Every state is trying to

by francine Hardaway on January 11, 2006

Every state is trying to attract biotech companies. In fact, even China and India are chasing them. Why? At present, the industry in aggregate is not profitable, and is not likely to be so until 2010, partly because of continued regulatory hurdles. According to a new report by Ernest and Young it�s not even a very big industry, although it is growing steadily.

Although it�s still relatively small, on the eve of its 30th birthday, biotech in the U.S. is very strong. The U.S. is the dominant leader, but it�s being chased by Asia. Last year, the industry reached $46 billion in revenue, fueled by product sales that have in turn been accelerated by product approvals.

But unlike tech companies, very few biotech public offerings have raised more than $100,000,000. Of the three companies that raised over $100,000,000, only one has continued to price above its IPO offering price and 80% of deals have to reduce their pricing ranges, although the deals are getting done. Classically, the IPO has been the exit activity for a biotech company, but in the last several years there has been a trend toward mergers. The mergers have reduced the distinction between big biotech and big pharma � a distinction I�m not sure was ever real.

Ernst and Young�s report only measures public companies; it says there are 330 public Biotech companies in US, as opposed to 131 in Asia-Pacific and 98 in Europe. Last year, these companies averaged a 5% increase in employees and a 17% revenue growth. But the public companies are the tip of the iceberg; there are countless early-state private companies, funded by grants, strategic alliances, partnerships and VCs.

The good news is that biotech�s revenue growth is beginning to come from product sales, rather than simply from grants and venture capital. This change indicates the maturing of the industry; we are starting to see products that have been approved for a longer period of time and are beginning to be used widely by clinicians. We also see an increase in products that are in clinical trials. There are 365 products from biotech companies now in Phase III clinical trials– the last phase before we Baby Boomers get to take the drug.

For a long time, biotech was seen as the research arm of the pharmaceutical industry.Biotech spends 150% more on R&D than big pharma. Last year, there was a 12% increase in R&D spending in the biotech environment. And it has been getting a better return on its R& D dollars than big pharma�drug approvals for biotech firms are far outpacing those of big pharma. This situation seems to work well for both industries.

Biotech is a pretty efficient machine for getting products to market. And it�s very hard to kill a biotech company. They seem to restructure and downsize until they make it to the next round.

Once these companies get a product to market, they use big pharma�s salespeople through their collaborations. Biotech has the ability to drive the dollars where they will do the most good in the future � in the science.

Last year, $21.2b in venture capital was invested, which was a 15% increase over the previous year. Why? Because the market window for biotech IPOs opened in late 2003 and stayed open in 2004 to get a number of deals done. As you know, VCs don�t get in unless they can figure out in advance how they�re going to get out (with huge returns).

So even if the industry isn�t profitable yet, it�s coming along, and no one wants to be left waiting when the train leaves the station.

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