One of the “Super Sessions” at the forthcoming 2011 Biotechnology Industry Organization (BIO) international convention is a presentation of the highlights of Ernst & Young’s 25th Annual Biotechnology Industry Report.
The 97 page report, available online, offers a useful summary of metrics around financing, deals and sector performance.
As the report notes, one of the key issues that biotech companies continue to face is access to funding in order to sustain innovation. Many biotechnology executives I spoke to at the recent American Society of Clinical Oncology (ASCO) meeting in Chicago confirmed how difficult access to capital remained.
The E&Y report confirms this anecdotal evidence. In their report they note that the 80/20 rule that we are all familiar with applied to biotechnology funding in 2010, with 20% of US companies obtaining 82.6% of the capital!
Given this ratio, it’s not hard to see why so many small biotech companies have struggled for funds. However, what would have been more interesting to learn about is what were the characteristics of the 20% that led them to successfully obtain more than 80% of the funding? In other words what are the learnings for emerging biotech companies seeking capital?
The report also notes that biotech’s share of available VC funding fell from 18% in 2009 to 12.2% in 2010, as VC’s invested in other market segments such as media and technology. One only has to look at the recent market interest in LinkedIn to see that investing in web 2.0 companies is back in fashion again, although with the subsequent share price drop it might be considered to be a little akin to Tulip mania.
Another key funding point that the E&Y report picks up on, is that many VC’s now invest in tranches with milestone or contingency based payments. The result of this “risk sharing” is a lowering of available working capital. The consequence for biotech companies is that less upfront R&D investments can be made. Instead they may be forced to go after fewer indications and not pursue all available opportunities.
Ernst & Young also interviewed several biotech CEOs about how they planned to sustain innovation, and two strategies emerged:
- Prove that what you are doing benefits patient outcome
- Do more with less i.e. improve efficiency
They are not mutually exclusive, and as the report points out, these are the challenges faced by all life science companies.
It will be interesting to see at BIO 2011 how industry executives view the current state of the biotechnology industry and how innovation can be sustained.