Fundamental Reinvention of Life Sciences R&D Model

June 21, 2012 /

The global biotechnology industry showed a second straight year of increasingly stable financial performance in 2011, according to Ernst & Young’s 26th annual biotech report, Beyond borders: global biotechnology report 2012, with established biotech markets registering more than 10 per cent revenue growth for the first time since the start of the global financial crisis.

However, longer-term sustainability remains challenging, with the traditional funding-and-innovation model for pre-commercial biotech firms under unprecedented strain and the industry’s efforts to date to «do more with less» uncertain to deliver significant productivity gains.

In this capital-constrained environment, the inefficiency and duplication of the drug R&D para-digm is an indulgence we can no longer afford, » says Jürg Zürcher, Biotechnology Leader Europe, Middle East, India and Africa at Ernst & Young Switzerland. «More than ever, the in-dustry needs to remove duplication, encourage pre-competitive collaboration, pool data and allow researchers to learn in real time.

Revenue stabilizes

Companies in the industry’s established biotech centers (US, Eu-rope, Canada and Australia) achieved revenues of US$83.4 billion in 2011, a 10 per cent increase from 2010 on a normalized basis (after adjusting for the acquisition of three large US-based biotechs by non-biotech buyers).

After slashing R&D spending in 2009 and increasing it modestly by 2 per cent in 2010, the industry grew R&D by a healthy 9 per cent (on a normalized basis) in 2011.

Overall funding explodes, but “innovation capital” stays flat: Biotech companies raised a staggering US$33.4 billion in 2011, second only to 2000, when the genomics bubble was at its height. However, this increase was driven by a handful of commercial leaders with revenues in excess of US$500 million that took advantage of low interest rates to raise large sums of debt. Importantly, capital raised by the rest of the industry (innovation capital) remained largely unchanged from the previous four years at US$16.8 billion. IPO buyers remained selective, with only 16 IPOs and aggregate proceeds of US$857 million, compared to US$1.3 billion in 2010.

M&As up, but big pharma largely absent

Mergers and acquisitions involving Euro-pean or US biotechs increased from 49 deals in 2010 to 57 deals in 2011. However, big pharma was the buyer in only 7 of these 57 deals, a potentially troubling trend given pharma’s critical role in supporting biotech innovation. Ernst & Young estimates that the “firepower” of the top 28 drug companies to support biotech innovation declined by 30 per cent between 2006 and 2011 – a situation that is not expected to improve with more patent expiries and investor pressure ahead.

A new model for industry R&D

The report finds that drug R&D needs a new approach that is iterative, fast, adaptive, cost-efficient and open. The report propose such a new model, the holistic open learning network (HOLNet). These networks of diverse entities – drug firms, providers, patient groups, social media networks, data analytic firms and more – would pool vast amounts of data, share real-time insights from across the health care ecosystem, and adapt rapidly. HOLNets would build on existing trends and, critically, connect information from across the value chain and cycle of care.

This approach could encourage data sharing in precompetitive spaces (e.g., genetic data from patients, claims data from payers, outcomes data from providers’ Electronic Health Record sys-tems, data on failed clinical trials from life sciences companies and insights from dis-ease foundations); create uniform standards for data that will enable it to be combined and studied holisti-cally; enable engagement with regulators on new approaches to R&D and clinical trial design and build more enduring relationships with patients and use richer real-time patient data (with informed patient consent) to inform drug R&D.

Jürg Zürcher says, «To shift the R&D paradigm, companies will need to recognize that in some situations sharing information may create more value than protecting it. Disruptive reinvention is never easy. But, given the significant financial pressures facing most biotechs and other key health care players – payers, big pharma, investors – conditions have never been better for a HOLNet approach that leverages big data, real-time insights and the diverse strengths of a wide range of players.


Revenues of European public biotechs grew 10 per cent to US$18.9 billion. R&D expense grew by a healthy 9per Cent in 2011, up from 5 per cent in 2010 and a 2 per cent decline in 2009. The combined net loss improved dramatically from US$568 million in 2010 to US$0.3 million in 2011, bringing the industry to the brink of aggregate profitability for the first time.

M&As rose for the second straight year, with 22 transactions compared to 17 in the two previous years. Financing totaled US$2.9 billion, down from US$3.8 billion in 2010.

United States

Revenues of publicly traded biotechs were US$58.8 billion, a 12 per cent increase on a normalized basis -outpacing the 10 per cent growth rate in 2010. R&D spending increased by 9 per cent in 2011, building on the 3 per cent increase in 2010. Net income fell 21 per cent on a normalized basis from US$5.2 billion in 2010 to US$3.3 billion in 2011.

M&As involving US-based biotech companies rebounded to 37 deals from a low of 26 in 2010. Total US funding reached US$29.8 billion in 2011, up an impressive 38 per cent from 2010 but driven largely by debt raised by profitable companies to refinance existing debt and for stock buybacks and acquisitions.


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