By Donald Zuhn —

On Wednesday, less than a week before the industry congregates in Chicago for the 2010 BIO International Convention,
Ernst & Young issued its 24th annual report
on the biotech sector.  In the report,
entitled "Beyond Borders: Global Biotechnology Report 2010," the
professional services firm concludes that "[t]he global biotechnology
industry was able to weather the continued worldwide economic turmoil and
deliver a strong financial performance in 2009, with the world's established
biotech centers reaching profitability for the first time in history."  Despite the good news, Glen
Giovannetti, Ernst & Young's Global Biotechnology Leader, predicted that
biotech companies would continue to face a challenging funding environment for
the foreseeable future.  Mr.
Giovannetti's comments about biotech funding align with the results of the
latest MoneyTree report issued by the National Venture Capital Association
(NVCA), which showed that biotech venture funding between the fourth quarter of
2009 and the first quarter of 2010 dropped by 24% (see "NVCA Report Shows First Quarter Drop in Venture Funding").

The report's silver lining concerns its
finding that companies in the industry's established biotech centers of the United
States, Europe, Canada, and Australia posted an aggregate net profit of $3.7
billion in 2009, which constituted a $5.5 billion increase over the $1.8
billion net loss these four markets suffered in 2008.  According to the report, this marked "the first time ever
that these markets have reached aggregate profitability."  This declaration, however, contradicted a similar
announcement made by Steven Burrill, the CEO of Burrill & Co., when he asserted in
February
2009 that the biotech industry turned a profit for the first
time in 2008 (see "Bio-irony: Biotech Turns a Profit in 2008").  According to the report, the
improvement in the established biotech centers was driven by a "dramatic
increase" in net profit in the U.S., which was due, in turn, to the
adoption of cost-cutting and efficiency measures.

While
the report indicates that biotech companies in the U.S., Europe, and Canada
raised 42% more capital in 2009, jumping to $23.2 billion, a significant
portion of this capital was raised by only a handful of established public
companies via follow-on offerings. 
The report noted that access to capital for many companies otherwise remained
scarce.  This gap between the
industry's "haves" and "have nots" is expected to pose new
challenges for emerging companies in accessing capital in the coming year.

The
report concludes that biotech companies are now operating in a "new
normal," where access to capital will remain difficult.  In this new normal, venture capitalists
are being more selective and are directing funding to existing projects rather
than to new companies.  In
addition, IPO investors appear to be looking for "de-risked investments,"
and consequently, IPOs are pricing below companies' expectations.  The report lists five guiding
principles for biotech companies operating in the new normal:

(1)
Broadening the search for capital to include nontraditional sources of funding;

(2)
Learning to use scarce capital more efficiently;

(3)
Focusing on reimbursement (payor acceptance) as an end goal in product
development rather than marketing approval;

(4)
Using more creative partnering approaches; and

(5)
Attracting potential buyers by demonstrating what truly differentiates one
company's products or platforms from those of its competitors.

In
breaking down the results by region, the report indicates that the U.S. biotech
industry's net income skyrocketed from about $400 million in 2008 to a record $3.7
billion in 2009, which was driven by revenue growth, cost cutting, and a change
in the accounting rules for acquisitions. 
Despite the positive results for the U.S. biotech industry's net income,
revenues of U.S. public companies fell 13% in 2009 to $56.6 billion.  The report also noted that total U.S.
capital for the biotech industry increased by 39% in 2009 to $18.0 billion.  Of this amount, venture capital constituted
$4.6 billion, which was the second-highest venture funding total in history,
behind the $5.5 billion raised in 2007.

In
Europe, revenues of public biotechs rose 8% to €11.9 billion, which was below
the 17% growth seen in 2008.  Total
funding for the European biotech industry was up 48% to €2.9 billion in 2009,
with venture capital constituting €800 million of this total (a 21% decrease
from 2008 and the lowest amount since 2003).  The Canadian biotech industry, meanwhile, raised more than $733
million in 2009, an increase of $255 million.