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BIOTECH COMPANIES PROJECT NEED FOR $ 45 MIL. IN FINANCING FROM EXTERNAL SOURCES OVER NEXT FIVE YEARS -- ARTHUR YOUNG SURVEY; CONSOLIDATION EXPECTED

Executive Summary

The average biotech company focusing on the development of therapeutic products expects to need $ 45 mil. in financing from external sources over the next five years, according to a just-released report by the Arthur Young accounting/consulting firm. The report, called "Biotech 89: Commercialization," is based on a survey of 291 biotech firms, 30% of which are involved in the development of therapeutic products for either animals or humans. According to the survey, almost half (44%) of the therapeutic-oriented firms reported that external financing would be necessary within the next two years (1989 and 1990), with the average estimated need being $ 14 mil. The estimates for additional financing reflect survey findings on survival indices. According to the report, therapeutic firms, on average, have enough cash and cash equivalents to fund current operating levels for approximately 37 months. Because of the effects of the stock market decline last October, the biotech industry overall, which includes companies involved with diagnostics, agriculture and research supplies, anticipates that new funding in the short term will be more dependent on debt and strategic partnerships that is has been historically. However, Arthur Young found that the firms projected that financing with public equity will rebound to exceed pre-crash levels in five years. According to the survey, public equity provided 25% of the surveyed firms' financing prior to the 1987 market drop, fell to 10% in the current year, and is projected to provide 27% in the next two years and 42% in the next five years. "The anticipated future rise is remarkable," the report comments, "suggesting that companies believe firmly in the restoration of equity markets -- and their interest in biotech companies -- within the next five years." Strategic partnering, which has provided 10% of funding to date, was projected to provide 19% in the current year, 24% in two years, and 19% in five years. Although the projected percentage drops over five years, the report observes that "in dollar terms, strategic partnering is more than likely to continue growing in importance as a financing vehicle." Suggesting that "the importance of strategic alliances goes beyond their financial implications," the report points out that survey participants, "when asked to rate the past and future importance, rather than absolute financial impact, of various financing sources, strategic alliances were ranked first by the industry as a whole." Therapeutic firms ranked agreements with U.S. pharmaceutical firms as their most important alliances, followed by agreements with foreign pharmaceutical firms and alliances with universities, respectively. The therapeutic firms reported, on average, having eight strategic alliances, five with universities. The survey firms also foresee further consolidation in the industry over the next ten years. When asked to predict the percentage of biotech firms that would be acquired in upcoming years, the companies estimated that 10% would be the subject of acquisitions in 1988, 19% within two years, 32% within five years, and 46% within ten years. However, the report notes that "only 5% believe that their own company will be acquired in the next year, while another 15% expect to acquire another company in the same period of time." More than half of the therapeutic-oriented firms that expect to be involved in acquisitions believe that they will be the target and not the suitor. Overall, the surveyed biotech companies reported that the stock market crash has "had no significant effect" on marketing strategies. However, the therapeutic market segment is the "most likely to have changed their marketing strategy as a result of the crash (26%, considerably higher than the industry norm of 13%)," the report says. Therapeutic firms, the report continues, "provided more evidence than other market segments of construction delays and outside production increases." The biotech industry overall projects spending $ 51 mil. (per company) on manufacturing facilities over the next five years. The report notes that investment in foreign facilities is projected to increase 90-fold in the next five years (from the current $ 100,000 to $ 12.5 mil.), while investment in domestic facilities is expected to increase 10-fold (from $ 3.5 mil. to $ 38.1 mil.). "Therapeutic companies are reaching the stage where capital investments in manufacturing will be needed," the report observes, noting that 63% of the firms expect to make additions to manufacturing facilities over the next two years. Fifty-nine percent of the therapeutic firms report currently having facilities. The therapeutic segment also expects significant growth in sales in the next five years: the firms estimate a 48% increase in sales in the next two years and a 331% jump in five years. The companies project that foreign sales will account for an increasing percentage of total sales, growing from the current level of 16% to 20% in two years and 31% in five years. Average current sales for a therapeutic biotech firm are $ 8.3 mil., and account for 51% of total revenue. Product sales almost cover R&D expenses, with R&D expenditures averaging $ 8.6 mil. R&D costs, which make up 44% of total expenses in the therapeutic segment, are 35% higher than the levels found by the survey last year. The survey also notes a changing trend in sources of revenues in the therapeutic segment. Revenues from contracts and collaborative agreements dropped as a percentage of total revenues from 52% last year to 32% this year, while sales rose from 28% to 51%. The report attributes the shift to maturation of the industry. However, some of the change is also due to a regrouping of firms included in the therapeutic segment. Last year's survey did not include companies involved in animal therapeutics, which typically have lower contract/collaborative revenues, in the therapeutic market segment. Adjusting last year's data for the change in composition of the therapeutic group, the survey found that contract/collaborative revenue covered 60% of R&D costs this year, compared to 73% last year. "Both contract/collaborative revenue and R&D expenses are growing for the therapeutic segment, but contract/collaborative revenue grew 11% in the past year, while R&D expense grew at a faster rate of 35%," the report explains. Although only 17% of the therapeutic firms reported a net profit for the year, 66% of the companies reported a net loss or net profit within $ 5 mil of the breakeven point. The average net loss for therapeutic companies was $ 3.3 mil. Addressing the role of patent disputes, the majority of survey respondents (68%) said they "believe that an alternative to litigation should be used to resolve patent disputes, primarily because of the prohibitive expense of litigation and the unpredictable nature of the present litigation system," the report states. "Many respondents favor some form of arbitration," the report notes. Copies of the report are available from Arthur Young, in New York. Price is $ 65.(ITEM 150)[EDITORS' NOTE: In responding to the survey, "current year" was interpreted by many companies as the most recent fiscal year, while others extrapolated ahead.]

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