Biotech business model “unsustainable”; report

Biotech is a particularly cash-hungry sector that relies heavily on the support of venture capital, which has dried up in the economic downturn and left many companies with less than 12 months cash reserves.

In its 2009 biotech report Ernst & Young admits that funding levels will remain lower for the foreseeable future and companies will have to break away from the traditional business model to prosper.

The report believes that this shift could result in long term benefits, stating: "The movement to a system that measures and truly rewards companies based on the value their products deliver could give investors the returns they need and create the basis for a more sustainable business model​."

Ernst & Young suggest that biotechs should start rethinking how they raise capital, with creative development partnerships and buyouts with long-term financial incentives possible alternative business models.

However, such measures will probably come too late for many biotechs that are tied to the “unsustainable​” business model, with the report predicting an unprecedented level of companies will run out of money this year.

This cash-flow crisis is clearly illustrated by the 162 publicly traded biotechs, 46 per cent of the total, which at the start 2009 of did not have enough operating capital to survive the year.

One positive to emerge from the report is that 2008 was the first year that the US biotech sector as a whole posted a profit, although globally it recorded a $1.4bn loss.