biotechnology: a new market, a new futur

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Axis Pharma C/Jordi Girona 29, Edif. Nexus II Phone: +34 932521204 Email: [email protected] Barcelona, Spain Fax: +34 932521194 Web: www.axispharma.com

Biotechnology: a new market, a new futur

byEsperanza ReguerasManaging Director Axis Pharma

Published in: Farmaespaña Industrial Año I Nº5 2005

A new market, a new future

At the present time already nobody questions the economic and social value of the biotechnology. This new industry has supposed an authentic revolution for the sanitary, agricultural and industrial sector as well as for the financial community.

Centring us in health the biotechnology has been able to contribute new solutions to identify and to develop new products in a quicker and more cost-effective way. Likewise it has allowed approaching illnesses from other points of view opening new hopes for pathologies that were not well resolved until the moment. It has also allowed developing a new form of diagnosing pathologies and of preventing them. It has allowed identifying patients more or less responders to a certain treatment. It has allowed developing more specific and more selective medications and therefore treating patients with higher efficacy and less toxicity.

In definitive the contribution of the biotechnology to the healthcare is unquestionable today and the road has just begun.

The biotechnology has been developed as new industry in several developed countries but without a doubt this industry is led by United States. The Biotech development in USA can serve as experience and model for other countries that want “to be gone up to the train” of the biotechnology.

We present in this article some of the structural and evolution aspects of the biotech industry.

New technologies and their applications

Biotech development implies multilevel important advances. The new biotechnologies that use cells and biological molecules can have important applications in medicine, agriculture, alimentary processes, industry and environment.

Important applications in research and development: - Understand cellular processes - Stem cell technology - Understanding genetic function - Basic investigation with genomics, proteomics, bioinformatics

Applications in products’ development: - Identification of new products, new targets - Development of targeted products - Products “tailored for each patient”

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Applications in health:

- Diagnosis: new diagnostic tools based on biotechnology with higher effectiveness and specificity at lower cost.

- Therapy: improvement of current therapies and access to new therapies that would not be feasible without the biotechnology.

Substitution of lost proteins Use of genes to treat pathologies Cells transplantation Immune system stimulation Suppression of the immune system

- Regenerative medicine: tissue engineering - Vaccines - Herbal-medicines

The FDA has approved a total of 242 new medicines with biotech origin. In 2004 it approved 32 biotech products including products as Avastin, Erbitux oTarceva that have represented an important advance in patients’ survival.

Biotech worldwide CONFIDENTIAL

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United States is the worldwide leader in biotechnology. This leadership is, like we will see next, consequence of several factors but mainly due to 2 key ingredients:

- A solid and wide base of investigators with venture spirit. - Potent, flexible financial System inclined to financing new

technologies and high risk projects.

The first example of the solid development of the biotech industry in USA is shown in the comparative of the biotech industry profile in different territories as the following table shows:

Comparative of data of the biotech companies on the stock exchange (2003) (* data in Millions of Dollars)

World USA Europe Canada Asia/PacificTotal % Total % Total % Total %

Total revenues * 46.553 35.854 77,02 7.465 16,03 1.729 3,71 1.505 3,23R& D exp * 18.636 13.567 72,80 4.233 22,71 620 3,33 217 1,16% R&D / sales 40,03 37,84 56,70 35,86 14,42Net loss * 4.548 3.244 71,33 548 12,05 586 12,88 170 3,74% loss / sales 9,76 9,05 7,34 33,89 11,29Nº employees 195.820 146.100 74,61 32.470 16,58 7.440 3,80 9.810 5,01Sales / employee 0,24 0,25 0,23 0,23 0,15employees/co 43.80 99,18 17,45 15,83 14,70Nº public companies 611 314 51,39 96 15,71 81 13,26 120 19,64Nº private companies 3.860 1.159 30,03 1.765 45,72 389 10,08 547 14,17Total nº companies 4.471 1.473 1.861 470 667% co in Stock market 13,66 21,32 5,16 17,23 17,99

Source: Axis Pharma elaboration based on The Global Biotechnology Report 2004, Ernst & Young

We analyze hereafter each one of these key elements:

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1 - Revenues of the biotech companies:

Source: Axis Pharma based on data from The Global The Biotecnology Repot 2004 (Ernst & Young).

United States is presented as first power in biotechnology. Not only due the highest level of revenues (77% of the total) but also for the highest investment level in R&D (73% of the total).

