As Biotech Matures, Alliances Will Come From All Quarters
Biotechnology, the industry that wanted to change the world from the inside out, is finding that the world is changing it.
Companies that once dreamed of building themselves into businesses that would discover, develop and sell genetically engineered products to improve the world are scaling back their ambitions, their idealism and their projections of independent success. Now, they are positioning themselves in a buy-or-be-bought environment.
The future of biotech companies, according to a prestigious annual industry survey and report, will be increasingly shaped by alliances and partnerships of all sizes and by mergers and acquisitions. More and more of the new partners or buyers will be from overseas, signaling profound changes in this still-maturing industry.
What is a sea-change for biotechnology also holds implications for future industry-building in the United States.
Since its founding nearly two decades ago, the biotech industry has been viewed as one of the country’s most promising industries and as a model for creating economic growth through exploiting new technologies. But as the companies abandon their dreams of independence and go abroad for capital and marketing partners, they are also relinquishing their claim on revenue from the technologies and products, their economic self-determinism and their connections to future generations of products.
That has happened in other leading-edge technologies before; with biotech, observers fear, the process by which foreign companies take over production of what American companies discover is being speeded up. At the same time, the U.S. leadership in discovery of new sciences, technology and products is being eroded by the nation’s declining interest in and support of science education.
As international mergers and acquisitions, such as the recent Genentech-Roche and Genprobe-Chugai combinations, proliferate it becomes clearer that we “have an industry that is going to be global,” said G. Steven Burrill, national director of high-technology services at Ernst & Young, the large auditing and services firm that on Tuesday reported the findings of its latest biotechnology survey.
“The investment has been positive because it makes it possible for (these companies) to grow and prosper. . . . On the other hand, one can . . . see increased foreign investment in what we thought was a domestic industry. The biotech industry may exist in the United States, but many of the fruits are either going to be shared or largely for the benefits of foreign economies and not the United States.”
Burrill said this “internationalization” is part and parcel of the “new realism” facing biotech companies: an increasingly stingy U.S. financial marketplace, an overloaded and labyrinthine regulatory system, new militancy from foes in the public and perhaps even their own managerial shortcomings.
One of the most stunning changes in attitude of biotech companies (about 40% of 1,100 biotech companies nationwide responded) was the willingness to consider acquisition. Forty-six percent of all companies--and nearly 60% of the smaller companies that still make up the bulk of the industry--said a chief goal was to establish enough value to attract an acquisition. “If there ever was one thing that has shifted over the years, this is it,” said Kenneth B. Lee, director of Ernst & Young’s life sciences division and co-author of the report. “Only a couple of years ago, no company would admit it was available to be acquired.”
Nearly 40% of the companies, in fact, said they expected to be acquired within the next five years; 47% of the companies said they expected to buy a smaller company in the same time frame. And nearly a third of the companies also say merging with a firm of similar size is likely.
Also, of the companies responding, 61% said a primary corporate strategy was to develop products that would attract partners who would market and perhaps steer them through the regulatory review process. This indication of the increasing commercialization of the industry also illustrates the shift away from the idealism that propelled many of the industry’s early entrepreneurs and investors.
Even though biotech companies have scaled back expectations of revenue and profit growth, optimism abounds. Industry sales increased 25% in 1989 to $2.9 billion. The companies project sales to double in the next two years and soar after that to make biotech a $75-billion industry by the end of the century.
“That’s pretty euphoric growth,” said Burrill. “And as they increase their partnering, they decrease the probability of meeting the $75 billion” because as they license their products to other companies, the other companies and not the biotech companies will pull in the revenue.
RESHAPING BIOTECH
Plans for consolidation within the next five years among 422 biotechnology companies surveyed.
To acquire a smaller firm: 47%
To be acquired by a larger firm: 39%
To merge with an equal size firm: 32%
Los Angeles Times
