Back From the Brink (Painting by Jennifer Coates)
Back from the Brink
deCODE genetics, a pioneer in the field of genetics-driven drug discovery, came dangerously close to sliding into financial oblivion last year. The Reykjavik, Iceland–based company had for years been mining its massive database of genomic profiles and health records of Icelanders in the hunt for genetic clues to common diseases, such as cancer, diabetes and heart disease. Despite a well-earned reputation for world-class research, the public biotech firm ran out of cash in 2009, a victim of the global economic downturn, and in November, filed for Chapter 11 bankruptcy protection. It emerged just two months later as a private company, backed by venture capital (VC) from a consortium led by Arch Venture Partners and Polaris Venture Partners. The new organization, deCODE genetics ehf, will continue genetic exploration and offer contract sequencing and data analysis services to others, but will no longer conduct risky and expensive drug development work. Like many other biotechs, deCODE did what it had to in order to survive.
"Biotech is back from the brink," says Willy De Greef, executive director at IBRS and former secretary general of EuropaBio. As in Europe, most biotech companies in the U.S. and Canada slashed costs, laid off staff and suspended research projects to conserve cash in hopes that business and market conditions would improve—which they have, according to most indications. "The panic that set in early last year may have contributed to company managers taking strong measures," De Greef says. "What didn't kill them made them stronger."
Of course, many biotechs did not survive this course in Darwinian economics. Some succumbed to financial pressures and folded. Others were bought out at bargain-basement rates by larger biotech and pharmaceutical companies eager to acquire leads to potential drugs and therapeutics. Last year in the U.S., about 25 percent of the nearly 400 active public biotechs either went out of business or were acquired by other companies, says David Thomas, industry research and analysis manager at the Biotechnology Industry Organization (BIO).
"But there's light at the end of the tunnel," notes Jim Greenwood, BIO president and chief executive officer. Last year, half the public U.S. biotechs had 12 months of cash on hand, and a third were financed for less than six months. This year, only a third are operating with under 12 months of capital available and just one quarter have funds for less than six months.
Venturing Into Optimism
Much of the guarded optimism on both sides of the Atlantic is fueled by last year's better-than-expected VC investment in biotech and an improved outlook for private biotech companies going public this year. While VCs in the U.S. invested a total of $17.7 billion in 2009—the lowest amount in more than a decade—biotech was the single largest beneficiary of funds, with $3.5 billion going into 406 deals. (Software was the next highest, with $3.1 billion funding 619 deals.) Biotech investment in the fourth quarter alone topped $1 billion, according to PricewaterhouseCoopers and the National Venture Capital Association. "Venture capitalists continue to place their bets in areas of promising growth, especially in the life sciences sector, which accounted for one fourth of all deals in the fourth quarter of 2009," says Tracy T. Lefteroff, global managing partner of PricewaterhouseCoopers's VC practice.
Nearly 65 percent of last year's total VC investment went to companies needing expansion and later-stage financing, as opposed to start-ups and very early–stage companies. The latter often tap into "angel" investors—high-net-worth individuals who provide financing through loans and equity investments. While angel investing declined 30 percent to $9.1 billion in the first half of 2009 compared to a year earlier, the VC uptick in biotech will likely fuel more angel activity this year. "Assuming venture capital picks up a bit, which it will, the angels will likely be more inclined to deal with biotech because they know there is later-stage money, which they clearly need," says Jeffrey Sohl, director of the Center for Venture Research at the University of New Hampshire.
Last year, only three U.S. biotech companies concluded initial public offerings (IPOs) to sell stock to the public. So far this year, more than a dozen have lined up to do so, albeit many of them holdovers from 2009. "We expect IPO activity to pick up in 2010 as the economy continues to improve and investors become more willing to test the public equity markets again," says G. Steven Burrill, chief executive officer of Burrill & Co., a life sciences investment firm in San Francisco.
Europe And Canada
In 2008, VC investment in European biotech companies totaled about $712 million. But last year, the sector retrenched to about $255 million by the end of the third quarter, for a projected 2009 total of $340 million. "There was a contraction on the financing side, which translated into fewer deals and a shakeout in biotech companies," says Helmut M. Schühsler, managing partner of TVM Capital in Munich.
This year, European investors are less interested in early-stage companies and more attracted to those having products, some revenue and collaborations or partnerships in place with other firms and institutions, Schühsler says. "Companies will have to become consolidators of early-stage products and build partnering engines to be successful," he predicts.
When it comes to partnering, Hamburg-based Evotec has found—the more, the merrier. This integrated biotech company conducts a range of biotech and drug discovery services for itself and others. Evotec receives licensing and other revenues from partnerships and collaborations with four large pharmaceutical firms, including Novartis and Roche, as well as numerous smaller biotech companies and nonprofits. "We built a portfolio of alliances, because you cannot bet on just one pharma partner or one product or lead molecule," says Evotec chief executive officer Werner Lanthaler. "You need to have many options, so if one goes down, they don't all go down."
As in Europe, Canadian VC investment tumbled last year, falling 27 percent to a 13-year low of $962,000. Biotech was hit particularly hard, with many companies forced to scale back, and several going bankrupt. Despite this, Canadian biotechs remain upbeat, says Peter Brenders, president and chief executive officer of BIOTECanada. At the close of 2009, more than 70 percent of the country's biotech companies had funds for close to 12 months or more, compared to only 30 percent in July 2009. "Not only have we turned the corner, but we are already heading down the street," Brenders says, predicting new company formation in "clean technologies," including biofuels, bioprocessing and biomaterials. "It's our fastest-growing sector," he says.
The situation is similar in Europe, where public support for and understanding of renewable energy helped biofuels and bioplastics companies survive last year. "They withstood the crisis very well with government support, which also made private investors more confident," says De Greef. "Also, industrial biotech is inherently less risky than medical biotech, because they don't have that huge death trap called clinical trials to run through, which are long, unbelievably expensive and very risky."
Policy And Politics
Patent issues are pending domestically and internationally. In the U.S., legislation has been proposed that would award patents to those who are first to file, rather than first to invent, bringing U.S. law in line with the rest of the world. Other provisions, such as infringement, damage awards and patent challenges are more contentious, and have pitted biotech and pharma against the computer, information technology and financial services industries during five years of ongoing hearings and deliberations in Congress.
With the search for new drugs becoming increasingly global, many developing countries want to capitalize on indigenous plants and other biological resources having commercial potential. The Convention on Biological Diversity (CBD), passed by the United Nations in 1992 (but never ratified by the U.S. Senate), requires benefit-sharing in exchange for access to plants and other resources. Although debate over the CBD continues, several countries—including India, Brazil and China—have or are considering adding CBD provisions to their patent laws.
Last year, China amended its laws by requiring patent applicants to disclose the original sources of any "genetic resources" in their patents and to prove that access was lawfully obtained. The biotech and drug industries believe these and similar requirements will open patents to attack for not disclosing correct or sufficiently complete information. This vulnerability, they say, will discourage research and ultimately inhibit the benefit-sharing that developing countries desire. The situation remains unresolved.
A tax-credit package intended to help struggling biotechs survive the recession failed to pass last year. In late March, after the U.S. House of Representative passed "The Patient Protection and Affordable Care Act of 2009," Greenwood of BIO released a statement that said: "The bill … includes a critical provision that will provide some financial relief to research-intensive, small biotechnology companies that continue to suffer from tight credit markets. The Therapeutic Discovery Project Tax Credit included in the bill will help offset a portion of the resources spent on therapeutic development activities, including hiring scientists and conducting clinical studies." It sounds like another good sign for the future.