Europe is clearly in a weak position representing only a 16% of the worldwide revenues and a 23% of the worldwide investment in R&D.

Analyzing absolute figures distance of revenues and investments between United States and Europe is very significant: revenues and investments are 4.8 times and 3.2 times higher in United States versus Europe.

2 -% R&D expenditure in each territory versus worldwide and % of R&D expenditure vs. sales in each territory:

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Source: Axis Pharma based on data from The Global Biotecnology Repot 2004 (Ernst & Young).

As showed in this graph the relative effort carried out in Europe in R&D is proportionally superior to the one in United States. Lower biotech revenues in Europe imply the need of a higher relative effort in R&D to be competitive and to have future options in this market. The R&D investments in Europe went in 2003 equivalent to 57% of the revenues versus 38% in the United States. The absolute investment in R&D as seen before is 3 times higher in United States than in Europe.

3 - Biotech companies profile:

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Source: elaborated by Axis Pharma based on The Global Biotecnology Repot 2004 (Ernst & Young).

The total number of biotech companies in United States is lower regarding Europe but the % of the public companies is however very superior vs Europe (21% in United States versus 5% in Europe) as shows the following graph.

4 -% of public companies

Source: Axis Pharma based on The Global Biotecnology Repot 2004 (Ernst & Young).

5 - Average size of the biotechnology companies:

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Source: Axis Pharma based on The Global Biotecnology Repot 2004 (Ernst & Young).

Companies are clearly bigger in United States vs the rest of territories: 99 employees/company in U.S versus 18 in Europe and also with a higher average revenues/company in United States (24.34 Million dollars per company in U.S vs only 4 Million dollars per company in Europe).

This surprising and positive evolution is a consequence of a well done work.

The biotech industry in USA has more than 1.400 companies. More than 20% of them are already public companies with sales of 35.8 thousands of millions of dollars, they give employment to more than 190,000 people and they invest in R&D about 19 thousand of millions dollars a year.

Biotechnology in United States: a model of success

As we have seen the data are conclusive as for the leadership of United States in the biotechnology industry. We will analyze the successes have been obtained in this field.

1. Success in results:

- Important levels of revenues (46,000 millions $ in 2004). - Strong revenues growth:

+310% between 1994 and 2004 (mean of +31 annual%) +17% in 2004 vs 2003.

- Constant level of losses (around the 4,000-6,000 Million dollars per year) reducing the % of losses/sales from 32% in 1994 to 14% in 2004.

- High and growing investment in R&D (key market driver) +11% in 2004 vs 2003 +183% 2004 vs 1994 (+18.3 % annual average) 43% over sales in 2004

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Source: Axis Pharma based on data of annual biotechnology industry reports, 1993–2005 Ernst & Young LLP and BIO.

2. Profile of the biotech companies in United States:

- Over 1,400 companies - High % of companies in stock exchange: 23% in 2004. - Big mean size: average of 130 employees/company in 2004 - Growing number of employees: 190,000 people approximately in

2004.

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Profile & evolution of biotech market in USA (II)

265 260 294 317 316 300 339 342 318 314 330

1,311 1,308 1,287 1,274 1,311 1,2731,379

1,457 1,466 1,473 1,444

103 108118

141155 162

174191 194

177187.5

79 8392

111 118127 126 131 132

120130

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400

600

800

1000

1200

1400

1600

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Nº

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80

130

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Nº public companies Nº companies 000 employees Employees/cia

Source: Axis Pharma based on data of annual biotechnology industry reports, 1993–2005 Ernst & Young LLP and BIO.

3. The fruits: great number of patents and products approved in biotechnology:

- High and growing number of patents approved in United States in biotechnology. Around 7,800 in 2002.

- Growing number of annual new medicines or vaccines approval from the biotechnology: 40 in 2004 and 314 in the period 1989-2004.

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Source: Axis Pharma elaboration based on data of BIO

Cancer the most important target of biotech companies in the US. It’s a not well resolved pathology until the moment with the chemical treatments that could find cure thanks to the biotechnology development.

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Source: PhRMA survey 2002

Financing: one of the key success factors in USA

The important and positive evolution of the biotechnology in it US is in part consequence of the available financing that has allowed the development of companies and projects. As in pharmaceutical industry the life-cycle is long and therefore the projects and the companies need an intense financial support during long periods of time. However the fruits are arriving as we have seen and some are very “big fruits”.

