Online Extra: Biotech's "Fantastic Future Ahead"

Some bold predictions on what's coming for the industry from Ernst & Young's Scott Morrison

On June 1, financial-services provider Ernst & Young released its 19th annual report on the biotechnology industry. The firm is so optimistic about biotech's future it declares that in the U.S., the sector is "coming of age." Scott Morrison, director of Ernst & Young's U.S. Life Sciences practice talked about the report recently with BusinessWeek science reporter Arlene Weintraub. Following are edited excerpts from their conversation:

Q: Do you think biotech has reached a turning point in terms of finally being able to deliver the string of commercially successful products that the industry has been promising for the last two decades?


Clearly we do. The number of products approved, as well as those in the pipeline, continues to increase. Products are what drive growth. This is just the tip of the iceberg.

Q: What are some of the other measures you use to determine that the industry has reached critical mass?


Ten years ago one of the benchmarks we put together was the "Merck biotech index." We tracked Merck's (MRK ) market capitalization and sales relative to the overall biotech industry. In 1996, the entire biotech industry was equivalent to one Merck. Today Merck isn't that relevant, and the biotech industry is four or five times its size.

On an individual basis, if you measure by market cap, Genentech (DNA )is the world's largest biotech. And Genentech and Amgen (AMGN ) are both larger than Merck.

Q: What do you predict the biotech industry will look like in 2010?


By then the industry will be profitable. And a large proportion -- half -- of revenues in the life-sciences sector will come from biotech. Today biotech only accounts for only 25% to 30% of [life-sciences sales].

Q: With such bold predictions for a bright future, how come investors aren't flocking to biotech? Initial public offerings seem to be doing particularly poorly.


The good news is that there was an IPO market last year. The bad news is it was incredibly selective. Buyers were incredibly sophisticated. There has been volatility in this sector, so now there's a flight to quality. The companies that have suffered are young, they don't have products yet. In today's environment, there's less of an appetite for those stories.

Q: Yet the total amount of financing raised by biotechs jumped from $14.4 billion in 2003 to $17 billion last year. Where did most of that come from?


The private equity is there. It was a great fund-raising year overall. There were a huge amount of convertible debt financings of companies nearing product approvals. In fact, a very large percentage of private money is being put to work in product stories -- companies in later-stage rounds.

Q: With President George W. Bush threatening to veto legislation that would free funding for embryonic stem-cell research, some experts worry the U.S. will lose its lead in biotech overall. Is there any evidence of that happening?


No. Roughly 75% to 80% of capital [invested in biotechs] went into the U.S. last year. We are the key beneficiaries of that financing. Any metric you use to look at regional distribution -- market cap, revenues, number of employees -- establishes the U.S. as the center of excellence.

Q: Another fear is that big pharmaceutical companies will swoop in and acquire all the biotechs. Does that worry you?


Pharma will never gobble this industry up. In fact, we're likely to see the trend go the other way. Our view is that if you look in the pipeline at products in pivotal trials, it really is a fantastic future ahead for the industry.

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