In times like these, it's nice to hear a bit of good news as well. "The crisis on the markets has not affected venture capital investment in biomed companies so far, and is unlikely to have a significant impact on it in the near future," predicts Scott Sarazen , global biotechnology markets leader at international accountancy firm Ernst & Young in an exclusive interview with "Globes." "2007 was, surprisingly, a great year for venture capital investment in biomed, and $7.5 billion was raised for the industry. 2008 hasn't been that strong, but the fall is relative only to 2007, which was an outstanding year, and not to previous years. $3 billion was raised in the first half of this year - more than in 2004, 2005, or 2006."
Sarazen was speaking ahead of the 12th annual "Globes"-Ernst & Young Journey Conference, opening on November 3 at the David Intercontinental Hotel in Tel Aviv. He adds that venture capital funds have already raised substantial funding, which is why the industry is still relatively secure. He also points out that the money still has to be invested. "In a market where real estate and financial stocks have taken a battering, biotech suddenly looks like a slightly less intimidating option."
Not everyone will have a strong year. The youngest companies now at the preliminary stages will be the first to be hit. "There's now uncertainty about the raising of future funds, as well as the possibilities for exits," says Sarazen. "So the funds are keeping back budgets so that they can continue investing in existing portfolio companies, whereas in the past, they might have floated them or raised funding for them privately. These investments are likely to be at the expense of investment in young and new companies."
This trend was clearly in evidence in 2007, when venture capital investment increased 60% over the previous year, although investment in series A rounds grew by only 17%. In terms of drug companies, this means that the money is earmarked solely for companies at Phase II clinical trials and later.
Times are tough - crisis or no crisis
Sarazen believes, however, that we will emerge from the crisis with a group of strong and robust companies. "Biomed companies has always had the creativity needed to find solutions even during times of crisis, and they always managed to operate even while tightening their belts. Some of them have gone ahead with licensing deals to bring products onto the market even in times like these."
Globes: What's happening on the mergers and acquisitions market?
Sarazen:"It's still alive and functioning, because, among other things, the big pharmaceutical companies still have to cope with the projected expiry of patents. $70 billion in sales will disappear - sales that currently do not have any substitute in the way of future product pipelines. Because of this, mergers and acquisitions totaled $35 billion in 2007 and there have already been $20 billion worth of mergers and acquisitions in the first half of 2008 - excluding licensing agreements and collaborations."
There is good news, even for young companies. "While in previous years it was clear that a company couldn't be acquired on the basis of a technology platform, (a patent owned by the company which, it believes, could be the launch pad for discovery or formulation of a range of drugs, G.W.), but a lead product only, there is now renewed interest in platforms," says Sarazen. "The interest is the strongest when there is a platform which is also backed by a product that proves its feasibility, but in hot fields, the hunt by pharmaceutical companies for new products has led to the acquisition of platforms that are still not backed by a proven product."
Crisis, or not, says Sarazen, young companies need to be creative. "Even in a reasonable market, a young biotech company can raise at the most $200 million from all its sources, including the stock market. The price of reaching profitability is no less than $1-3 billion. The company might be acquired during the process, and it might not. To raise cash, companies need to agree collaborations on product development, licensing or selling stakes in the company to finance others."
Is customized medicine developing the way it was expected to?
"The problem is that it's difficult to prove the economic value of developing customized drugs. I believe that only by securing health insurance cover for these products, will it be possible to also speed up their development and find a way to unlock the economic value - with, perhaps a bit of regulatory help along the way, as was the case with orphan drugs (drugs for rare and incurable diseases, which have a seven-year exclusivity period for the indications they are designed to treat, G.W.). I believe that customized medicine will happen eventually, because it is in everyone's interest that it does. Patients and insurance companies will be spared unnecessary treatment, doctors will be more effective in the treatment they deliver, and the FDA will see less safety issues and greater efficacy."
The interesting thing, according to Sarazen is that "Even the drug companies stand to gain from this. Today they spend a fortune on marketing campaigns to convince patients to take drugs that aren't always beneficial to them. If each drug is focused on a specific group - that group will know what drug to ask for and look for. There will no longer be any need for such a lot of marketing. We'll save on clinical trials too, because there won't be any requirement for samples from thousands of people to prove a drug has absolute statistical significance."
Published by Globes [online], Israel business news - www.globes-online.com - on October 19, 2008
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