The Bio Boost

September 23, 2002

As other tech sectors witnessed severe investment declines, biotech companies raised close to $60 billion in public and private funding from 1999 until the first quarter of 2002, up from the $15 billion raised between 1996-1998. However, this dramatic boost in cash flow mostly benefited the already established giants of the industry--Amgen, Genentech Inc., Biotech, etc.--while smaller companies still lack the resources and the capability to produce potential blockbuster drugs and increased marketshare.

The major players in biotech tend to dominate certain therapeutic areas, and secure market positions by acquiring and partnering with smaller biotech companies that are constrained by cash flow issues. Cash flow plays a crucial role for biotech development (a typical biopharmaceutical company requires at least $1-2 million during the first two years and an average of $5-10 million in the second two years), and consequently, smaller companies are often forming partnerships with larger corporations in order to survive. In addition, biotech and pharmaceutical concerns now compete directly for the acquisition of smaller drug development firms, for the same patient markets, for new technologies, and in diagnostic products and services markets.

Because clinical development is a long, expensive, and convoluted process, the biotech industry is likely to see results only by the middle of the decade for drug discovery. In addition, biotech companies need to ensure a constant flow of cash to fund their ongoing research and speed up the commercialization process. A shortage of funds is a problem especially faced by the smaller biotech companies who have to compete with the bigger players in the market. Companies have not yet yielded results with respect to maintaining a constant supply of new and improved products in the market and this could hamper long-term growth in the biotech industry.

Although drug delivery is considered to be the primary growth-driver for biotech, the medical devices sector of the biotech industry is witnessing optimism with a slew of new product launches expected in 2002 and 2003. There are a large number of devices approaching commercialization in areas such as orthopedics, plastic surgery, and urology. Yet the FDA approval process for medical devices is comparable in terms of difficulty to that for new drugs. For new, groundbreaking medical devices (that are different from those currently available), the approval entails rigorous clinical and animal tests, as well as human trials, an obstacle the medical devices industry continues to struggle with and needs to overcome to sustain profit levels and long term growth.

By Ketaki Sood, Larta Research Economist

Wendy Hall, Larta Staff Writer