By Michael S. Rosen

CHICAGO - Is the biotech industry facing a nuclear winter (as some have forecasted)? Will many of the smaller companies disappear due to a lack of financing monies?

While tough times surely lie ahead, this is a resilient industry. There are still many diseases needing more effective medicines, a rapidly aging population requiring increased health care and persistent entrepreneurs to bring these to the forefront.

What are some of the top trends that have taken place in 2008 that we may see carried through to 2009? This is my take on the top six at the advent of a new presidency:
   1. Health care reform in the U.S.
   2. Growth of stem cell research
   3. Big Pharma rushing to transform itself into biotech
   4. Japanese and Indian Big Pharma globalization
   5. Biofuels on a backburner, but an increased need for alternative renewable fuels
   6. Biotech consolidation

Let's take a look at each of these.

Health Care Reform

Barack Obama, Hillary Clinton and John McCain all campaigned heavily on the need to increase health care coverage in the U.S. Though the oft-cited number of 45 million Americas without health care coverage is at the forefront of this change, with all the layoffs in 2008 (and more coming in 2009) surely this number has increased significantly.

More than this is a need to contain rapidly escalating health care costs at U.S. hospitals. This cost has increased to the point that U.S. insurers are now more open to reimbursing patients for "medical tourism". That means medical treatment in another country at a substantial cost discount to the U.S. including the cost to fly there and stay in a hotel in that country.

There are some 2 million U.S. "medical tourists" today. Experts say this is expected to increase to 10 million in a few years. U.S. hospitals may find themselves going the way of U.S. car companies if they aren't careful to contain their cost structure. Consumers (patients) no longer have the patience or money to afford the incredibly high expense of American health care.

Both Wal-Mart and the pharmacy chains such as CVS and Walgreens have realized the need for lower-cost health care. They've started up low-cost patient clinics in their stores. These clinics are expected to expand significantly in 2009. They have fired yet another cannon on health care costs by making a large amount of generic medicines available at a low cost (i.e. $4 for a one-month supply of medicine).

Not only will 2009 (and 2010) mark major years for blockbuster drugs coming off patent (which will help American consumers but create havoc in Big Pharma) but it's highly likely that the FDA (like its European counterpart the EMEA) will authorize a "biotech similars" (biotech generics) approval process. This will enable the entry of a number of generic biotech drugs into the U.S. market.

This is also an important message to both Big Pharma and the biotech industry.

The days of exorbitant pricing of new biotech drugs are coming to an end. It takes a long time and a lot of money to develop a new drug and get it approved by an ever-more-conservative FDA. Still, new and more cost-effective models for drug development are needed with better predictive tools on how a drug will fare in human testing.

Growth of Stem Cell Research

This one seems to be a no brainer. The Obama government will most likely revoke the Bush administration's executive order that limits embryonic stem cell research.

This will hopefully stimulate a wave of new research in this promising field. Though the U.S. research efforts in adult stem cells and chord blood stem cell research have gone forward during the Bush years, the limitation on embryonic stem cell research to a few limited lines has vastly limited U.S. research efforts. This has allowed countries like Israel to jump far ahead of the U.S.

This area of medicine has vast transformative potential for treating a giant array of diseases and will hopefully accelerate. To help the U.S. regain the lead, the Obama government should also increase NIH funding of this research modality.

Big Pharma Rushing to Transform Itself Into Biotech

This trend is more than the tried-and-true strategy of mergers and acquisitions that's really about acquiring product pipeline. The problem with Big Pharma acquiring biotech companies is that the discovery genius behind the drugs often leaves soon after the merger. Big Pharma often doesn't know how to capitalize on these new drug discoveries.

More recently, Big Pharma has realized that it's not just swapping large molecules for small molecules but transforming the way it does R&D and the culture of doing R&D where centralization and "brute force" don't work. While many of the Big Pharmas are trying to radically change their R&D environment, it's not clear how successful they are.

One measure is the creation of Big Pharma biotech incubators out of down-sized facilities in the hope that some of the small-company culture will rub off on its own scientists. The latest rumor is that Pfizer (as it's getting closer to the precipice of generic Lipitor) is considering a run at Amgen.

This is no easy feat (even though Pfizer has some $26 billion in cash) given Amgen's market cap of $61.3 billion to Pfizer's market cap of $116.7 billion.

Taking out Amgen will go for a lot higher than the current market cap. Still, 2008 hasn't been a year of major M&A activity with large companies. Instead, we've seen smaller, bite-sized acquisitions. Even Roche has been stymied in its acquisition of Genentech (a company in which it already owns a significant chunk).

Japanese, Indian Big Pharma Globalization

2008 (and 2007) have clearly been the years when Japanese Big Pharma has been on the move with a voracious M&A appetite. Takeda acquired Millennium, Eisai acquired MGI Pharma, Astellas made a number of smaller biotech acquisitions and Daiichi-Sankyo acquired Indian company Ranbaxy to take advantage of a strong yen-dollar relationship.

Indian companies (while not as flamboyant and with less cash) have also made acquisitions in Europe and the U.S. It's my prediction that both will continue this trend in 2009 and beyond. For the Japanese, it's about supplementing their pipeline. For the Indian companies, it's about acquiring infrastructure and presence.

Biofuels on a Backburner; Increased Need For Alternative Renewable Fuels

With the price of oil dropping to below $40 a barrel and even with the OPEC nations cutting back on oil production, it's not likely that we'll see pricing above $100 a barrel in 2009 (though one never knows). Biofuels has taken a major hit in the U.S. in its first stage.

The biofuels industry (particularly in the Midwest) was heavily criticized for its non-energy-efficient approach of taking Midwest biomass (corn and soybeans) as its primary source of fuel in the rush to ramp up production as an alternative source of fuel. The result was a large escalation of grain prices and food prices that depended on these grains.

While the Midwest has huge biomass in this area, a more efficient conversion process of this biomass is needed. This technology does exist at Midwest research universities and at places like Argonne. If U.S. biofuels are to succeed in its second stage, it will need to look at perhaps other more efficient biomass sources.

There will also need to be a greater utilization of the Midwest's nanotechnology capability in other alternative fuels sources whether it be solar or wind-driven energy types or other energy sources.

Biotech Consolidation

Given that the overall level of financing for the biotech industry for the first nine months of 2008 was only about 38 percent of full-year 2007 levels and that partnering revenue was only about 46 percent for the same period of time, it's evident that:
   1. biotech companies are getting much less funding for 2008,
   2. biotech cash position is reaching critical levels, and
   3. the ability to raise cash in 2009 isn't going to be much easier and will be more difficult.

There is expected to be at high rate of company failures and/or mergers during 2009.

Realizing this dilemma, the industry made a visit to Washington to pitch the utilization of what the industry has most of: losses. In the pitch, biotech leaders requested to be able to convert these losses (which for revenue-generating companies is useful as tax-loss carry forwards) into cash so long as it's used for an R&D expense.

There is precedent for this as New Jersey has been doing this for some time.

The biotech industry has proposed a cap of $30 million per company. While this move is good, the actual sale mechanism of these tax losses is neither simple nor quick and may not alleviate the problem in the short term. Furthermore, a number of biotech companies are projected to be delisted from the NASDAQ and AMEX due to the rapid fall in their stock prices.

Doom and gloom in the biotech industry is not a new topic and the industry has weathered tough times before (but perhaps never on so many fronts). The one point of optimism is Big Pharma's continued urgency for a new product pipeline. They are now getting it at bargain prices (in a number of cases at 30 percent to 40 percent less than what it would have cost six to 12 months ago).

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Source: MidwestBusiness.com