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Biotech Industry Overview - Trends

LMSB-04-0207-019

"This document is not an official pronouncement of the law or the position of the Service and cannot be used, or cited, or relied upon as such."

3. Trends

The Biotech Industry within the last 5 years has seen a significant influx of capital into their firms due to their cutting edge technologies, the mapping of the human genome and a wave of new biologic drug product approvals by the FDA. This influx of capital, which has come from venture capitalists, private investors, off balance sheet financial arrangements, convertible debt instruments, alliance revenue and product sales, has changed the Biotech business model. The large and mid sized biotech firms, have gone from reliance on large pharmaceutical partners for up front fees, milestone payments, and moderate royalties in funding their R&E endeavors (Platform Based of Tool Based Model), to a model whereby they can independently fund their own R&E activities and directly market their products, or enter into more lucrative co development and co promotion agreements with their large pharmaceutical partners (Composite Business Model).  This new model has enabled a number of large and mid sized biotech firms to significantly retain more of the fruits of their labor (i.e. profits and earnings).  This is evidenced by the fact that in 1999, 55% of publicly traded biotech companies had less than two years worth of cash, and 35% had less than one year.  As of 2001, 54% of biotechs had at least three years of cash and 42% had more than five years for funding their research activities.  This financial strength presents an enormous challenge.  Biotech firms now need to put the money to work by continuing to effectively get products into the marketplace and get shareholders a return on investment. It also means they must advance existing projects in clinical trials, expand their R&E infrastructures, negotiate collaborations which retain maximum downstream value and possibly acquire other technologies or companies.  Examples of biotech companies already making strides in these areas over the past couple of years are, Amgen in its acquisition of Immunex for $16 billion dollars, Millennium’s acquisition of COR Therapeutics for $1.5 billion dollars, Medimmune’s acquisition of Aviron,  Elan’s acquisition of Dura for $1.8 billion dollars, collaborations such as Imclone and Bristol Myers for $2 billion dollars, Cura Gen and Bayer for $1.5 billion dollars, Vertex and Novartis for $800 million dollars, Millennium and Bayer for $465 million dollars, Millennium and Aventis for $450 million dollars, and Millennium and Abbott Labs for $250 million dollars.  This activity has allowed the large and mid size biotech companies to begin achieving their goal of becoming vertically integrated stand alone drug companies.  Conversely, smaller biotechs with products still in early stages of development and who have not reached profitability must still rely on outside sources for capital (i.e. Platform or Tool Based Business Model), such sources being large pharmaceutical or biotech companies.  This has raised speculation that over the next few years you will see increased M&A activity, not Pharma and Bio but Bio and Bio as biotech companies strive to acquire critical mass for achieving drug development independence.  From a financial standpoint, Standard and Poors expects industry wide revenue for public firms to increase from 25 billion in 2001 to 31 billion in 2002 with aggregate earnings to grow at approximately 24% a year.  These revenues are currently fairly concentrated; estimates are that the six largest biotech drug developers in terms of sales (Amgen, Biogen, Chiron, Genentech, Genzyme and Immunex) will account for approximately two fifths of industry revenue.   This revenue base will become more diversified as additional smaller firms grow their product portfolios (60 biotech companies report a profit for 2001 according to Ernst and Young’s annual published revue of the Biotech industry "Focus on Fundamentals").  With this expected growth, comes important income tax considerations.  Some biotechs are deferring the reporting of their alliance revenues, other biotechs are using off balance sheet R&E financing vehicles to attract investment into their firms, while still other biotechs are looking to place their intangibles offshore.  These activities will need to be monitored for compliance in the future.

Chapter 2 | Table of Contents | Chapter 4

Page Last Reviewed or Updated: 03-Mar-2014