spreading to other parts of the world-particularly Europe," said Glen Giovannetti, Ernst & Young's Global Biotechnology Leader. "Time will determine whether these trends will be sustained, but there's reason for optimism. Innovation is being rewarded with record revenues and unprecedented premiums in M&A transactions." Multi-Faceted Success By virtually every performance indicator, the global biotechnology industry showed robust growth in 2006: > Deal values soared, with alliances involving U.S. companies totaling US$23 billion -- an all-time record -- while high premiums (the difference between the price per share paid by a buyer and the company's share price before the deal was announced) drove the value of mergers and acquisitions (M&A) to the second-highest level in the industry's history. > Capital raised by the world's biotechnology companies grew by a massive 42 percent, to US$27.9 billion. Venture capital (VC) reached US$5.4 billion, an all-time high. > Global public company revenues grew by robust double-digit rates and crossed the US$70 billion threshold for the first time. Double-digit revenue growth was achieved in Canada (22 percent), the U.S. (14 percent) and in Europe (14 percent). > Net losses of publicly traded companies fell by 37 percent in Europe and 43 percent in Canada, creating momentum toward profitability. While the U.S. sector saw increased net losses, this was due primarily to large transaction-related charges in a year of unprecedented deal activity; in the absence of these, the U.S. industry would have been profitable in aggregate for the first time, and the global industry would have had its lowest net-loss ever. > U.S. product approvals increased from 33 in 2005 to 36 in 2006. New drug application (NDA) and biologic license application (BLA) approvals grew from 21 to 25. In Europe, product pipelines of public companies grew significantly. The Year of the Deal Intense competition, particularly among pharmaceutical buyers, created a robust deal environment in 2006. The average premium in M&A transactions with values over US$500 million increased to 60 percent in 2006, more than twice the average M&A premium from 2003 to 2005. Several companies in the U.S. were acquired for premiums in the 50 percent range, with some crossing the 100 percent threshold. In a reversal of recent trends, pharmaceutical buyers gravitated towards early-stage platforms and technologies. "In many ways, 2006 was the year of the deal -- but this is all the more remarkable because there was no one deal of the year," said Giovannetti. "In prior years high deal-value totals were typically driven by a single mega deal, but in 2006 we now have widespread recognition among buyers of the potential value in biotech's platforms and pipelines. That's remarkable, and a testament to the tremendous innovation of the global drug development industry." U.S. Strong and Approaching Profitability The U.S. had another strong year for product approvals with 36, including 25 NDAs and BLAs. This compares favorably with 2005, when the industry secured 33 approvals, including 21 NDAs and BLAs. Capital raised increased by 38 percent, fueled by some of the largest financings in industry history. U.S. revenue grew by 13 percent among public and private biotech companies to US$59 billion, and the industry made a truly historic move toward profitability. In the absence of over US$4 billion in acquired in-process research and development charges related to the year's unprecedented deal activity, the U.S. publicly-traded sector would have shown an aggregate net profit, for the first time in its history. Notably, the largest revenue growth companies in the U.S. included "mid-tier" firms with recent product launches and rapidly growing sales. "We predicted profitability in the U.S. industry before the end of the decade," said Mike Hildreth, Americas Biotechnology Leader, Ernst & Young. "Only a strong deal year with high charges for in-process research and development kept the industry from reaching that goal this year." Sustained Progress in European Recovery The European biotech sector sustained the recovery it had begun in 2005, with revenue growth of 13 percent-more then twice the 2005 growth rate of six percent-contributing to revenues (for public and private biotech companies) of euro 13.3 billion (US$16.6 billion). 2006 marks a four-year turnaround, from the 12 percent revenue decline recorded in 2003. Financing increased by a robust 45 percent to reach euro 4.7 billion (US$5.9 billion). VC financings reached an all-time high of euro 1.5 billion (US$1.9 billion). The pipelines of publicly traded companies grew an impressive 30 percent, bringing the overall pipeline to almost 700 compounds, plus 27 in registration and awaiting regulatory approval. In addition, Europe's privately held biotechs have nearly 800 compounds in their pipelines, and 12 compounds in registration. "Last year, there was cautious optimism in the European biotech industry -- as the sector emerged from a prolonged period of restructuring," said Siegfried Bialojan, Germany Biotechnology Leader, Ernst & Young. "This year, double-digit revenue growth -- and sustained success across multiple measures- prove Europe's biotech sector has bounced back." Emerging Solutions for Asia-Pacific Challenges In Asia-Pacific, governments and companies are moving aggressively to make the transition from competing on cost to developing homegrown innovative pipelines. Businesses are adopting creative models to overcome capital constraints and other hurdles. Firms are reinvesting revenues from services to develop innovative pipelines, and are entering deals to accelerate commercialization efforts, drive economies of scale and increase global competitiveness. Conglomerates are entering the fray, making investments in the growing sector. "Asian biotechnology companies face critical challenges in their efforts to accelerate the transition to become enterprises driven by research and development," said Utkarsh Palnitkar, India Biotechnology Leader, Ernst & Young. "Companies are leveraging the Asian advantage in bio-manufacturing and contract services arena and utilizing them to drive the growth story in drug discovery and research." Outlook: "Challenges of Success" will Drive Deals With the biotech industry maturing in more regions, an increasing number of companies will have to deal with the challenges of success. This year's report features results of an Ernst & Young survey of over 400 biotechnology CEOs, at small, mid-sized and large biotech companies, which found that some of the fastest growing challenges facing their companies are issues facing maturing companies: ensuring regulatory compliance for sales forces, dealing with pricing pressures, expanding globally, and managing global operations. Survey respondents also were resoundingly optimistic. Ninety-four percent of respondents indicated they plan to hire new talent in the next two years, and 68 percent indicated plans to introduce new products within two years. These challenges of success will drive even more deal activity in the years ahead according to survey respondents: * Ninety-nine percent of Americas CEOs and 87 percent of European CEOs plan to enter deals in the next two years, with "sales and marketing assistance" being the most popular reason for entering alliances; and * Fifty-two percent of CEOs plan to partner to bring new products to market, up from 29 percent of products that are currently marketed with the help of partners. "Maturation brings greater responsibilities, including greater regulatory challenges and heightened investor scrutiny," said Giovannetti. "Despite these challenges, the biotechnology sector still holds great promise for innovative companies and is comfortably on track to become a US$100 billion revenue industry before the end of the decade." 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