Wall Street Journal | Goran Mijuk
A lack of funding in the biotech industry, brought about by the financial crisis, is proving a boon for cash-rich drug firms. Since the outbreak of the crisis in 2008, big drug companies such as Roche Holding AG have been able to strike deals early and for less money with small biotech developers, which are struggling to fund themselves because traditional investors such as private equity, hedge funds and venture capitalists are shunning the sector. The trend has helped the big drug firms outperform the Stocks Pharmaceuticals and Biotechnology index.
"We are doing around 50 to 60 partnership deals a year now, compared to around 30 deals per year before the crisis [of 2008]," said Dan Zabrowski, head of Roche's drug partnership unit. "Today, we start deals earlier with less upfront payments and share the risk with our partners."
Roche isn't alone. According to consultancy McKinsey, an increasing number of pharmaceutical companies are tapping biotech firms to increase the number of drug projects they have in the pipeline and raise the odds of getting a major product to the market. In fact, more than half of the drug industry's late-stage assets come from external sources, McKinsey found.
The business model is proving to be a success. Roche's skin-cancer drug Zelboraf, which the cancer specialist developed in collaboration with U.S. biotech Plexxikon Inc., a unit of Japan-based Daiichi Sankyo Co., came to the market in August, much earlier than expected. This was partly because Roche and Plexxikon started to work together in 2006, before the drug moved into the testing phase.
Zelboraf's early approval has been instrumental in Roche's shares outperforming the sector this year. They are up more than 8% in 2011, vs. the Stoxx Pharmaceuticals & Biotechnology index's 4.2% rise. The fast approval of Zelboraf could be beaten with another skin-cancer drug from Roche, called vismodegib, which it developed with U.S. biotech Curis Inc.
The U.S. Food and Drug Administration granted priority review for the medicine this fall and analysts think it could come to market early next year. These hopes have sent shares of Curis through the roof, gaining more than 80% this year.
But Curis's performance is rare in the biotech sector these days. Because of the financial crisis, many ventures have come to an end. According to U.S. consultancy Bourne Partners, the number of biotech companies, both listed and unlisted, today has dropped 10% from the 4,414 in business world-wide before the crisis. To secure funding, biotech companies are increasing in size to create big research-and-development operations that increase the chances of bringing drugs to market. And the outlook for the sector is unlikely to change.
"The amount available to biotech companies is predicted to decline into 2012," Bourne said, which could force smaller companies seek larger pharmaceutical firms as potential acquirers.