Biotechs are spending less on drug discovery

June 14, 2011|By Robert Weisman, Globe Staff

Pharmaceutical giants such as Pfizer Inc. have been expanding their research… (Mark Lennihan/Associated…)

US biotechnology companies raised 15 percent more in investment funding last year than in 2009, but “innovation capital’’ — the amount actually spent on drug discovery — declined by 20 percent, according to an Ernst & Young report set to be released today.

That’s because nearly half of biotechnology investment money last year was raised through debt financing deals by larger mature companies, which used it to buy back their own shares, boosting earnings and share prices. Meanwhile, the report said, start-ups and unprofitable smaller companies found it increasingly difficult to raise cash.

The findings, which will be presented Friday at a Cambridge meeting hosted by Biogen Idec Inc. and later this month at the global BIO trade conference in Washington, D.C., suggest that the industry’s investor-backed business model has come un der strain. One sign cited by the report: The number of drugs approved annually by federal regulators fell to 21 between 2005 and 2010, down from an average of 36 approved between 1996 and 2004.

“It’s a Darwinian process, and the good technology is still getting funded,’’ said Glen Giovannetti, global biotechnology leader in the Boston office of Ernst & Young, the accounting and advisory firm. “But I worry about what’s being lost. There may be some very interesting technologies that are not being funded. I worry that innovation could be delayed.’’

Ernst & Young’s report points to an acceleration of two trends that began late in the last decade: an increase in the number of research alliances between big drug companies and young biotechs, and the rise of contingency-based payments from partners or buyers for companies that meet milestone targets. “Investors are willing to provide funding,’’ the report said, “but it is being doled out in smaller increments and it comes with more strings attached.’’

While the report surveys the state of the industry worldwide, many of the trends it cites are common in the Boston area biotechnology cluster, one of the nation’s largest.

Pharmaceutical giants such as Pfizer Inc., Novartis AG, and Sanofi SA have been expanding their research presence here over the past year in an effort to forge alliances with academic researchers and start-up companies in fields ranging from cancer to rare diseases. At the same time, milestone payments — such as the contingent value rights Sanofi used to sweeten its bid when it bought Cambridge’s Genzyme Corp. this spring — are becoming more popular. And start-ups have been looking to drug companies and other nontraditional funding sources.