It’s important to highlight that the financial market in United States has a different profile vs Europe in terms of structure, operation, agility and aversion to the risk. The clear consequence of it is it that in Europe only 5% of the biotech companies are public companies vs a 21-23% in the United States.

1. In the US stock exchange we find the Nasdaq Biotechnology index that has an evolution similar to the Nasdaq index and superior to the S&P 500 index in the last 2 years.

Following graph shows a comparative evolution of Nasdaq (IXIC), Nasdaq Biotechnology (NBI) and S&P (GSPC) indexes in United States during the last years.

NBI index was created in the year 2001 and its evolution from then has been very satisfactory and even superior to that of S&P. In the year 2002-2003 there was a significant “fall” of all the technological sector but the recovery has been quite solid in the 2 next years.

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2. Finance sources for biotech in United States

- The total financing of the biotechnology had an important pick in the year 2000 being regularized in the following years. It continues being however an attractive sector for financial investments as shows the following graph:

Source: BIO

- Financing sources : around 50% of biotech companies financing in United States come through Venture Capital or from public offering (stock exchange) just as shows the following graph.

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Source: BIO

Over 24% of the total financing has come from venture capital (VC) and other 26% comes from public financing (stock exchange). The quick presence of companies in stock exchanges in the US has facilitated an important part of the financing. It is necessary however to keep in mind that the investment approaches in USA as well as the environment and financial approaches are factors not easily applicable to Europe where the presence of this type of companies in the stock exchange is much more difficult and the financial environment is much less favourable.

- Venture capital: the capital risk is in United States an important piece in the development of the biotechnology. It is one of the most important sources of financing acting as finance partner with a strong commitment with the projects. The number of deals and the amounts of VC investments in biotech are relatively high as shows the following graph. The VC investments in health sciences accumulated in the first 9 months of 2005 was closer to the total quantity invested in this sector in 2004 (a 26% of total venture capital investments).

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Source: NVCA (National Capital Venture Association)

Financing difficulty in Europe

1 - Low investments of Venture Capital in biotechnology

Quantities and % invested in Europe by the VC companies in biotechnology are clearly inferior to the ones observed in United States. This is one of the most significant differences: fewer dispositions of the investors to finance biotechnology projects in early phases of development and therefore of high risk stages. By definition the most adapted financial instrument to this type of projects is the VC. However we observe that this financial instrument is not investing in biotechnology in the measure that US venture capital firms do.

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Source: Axis Pharma based on data of Annual survey 2002, 2003 evca (european venture capital association).

2 - Few companies in stock exchange:

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Source: Europabio

The previous graph shows the proportion of public and private biotech companies in Europe by countries. United Kingdom is the European country with a bigger activity having a 13% of the companies being public vs an average of 5% in EU.

3 - Comparative situation Europe vs United States in 2003:

Comparing the situation in 2003 we could extract the following conclusions:

- Smaller companies in Europe - Low proportion of companies are public in EU - Smaller number of employees (total and by company) - Smaller revenues - Smaller investment in R+D

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Source: Europabio

The previous graph assigned a value of 100% to the USA parameters showing the relative situation of Europe for each factor. The number of companies in Europe is a 26% superior to that of United States but the investment in R&D is the 44% of the invested in USA. Revenues are a 35% of the US revenues, the number of employments is a 39% of those of the USA and the number of public companies is a 30% of the number in the USA. This graph represents of a glance the big structural differences of biotech industry in this 2 territories.

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Which are the barriers for the growth according to the biotech companies?

An interesting study published by the American trade department (A survey of the use of Biotechnology in US industry. Department of Commerce 2001) shows very interesting data on the barriers that the interviewed biotech companies considered the most important impediments to the advance of their companies.

Source: US Department of commerce

According to the results of this study the 3 most important barriers for advancing are:

- costs (regulatory and R&D), - procedures (regulatory) and - Initial financing of the project.

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The biotechnology in Spain

The biotech industry in Spain has been developed and strengthened especially in the last years. The biotech industry structure is shown in the following graph:

2000* 2001* 2002* 2003**ECDB 40 54

11971

EPDB 120 130 79EUB 40 41 48ESIB 102TOTAL 200 225 300Source: asebio * and Genoma Spain * *: ECDB (companies totally dedicated to the biotechnology), EPDB (Companies partially dedicated to the biotechnology), EUB (companies users of biotechnology) and ESIB (service companies in the

biotech industry). Advance of the strategic study of the biotechnology in Spain. Genoma Spain February 2004.

