Over the years, biotechnology companies have adopted a variety of different business models to be able to operate and grow, even under often challenging global macroeconomic conditions. The question today is, can they adapt once again to an unfriendly capital environment that is seen as their greatest threat to survival yet?

 

In its 2009 Beyond Borders annual report on the biotechnology industry, Ernst & Young warns that the global financial crisis threatens to render the business models that have driven the sector to date unsustainable. According to Glen Giovannetti, Ernst & Young’s global biotechnology leader, the funding drought is placing these business models that fueled biotech’s growth since its inception under unprecedented strain.

 

Although there are a wide variety of biotech business models, there are two common denominators that are key to a company’s ultimate success—innovation and access to capital. These factors are closely linked, and despite several periods that have stressed this unique relationship, companies have found creative ways to recover and prosper from financial droughts as markets rebounded from their various perturbations.

 

Currently, biotech finds itself caught in a financial crisis that has analysts speculating whether many biotech companies can recover. The situation that they find themselves is different this time because this crisis is deep-rooted, systemic, and persistent.

 

This is not a short-lived market decline, says Giovannetti, so companies will need to think of innovative ways to raise money and keep going. The mature and blue-chip biotech companies will do fine since they have plenty of cash, product revenue streams, strong pipelines, and Big Pharma partners. It is the large universe of small public companies, and private companies looking for venture capital, that will feel the most pain. In the absence of capital, the market turmoil has left a cohort of more than 50 percent of public companies—about 180—with less than 12 months of cash reserves to operate their businesses.

 

The knee-jerk reaction has been for these small-cap companies to suspend development of secondary products in the pipeline, seek to sell noncore assets, cut costs, and focus resources on the most promising pipeline candidate. Some have sold themselves at less than favorable prices. The pressures on the industry today, however, are such that these Band-Aid solutions for survival around existing business models will not work going forward. As a result, we can expect considerable industry consolidation in the months and years ahead via mergers and acquisitions, bankruptcies, and liquidations.

 

Those that do survive will have adapted to changes that are not only being brought about by the prevailing financial crisis, but also by several mega-trends that will shift existing paradigms and, in doing so, create new, sustainable business models, Giovannetti says. Among these are:

 

• Generics and healthcare reform will create new competitive pressures. Companies will need truly innovative products, and to prove their comparative effectiveness, in order to secure reimbursement from payors.

 

• Personalized medicine is another well-documented development that promises to be truly transformative, with implications for the entire business model, from early research through commercialization and marketing.

 

As Giovannetti points out, biotech executives will need to understand the potential impact of these changes, prepare for them, and wherever possible, help shape them. The industry’s representatives will need to be actively involved in the policy debate on healthcare reform to ensure that the pay-for-performance metrics developed align incentives with the needs of innovation.

 

The consensus is that the industry is robust enough to recover, but it will take some time. The regrettable part of the grim economic realities today is that many novel medicines and technologies may now never be brought to market, or could take much longer to develop than originally thought. On the positive side, when the markets do return, the industry will be smaller, but much stronger and well-suited to doing what it has always done best—innovate and build value.