Biotech firms hit as cash dries up and research shifts eastward

The global biotechnology business model is "breaking down" as investors tighten purse strings and the industry's research base shifts to emerging economies, a report suggests.

Last year, biotech companies in Europe managed to raise just $1.1bn (£678m) in venture capital – the lowest haul since 2003. The auguries are also dim: 84 per cent of the participants at a recent biopharmaceutical conference in Monaco view funding as the industry's prime challenge.

Historically, the biotech industry has relied on external investment to develop innovative ideas that have often sprung from the world of academia. Investors dug into their pockets in the hope of cashing in by floating biotech firms or selling new therapies to established players in the pharmaceuticals sector.

But the business model is risky and many investments end up in the red. A report by the accountant PricewaterhouseCoopers cites a recent study of 1,606 biotech investments realised between 1986 and 2008. Of these, 704 resulted in a full or partial loss and 16 managed only to cover their costs.

The gross rate of return on these investments stood at nearly 26 per cent, well above the pooled average return of 17 per cent on all venture capital invested over the period. But the net rate of return was less than 16 per cent when costs and the impact of unrealised investments were factored in to the figures.

PwC said that while biotechnology companies had produced some valuable medical treatments, they had failed to reduce the risks inherent in the discovery and development of new drugs. "Biotech companies don't develop new medicines much more quickly or economically than pharma companies do," says the report, which is published today.

Moreover, it adds that many of the external conditions that supported the industry's success stories are "rapidly vanishing". One the one hand, investors who have been battered by the recent economic slump have become more cautious. On the other, the research base is shifting, with emerging economies competing more aggressively.

Between 1998 and 2006, for example, the number of students graduating with doctorates in the physical and biological sciences grew by 43 per cent in India. China was even further ahead, with 222 per cent growth. Besides rising numbers of doctoral students, both India and China have benefited from the return of about 100,000 of their highly-skilled expatriates from the US. Another 100,000 are expected to follow in the next five years.

These trends are supplemented by local investment. China has pumped $9.2bn into technological research and development, including biotech, in the past 18 months, while India is looking at plans to become one of the world's five producers of biosimilars (cheap copies of biotech medicines) by 2020.