Big Pharma's Cutbacks Are Small Biotechs' Opportunity

Includes: BBH, BIB, GSK
by: The Burrill Report

By Michael Fitzhugh

Research and development expenditures in the biotech industry fell in 2010 for the second straight year. But Big Pharma’s increasing reliance on biotech companies to fill its pipeline has been a net positive for small biotech companies, suggests an analysis by the professional services firm BDO.

Biotech companies in the Nasdaq Biotechnology Index spent an average $54 million on R&D in 2010, reflecting a 7 percent decline from 2009, says BDO. The global drug industry cut research spending for the first time ever in 2010, according to Thomson Reuters.

Average revenues for companies in the biotech index rose 11 percent to $77 million in 2010. Biotech companies with less than $50 million in revenue reported a healthy 42 percent increase in 2010 sales, spurred by strategic partnerships with large pharmaceutical companies and additional product and licensing revenue opportunities, says BDO.

Big and small biotech companies alike cut their R&D spend per employee in 2010, slashing their expenditure by almost 10 percent to $188,000 per capita. But, even though smaller companies cut back more severely than larger companies their R&D expenditure as a percentage of revenue was 108 percent, versus 54 percent at larger companies.

“Although the industry is moving toward increased focus and careful management of cash as a strategic asset, smaller biotechs ultimately develop more products, leading to higher R&D spending on a per employee basis,” says BDO.

Return on R&D investment is difficult to measure. But a sense that the long-term success of both pharmaceutical and biotechnology companies will depend on such future-facing investment is pervasive.

One of the more vocal voices in the changing R&D landscape has been GlaxoSmithKline (NYSE:GSK) CEO Andrew Witty. His company has significantly pared down its fixed R&D costs by closing research facilities, doing less discovery work internally, and pushing more and more responsibility for research to external academic and biotech partners.

In a conference call with reporters this week, Witty said pressure reamins on pharmaceutical companies to cut R&D spending, the Philadelphia Inquirer reported. “There is,” he says, “tremendous opportunity for the few companies who solve the R&D equation.”