Biotechnology Draws Record Profit as Research Money Slows

Biotechnology companies worldwide boosted profit by 37 percent to a record $5.2 billion in 2012, partly by tempering growth in research-and-development spending, according to Ernst & Young.

Drugmakers led by Amgen Inc. (AMGN) and Gilead Sciences Inc. (GILD) increased R&D investment 5 percent last year, down from growth of 9 percent in 2011, the London-based consulting firm said today in its annual biotechnology industry report. At the same time, revenue at companies across the U.S., Europe, Canada and Australia rose 8 percent to $89.8 billion.

The record profit doesn’t necessarily tell an encouraging story about the industry, where R&D spending is the engine of future growth, said Glen Giovannetti, Ernst & Young’s global life sciences leader. While 2011’s boost in investment seemed to signal a rebound from the economic downturn, the slower growth last year means “we’re not completely out of this,” he said.

“There were higher sales on the one hand but lower R&D costs -- that’s what’s driving the profitability,” Giovannetti said in a telephone interview. “In 2009, immediately following the crisis, that was the first year the industry showed profitability, because they were cutting R&D costs. To me, that’s not a sign of health.”

Increasing scrutiny of health-care costs in the U.S. and abroad is adding another dynamic to the business of drug development, Ernst & Young said. It’s no longer enough to prove a drug is safe and effective in order to expect potential success; now, companies must demonstrate the value of a medicine to the health system to attain reimbursement, said Giovannetti and Gautam Jaggi, managing editor of the report.

Higher Standard

Genentech, the South San Francisco, California-based unit of Roche Holding AG (ROG), takes that into consideration before even bringing a medicine into the clinic, said James Sabry, vice president of partnering.

“We only work where we can be first in class or best in class,” Sabry said in an interview in Chicago yesterday at the Biotechnology Industry Organization conference. Because development of so many drugs is now driven by knowledge of a disease’s genetic underpinnings, “you can start putting together arguments before you even get into the clinic” that a medicine will serve an unmet need and be more likely to receive reimbursement from government health plans and insurers.

Many smaller biotechnology companies -- those with less than $500 million in annual revenue -- aren’t adequately prepared to demonstrate the value of their new drugs, creating what Ernst & Young calls an “implementation” gap.

Payers’ Perspective

“To succeed in the new world of health care, companies will need to truly understand the experiences and needs of payers and patients,” Giovannetti and Jaggi wrote. “The question isn’t whether you can afford to act on this imperative, but whether you can afford not to.”

In a survey of 62 companies with revenue of less than $500 million, almost two-thirds said they consider it very important to prioritize products that may exceed what’s currently available and to demonstrate the value of products to payers. Yet half said they are unlikely to add people with reimbursement expertise to their management, clinical development team or board, the report showed.

These kinds of considerations may affect interest from larger companies looking to make acquisitions or partnerships. Sabry said Genentech only undertakes deals with companies that have products with demonstrated potential value to the health- care system, holding potential partners to the same standards as internal projects.

New Approval

“It sounds like reimbursement is the new approval,” said Les Funtleyder, a health-industry analyst at New York-based investment firm Poliwogg LLC. “It might be a consideration in M&A, with big pharma waiting on reimbursement before they do a deal or at least have that as a consideration in the deal.”

Mergers and acquisitions are increasingly important for investors in early-stage biotechnology companies as the market for initial public offerings remains unfavorable and unpredictable, Ernst & Young said. Last year, the total value of mergers and acquisitions involving U.S. and European biotechnology companies increased 9 percent from 2011, adjusting for two “mega-mergers” that year.

Total transaction value was $27.4 billion in 2012, the highest “non-megadeal total” since 2008. The average deal size was $566 million and premiums “remained strong,” with many exceeding 50 percent, according to the report.

The two large deals of 2011 were Paris-based Sanofi (SAN)’s acquisition of Genzyme Corp. for $20.1 billion and Foster City, California-based Gilead’s purchase of Pharmasset Inc. for $11 billion.

In 2012, the biggest biotechnology deal was Bristol-Myers Squibb Co. (BMY)’s purchase of Amylin Pharmaceuticals Inc. for $5.3 billion to gain diabetes drugs. Amgen, based in Thousand Oaks, California, was the most active buyer of the year with purchases such as Micromet Inc., for $900 million, and Kai Pharmaceuticals Inc., for $315 million.

To contact the reporter on this story: Meg Tirrell in New York at mtirrell@bloomberg.net

To contact the editor responsible for this story: Reg Gale at rgale5@bloomberg.net

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