Biotech Business Model “Unsustainable” in Financial Crisis, E&Y Says
Biotechnology by its nature goes through booms and busts driven by hope and fear, but now the industry is really in deep trouble. That’s the big headline coming out of this year’s Ernst & Young annual biotech survey, Beyond Borders.
Common sense would tell you that in a global economic meltdown, where mainstays like Citigroup hang by a thread, investors might not want to park their capital in an industry in which 90 percent of product candidates fail. Not to mention that, it also takes hundreds of millions of dollars and a decade or more to determine who the real winners are in developing new drugs. So it should come as no surprise that biotech companies in the U.S. and Europe raised $16 billion last year, a whopping 46 percent drop from the prior year, according to the Ernst & Young report.
Digging deeping into the report, I found the handy table where E&Y breaks down regional biotech clusters every year, which I know is of great interest to our readers in Boston, Seattle, and San Diego. This data is compiled from public company annual reports, so it leaves out private companies, but it will give you a sense that the pain is widespread, and some areas are being hurt more than others. It’s also annual data, so it may disguise how ugly things really turned in the second half of the year.
—New England. This is the second-largest biotech region in the U.S., behind the San Francisco Bay Area, when ranked by the number of public biotech companies (73 to 59). New England biotech companies had a combined market value of $49.7 billion on the last trading day of 2008—down 24 percent from a year earlier.
Still, all was not completely lost. The region’s biotech companies reported $13 billion in revenues, a 15 percent increase from the previous year. And even though new investment capital was hard to come by, New England biotech companies actually were able to sock away 5 percent more cash last year, with a total of $5.1 billion stashed away, according to the report. (For Xconomy’s company-by-company analysis of the balance sheets among Boston biotech companies, click here.)
—San Diego. The Southern California biotech hub was the nation’s third-biggest with 40 public companies, according to the report, although that’s down 9 percent from a year ago. San Diego’s biotech companies were worth a combined $17.4 billion—about one-third the value of those in New England—on the last day of 2008.
The overall picture isn’t holding up as well in San Diego. Revenues climbed 24 percent to $3.97 billion, although R&D spending fell 13 percent to $1.72 billion. Balance sheets in San Diego are shrinking, not growing. The region’s companies had $2.2 billion squirreled away entering 2009, a 19 percent drop from the cash and investments reported a year earlier. (For a closer look, check out our company-by-company breakdown of how well cash is holding up at San Diego biotech companies.)
—Pacific Northwest. This life sciences cluster, where yours truly calls home, has some things going for it with the Bill & Melinda Gates Foundation financing global health research and some strong basic research institutions, but it also had some pretty dismal biotech industry numbers to report to Ernst & Young. The Pacific Northwest ranks No. 9 in the U.S. in number of public biotech companies with 15, which puts it in a tie with Pennsylvania and the Delaware Valley.
The Pacific Northwest’s biotech companies had a relatively puny market valuation of $1.5 billion—nowhere near hailing distance of Boston or San Diego—and that figure represented a 45 percent drop from a year earlier. Spending on R&D was about $481 million combined, a 19 percent drop from a year earlier.
And even while they’re cutting back, Northwest companies haven’t been able to build up much of a financial cushion to ride out the recession. Only about $241 million combined showed up on the balance sheets of Northwest companies, a 28 percent drop from a year earlier. (Check out our company-by-company cash analysis here.)
This forced me to do a double-take about the $241 million. It’s not a misprint. It means New England biotech companies have about 25 times as much cash on hand, and San Diego companies have 10 times as much as the companies here in the Northwest. Something to consider next time an elected official tells the public about how competitive the local cluster is with the big boys around the country.