Beyond Borders: Global biotechnology report 2010

of factors, including a change in accounting
rules, contributed to the large uptick in US
profitability, but cost reductions certainly
played a significant role. It is also worth
noting that, while increased profitability
was most dramatically apparent in the US,
the bottom line in each of the other
established centers — Europe, Canada and
Australia — improved significantly in 2009.
Operating efficiency, it would appear, is an
integral part of the new normal.
That drive for efficiency was also clearly
visible in the industry’s survival index,
which measures the number of years of
cash that companies have on hand based
on their current cash burn. In 2008, the
survival index had deteriorated considerably
as many companies had a difficult time
raising capital. But in 2009, thanks to the
efforts to reduce cash burn (as well as the
success some companies had in fund-raising
transactions) the survival index bounced
back in the US and Europe, though there
was no appreciable improvement in Canada.
United States
As mentioned above, the financial results of
the US biotechnology sector were skewed by
the megadeal of the decade — the acquisition
of Genentech by Roche. At the time of the
transaction, Genentech accounted for more
than 20% of the revenues of the US publicly
traded biotech industry, so it is not surprising
that the transaction had a sizeable impact on
the industry’s results.
The revenues of US public companies
fell to US$56.6 billion in 2009, a 13%
drop compared to 2008. After removing
Genentech from the 2008 numbers, the
industry’s revenues would have instead
increased by 10%; adjusting for Sepracor,
the year’s other significant acquisition
would have raised the growth rate even
further, to 12%. This is fairly consistent with
2008, when the industry’s revenues grew
by 8.4%, or 12.7% adjusted for significant
acquisitions. In addition to the acquisition
of Genentech, the industry’s revenues were
impacted by declining revenue at a couple
of industry stalwarts: Amgen (which saw
revenues decline because of a significant
decline in sales of Aranesp, driven by a
product safety-related label change that
occurred in August 2008) and Genzyme
(which was negatively impacted by
manufacturing problems for Cerezyme and
Fabrazyme).
R&D spending decreased by 24%, compared
to a 20.5% increase in 2008. After adjusting
for the Genentech acquisition, R&D
expenditures would have still decreased
by 13%. Companies reporting significant
reductions in R&D spending included
Amgen, Celgene and United Therapeutics.
However, the trend was fairly consistent
across the industry, with 64% of companies
reporting reductions in R&D spending. In
contrast, back in 2007, before the onset of
the financial crisis, only 37% of US public
companies reduced R&D spending during
the year.
As mentioned above, the truly noteworthy
development in the US industry was its
profitability. The net income of publicly
traded biotech companies increased from
about $US400 million in 2008 to an
unprecedented US$3.7 billion in 2009.
This is all the more impressive given
that the acquisitions of Genentech and
Sepracor had removed US$3.9 billion of
profits from the industry.
The remarkable uptick in profitability
was driven by a combination of factors.
The first of these is a seemingly arcane
change in accounting rules, but one with
significant implications for the biotech
industry: the treatment of acquired inprocess
R&D (IPR&D). Large acquisitions
by US biotech companies have typically
resulted in hefty charges for acquired
IPR&D — essentially the estimated fair
value assigned to ongoing R&D projects
acquired in a business combination. Given
the active deal environment in recent years,
the US industry’s profitability has been
lowered every year by these significant
charges. In 2008, for instance, US biotech
acquirers incurred about US$2.3 billion in
acquired IPR&D charges, in the absence
of which the industry would have been
very comfortably in the black. Starting in
January 2009, however, the accounting
treatment of acquired IPR&D changed.
Instead of reporting IPR&D as an expense
on the income statement, US companies
are now required to capitalize it as an asset,
eventually amortizing the assigned value
to expense. While the rule changes create
several challenges for companies entering
deals (see “Valuing milestones,” by Michelle
Mittelsteadt, on page 79 for a detailed
discussion), the absence of acquired IPR&D
charges gave an immediate boost to the
industry’s net income in 2009.
The reduction in the number of public
companies also helped the industry’s
profitability, since the majority of
companies that were acquired or ceased
operations during the year were in a
net loss position. In aggregate, these
companies had racked up net losses of
approximately US$850 million in 2008,
and their removal boosted the industry’s
bottom line by a similar amount.
The sum of all these factors, however, is
not sufficient to account for the magnitude
of the increase in industry profits in
2009. Much of the difference came from
one-time events such as asset sales, tax
benefits, milestones and royalty payments
as well as increased efficiencies at large
numbers of companies across the industry.
Noteworthy examples include industry
leaders such as Amgen and Gilead, which
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