Biotech Has First Profitable Year After Research Spending Cuts

http://www.businessweek.com/news/2010-04-28/biotech-has-first-profitable-year-after-research-spending-cuts.html

April 28 (Bloomberg) -- Biotechnology companies worldwide turned a profit last year for the first time since at least 1985 as those led by Celgene Corp. reduced spending on research while revenue increased.

Profit in the industry was $3.7 billion, compared with a loss of $1.8 billion in 2008, according to a report today on biotechnology in the U.S., Europe, Canada and Australia by Ernst & Young Global Ltd., a London-based consulting firm. The company has compiled its report annually for 24 years.

Research and development spending in the U.S. fell 13 percent last year, with about two-thirds of companies cutting those expenses as capital for some grew scarcer, said Glen Giovannetti, leader of Ernst & Young’s global biotech unit. Sixty percent of European firms reduced research costs. At the same time, overall sales increased in the industry, driven primarily by a small number of large companies with well- performing existing products, he said.

“What we don’t know is whether it was just fat that was cut or if some of these cutbacks in spending got into the muscle,” Giovannetti said April 26 in a telephone interview. “Unfortunately it could be planting the seeds for a slowdown several years out.”

The comparisons exclude Genentech Inc., which was fully purchased by Roche Holding AG in March 2009 for $44 billion. Basel, Switzerland-based Roche had already owned part of the company.

Celgene, the Summit, New Jersey-based maker of the cancer treatment Revlimid, spent $794.8 million on research and development last year, down 15 percent from 2008, the company said in a statement. Sales increased 20 percent to $2.57 billion. Thousand Oaks, California-based Amgen Inc., the maker of Enbrel for arthritis and psoriasis, spent $2.86 billion on research and development in 2009, down 5.5 percent from the previous year.

Scarce Capital

Some larger companies reduced spending to increase efficiency, while smaller ones had to cut costs as they saw less access to capital, Giovannetti said. Though capital raised last year increased 42 percent from 2008 to $23.2 billion, most went to established companies, he said.

The value of mergers and acquisitions in the U.S., excluding Roche-Genentech, decreased by half to $14.1 billion, according to the report. Three of those transactions had a value of more than $1 billion. In Europe, the value of merger and acquisition deals declined 42 percent to 1.8 billion euros ($2.37 billion).

“There have been three mergers of large pharmaceutical companies, including Roche-Genentech,” Giovannetti said, citing Pfizer Inc.’s October acquisition of Wyeth for $64.4 billion and Merck & Co.’s November purchase of Schering-Plough Corp. for $51 billion. “You have fewer potential buyers, and those companies themselves -- from a post-merger integration perspective -- are looking at rationalizing their own product pipelines and areas of focus.”