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The Biggest Challenges Facing Biotechs


The sector is surviving, but it will need the government's help to flourish.

It's clear to most health-care investors and industry insiders that biotech drugs are the future of the pharmaceutical industry, but those tiny biotechs that seem so promising need a lot of support from the government and venture capitalists.

California has always been the center for this innovative industry. A recent report from PricewaterhouseCoopers and the California Healthcare Institute shows the status of that sector and how it can act as a bellwether for the industry as a whole.

"California is the birthplace of biotechnology, and our state's biomedical innovation delivers not only global advances in health care but the jobs that drive our economy," said David Gollaher, Ph.D., chief executive of California Healthcare Institute. "While the biomedical industry has weathered the recession, it faces unprecedented challenges -- access to capital, the educational funding crisis, and uncertainty surrounding health-care reform."

The California biotech industry employs 274,000 people directly, representing one-sixth of the biomedical workforce in the US, according to data from the Bureau of Labor Statistics and the Securities and Exchange Commission. The California biotechs attract 42% of the venture capital investments for the biotech and medical devices industry, more than any other area. The state is the home to Allergan (AGN), Amgen (AMGN), Biogen Idec (BIIB), and Covance (CVD), as well as plenty of others.

"We are living in a period of extraordinary scientific and technological advancement that will not only change the future of medicine but also have economic, political, and financial implications for the way health care is delivered over the next decade," said Tracy T. Lefteroff, national life sciences partner for PwC. "We can see the importance of contributions from the biomedical sector in patterns of new public and private investments such as VC funding, financing for capital expansion and M&A, and a revived market for public offerings as well as tax credits and incentives to fuel R&D."

The survey showed that two-thirds of California biomedical companies maintained or expanded their work force over the last two years, while many other industries were making sharp cuts. More than 80% of those surveyed said they planned to maintain or expand their staff throughout the state, and two-thirds said they planned to expand their staff throughout the country.

Yet, the industry didn't completely escape the recession -- there were more than 2,500 job cuts in the sector across the state between March 2008 and March 2009.

Despite the loss of some jobs, California life sciences companies still attracted $2.6 billion in venture capital funding in 2009, albeit down from $3.5 billion in 2008, according to the PricewaterhouseCoopers/National Venture Capital Association MoneyTree Report with data provided by Thomson Reuters. Meanwhile, the next couple of years will still be fraught with hardships, predicts the report, as the biotech industry will still have a tough time garnering VC funds. Adding to the trouble of finding financing, the report shows that two-thirds of executives believe that there will be plenty more M&A and consolidation in the coming years, and half of them believe that bankruptcies will still be a part of biotech world (something that was virtually unheard of before this recession).

Like anything that is expected to hold the future, the biotech industry will need plenty of nurturing over the coming years. Beyond finding the funding, the industry will need the government to take great care to provide tax incentives for innovation in the sector. It will need it to hold off on corporate taxation and heavy-handed intervention, while the FDA will have to work on its timing of drug approvals and its high aversion to risk. If this perfect storm of government cooperation can flourish, then the biotech sector is likely to have a strong, plentiful growth period once the economy recovers.

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