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It is no secret that managing a biotech these days is trickier than ever. To cope, many have cut back on R&D spending and are hoarding cash, even as revenues are rising, according to a new analysis. Overall, biotechs spent $54 million on R&D in 2010, which is down 7% from the previous year. This followed a 9% decline in spending in 2009.

The good news is that average revenues rose 11% to $77 million, up from $69 million in 2009. The overall increase in revenue has been spurred on by strategic partnerships with large pharmaceutical companies. Small biotechs with less than $50 million in revenues reported a 42% increase, but larger biotechs reported average revenue of $124 million, a 3% decline from last year.

Biotech companies saw a double-digit growth in revenues and have maintained a fairly stable financial liquidity profile; however, there is significant pressure to be very strategic and selective about R&D expenditures,

says Aftab Jamil, who heads the technology and life sciences practice at BDO, which conducted the analysis.

Overall, (pharmaceutical industry) R&D funding decreased for the first time in 2010 and that trend is expected to continue at least in the short-term, which means biotech companies should expect to face more scrutiny from collaborative partners and equity investors…(And) to be successful, management teams at biotech companies will need to be increasingly strategic to fund those projects that have a higher chance of obtaining regulatory approval.

To arrive at these figures, BDO says recent 10K filings with the U.S. Securities and Exchange Commission were examined for the publicly traded companies listed on the NASDAQ Biotechnology Index. Those reporting more than $300 million in revenue were excluded as outliers, and the remaining 86 companies were divided into two groups - those above and below $50 million on revenue.

Overall, 70% of revenues were spent on R&D expenses in 2010, down from 84% in 2009 and 117% in 2008. Average R&D expense as a percentage of revenue was 108% for smaller companies, compared to 206% last year and 353% in 2008. For larger biotechs, the average R&D expense as a percentage of revenue was 54%; in 2009, this was 55%.

R&D spending per employee decreased by almost 10% to $188,000 last year for all companies. Smaller companies, in particular, cut back more severely at 21%, while larger biotechs cut 7%. Nonetheless, smaller biotechs spent $249,000 on R&D per employee, while larger companies spent $149,000.

For companies that decreased R&D spending last year, the effect on performance (which BDO measured by total annual shareholder return) was a mixed bag - 57% experienced a positive shareholder return of 71% on average, while 43% experienced a negative shareholder return of 34% on average.

Meanwhile, 51% of smaller biotechs last year were able to raise an average of $64 million in equity financing, which BDO describes as “a promising rebound” to levels last seen before the recent economic crisis. In 2007, for instance, 61% of smaller biotechs raised financing and the average value was also $64 million.

As for cash, the average biotech had $142 million in cash and short-term investments in 2010, a 3% decrease from 2009, although larger companies reported a 10% decline. Smaller biotechs reported a 6% increase, thanks to R&D cutbacks. Nonetheless, though, BDO says biotechs maintained financial liquidity fairly consistently and companies of all sizes are relatively flush following the 26% increase in cash reported in 2009. And overall, BDO found cash reserves were equivalent to approximately 2.64 years of R&D spending in 2010, up a little from 2.54 years in 2009.

As for losses, biotechs reported an average loss of $37 million last year, a 6% improvement from the previous and much better than the $48 million seen in 2008 and $40 million in 2007. In general, 73% of biotechs reported losses, a decline from 78% in 2009 and 86% in 2008. Before the recession, 81% of biotechs reported losses (here is the study).

Disclosure: None

Source: Biotechs: Revenues Rise, But So Do Cutbacks in R&D