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BIOTECH CONSOLIDATION: 74% OF SMALL COMPANIES EXPECT TO BE ACQUIRED DURING 1990s -- ERNST & YOUNG BIOTECH REPORT; INDUSTRY REVENUES TOP $ 2 BIL. IN 1988

Executive Summary

Nearly three-fourths of chief execs of small biotech companies believe that their firms may be acquired in the next ten years, according to Ernst & Young's annual survey of biotech industry executives. The Ernst & Young survey showed that 56% of CEOs of mid-size biotech companies believed they would be acquired in the next ten years, and 36% of CEOs of large companies felt they would be acquired in the next ten years. Overall, 66% of the CEOs surveyed said they expected to be acquired during the 1990s. Entitled Biotech 90: Into the Next Decade, the survey was based on information from 480 of the industry's approximately 1,100 companies. The study focuses on biotech industry growth and earnings, financing, international trade and regulatory issues. At a Sept. 19 teleconference, Ernst & Young National Biotech/Biomed Group Chairman Kenneth Lee called the CEOs' attitude towards mergers a "striking change" from the 1988 survey. In last year's survey, biotech executives predicted that 46% of the U.S. biotech companies would be acquired in the next ten years. However, executives in that survey were not responding to whether their companies would be acquired but to an abstract question regarding overall consolidation in the industry over the next decade. Due to the slow IPO market, Lee explained, being acquired is now a "viable exit strategy" for unprofitable biotech companies. However, the Ernst & Young report notes that "while acquisitions typically have a financial motivation, biotech companies rate marketing capability slightly ahead of availability of capital as a reason for considering consolidation." The survey notes that large companies' views on mergers in the industry mirror the views of the small companies. While 36% of the large biotech companies believed they would be acquired in the next ten years, 88% of the large companies felt that they would be acquirors during that period. The large companies, the report notes, "rate marketing capability, the status of technical development, and research expertise above availability of capital as reasons for considering a merger or acquisition." Survey author Steven Burrill, national director of Ernst & Young's High Technology Practice, said that despite increased industry sales in 1988 to over $ 2 bil., less than 50% of biotech companies were profitable. While two-thirds of "top-tier" companies (more than 300 employees) were in the black, only one-third of large companies (136 to 299 employees) and just 2% of mid-size (51 to 135 individuals) and small companies (less than 51 employees) were profitable. According to Burrill, 36% of CEOs see financing as their chief concern, well ahead of regulation and patent issues. In particular, large companies will require an average of $ 200 mil. in outside financing over the next decade to finance marketing expenses, such as accounts receivable and inventory costs, while smaller companies will need up to $ 40 mil. for product development, Burrill estimated. Biotech companies will lean toward public equity and strategic alliances for financing rather than the traditional methods of R&D agreements, venture capital and debt financing, Burrill predicted. The report notes that 14% of the biotech companies surveyed plan a public offering in the next year and 65% expect to go to the well in the next three years. Despite the fact that 1988 and 1989 have been "relatively tough years" in which to obtain financing, Burrill said that more than 30 new biotech companies have been formed to date this year, in addition to the 37 created in 1988. The industry also continues to be technology driven, as Burrill noted that "some of the new technologies are in those new companies."

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