E&Y: Biotech looks stable, but warning signs cloud the future

Ernst & Young has taken its annual snapshot of the financial health of the global biotech industry. And by and large, the big accounting firm found that the industry--or at least the public breed of biotech companies in the mix--is in pretty good shape, with a few qualifications that temper the forecast for what lies ahead.

Revenue in 2011? Up 12% in the U.S. R&D budgets? Up a respectable 9% in 2011 vs. 2010, when the numbers ominously leveled out. M&A activity is up, but Big Pharma is only doing a minority of those deals. And funding is up, but don't get fooled--the swelling figure is largely the result of a handful of companies taking advantage of some incredibly low interest rates to borrow cash.

Add it all up, says Glen Giovannetti, the life sciences leader at Ernst & Young, and "it is generally better, though I'd like to see double-digit growth." As far as the R&D growth, he adds, the numbers are back to normal, with about two-thirds of the companies confident enough to increase their research budgets. Venture capital, Giovannetti tells FierceBiotech, has actually been holding up well for several years, remaining essentially flat from 2010 to 2011.

"I've been waiting for the other shoe to drop," adds the consultant. Over the past few years, the biotech industry has benefited from a steady flow of venture bucks, even though the money going into new funds has dropped. Eventually, probably around the 2013-2014 stage, we will likely start to see those lines start to converge, with the total flow of investment cash sliding down to catch up with the long-term trend.

One troubling note for biotechs, he adds, is that up-front payments were down significantly in 2011, hitting a little more than $2 billion, roughly just a third of what it was a year before. The Big Pharma companies which are paying those up-fronts are getting more cautious as patents expire and they're still paying off the debt from big M&A deals of the past, offering dividends and executing stock buybacks. 

"They're making more careful decisions about how they spend their capital," says the analyst about Big Pharma.

Giovannetti, though, didn't travel to BIO 2012 just to read the results of the annual industry physical. The big accounting firm is pressing for a top-to-bottom change in the way drugs are discovered and developed, noting that biopharma companies will be competing in a far more fluid world, where precompetitive collaboration among a diverse group of players is more the norm than an experiment. In the brave new world, Giovannetti envisions data should flow from several sources--including payers--to help shape programs and commercialize products, and where information and IP will be exchanged more readily.

- here's the press release