Activity sectors

Companies partially or totally dedicated to the biotechnology are mainly dedicated to human health and agricultural activities.

Source: Axis Pharma based in “it Advances of the strategic study of the biotechnology in Spain. Genoma Spain February 2004.”

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Size, revenues and financing



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The previous graphs show some interesting data:

- The mean size of the biotech companies in Spain is on line with the European average. If we consider the group of companies total and partially dedicated to the biotechnology we have the following comparative figures: 21-139 employees/company vs 17 in Europe in 2003 and 1,7-6,9 Million Euros/company versus an average of 4 Million Euros/company in Europe. The average size however is far from the observed in United States like we have seen previously.

- The total revenue of biotechnology in Spain represents the 2,5% of the European total.

- The financing however is mainly coming from governments (public sector financing, 66%) although this percentage is diminishing in the last years.

- The financing % coming from the VC is clearly an important deficiency regarding Europe vs United States:

1% in Spain versus 25% in United States. The VC investments have grown in the last years.

- Low participation of VC: the % of the VC investments in biotechnology in Spain regarding the total of VC investments is significantly low: in 2002 0,8% of the total VC investment was dedicated to biotechnology. This % is inferior to the observed in Europe (4% in 2002) or in United States (26% in 2004).

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The private investment is also increasing as showed in the previous graphs. The 90%of biotech investment is dedicated to human health. The human health was also the main source of income: 93% in 2002.

Investment in R&D versus Sales

Source: Axis Pharma based in “it Advances of the strategic study of the biotechnology in Spain. Genoma Spain February 2004.

The R&D investment in Spain represented approximately in 2002 1,5% of the total investment carried out in Europe in biotech (9.500 Million dollars). The percentage is a figure relatively low considering that the GDP of Spain in 2002 was 7,5% of the European one.

Additionally an enormous investment effort is observed in R&D vs revenues. We have seen previously that the European effort was to invest the 57% of the sales in R&D (data of 2003) and that figure in United States was 38%. In Spain the investment in R&D vs sales is very superior to the observed in Europe as in United States. It is hoping that this titanic investor effort can give its fruits in coming years and that the revenues level can reach the relative levels that correspond to a country like Spain.

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C/Jordi Girona 29, Edif. Nexus II Phone: +34 932521204 Email: [email protected] Barcelona, Spain Fax: +34 932521194 Web: www.axispharma.com

http://www.axispharma.com/

mailto:[email protected]

CONCLUSIONS:

The figures and the presented graphics speak by themselves. The birth and development of a new industry like the biotech one supposes a revolution without a doubt in many activity fields but mainly in the human health. This development implies an enormous effort in economic investments and human resources making feasible that the ideas and the projects find financing and experts that want to create companies, to investigate, to generate employment and to generate value.

The current data confirm the strong leadership of United States in the biotech industry. They have made a good work. The investigators are highly inclined to start companies and the investors are inclined to facilitate the economic resources despite the high implicit risk jointly with a high profitability expectation. It is a relatively new industry with a high innovative component but that after all it must be droved by business approaches.

Europe is lagging behind. The delay doesn't owe himself fundamentally to the lack of financial resources or technicians but rather it is very influenced by some more conservative financial approaches, a less venturesome culture in a large part of the investigators and in general a more adverse environment to a high risk business.

Some of these factors are not easily modifiable in the short and half term what anticipate a bigger distancing in the development of the biotechnology in these two regions. It is necessary to recognize that the governments and European authorities are making in the recent years, some important efforts to push an industry that without a doubt will be one of the more important and profitable sectors in the coming decades. It is not still late to be gone up to the train.

In Spain an important turnaround has taken place in the last years although structurally they still exist some points to correct as the necessity of more private financing, bigger participation of VC in the biotechnology, increase of the number of companies and of its mean size and an increase of the revenues figures. The investment in R&D is at the moment important in biotechnology and it is expected that this investment will give some fruits in next years facilitating the development and growth of this important industry. It is necessary to continue pushing in this direction facilitating: the creation of companies started from research projects, application of business approaches to these companies and facilitation of VC development in this sector. These 3 ingredients could represent in my opinion an important and definitive impulse to the biotechnology in Europe and Spain.

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C/Jordi Girona 29, Edif. Nexus II Phone: +34 932521204 Email: [email protected] Barcelona, Spain Fax: +34 932521194 Web: www.axispharma.com

http://www.axispharma.com/

mailto:[email protected]

biotechnology: a new market, a new futur

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