More than half of the 82 publicly traded biotech companies in Canada had less than two years of cash in 2004, a looming cash crunch that is expected to result in "significant industry consolidation through mergers and acquisitions in 2005," said management consultants Ernst & Young LLP.
Otherwise, several companies will cease operations or be forced to sell significant chunks of their product pipeline to raise money to survive, it added.
In its annual global review of biotechnology, Ernst & Young said Canada's 350 closely held biotech firms probably have less cash than their public counterparts, so the "consolidation trend should be more pronounced in the private sector."
The firm made a similar prediction about consolidation last year, which failed to materialize. As a result, the industry is "dominated by very small, poorly capitalized companies," said Ernst & Young partner Rod Budd.
Rather than merge, many companies slashed spending or arranged strategic alliances to continue operating last year. "It was not an approach Canadian capital markets reacted favourably to," he said.
As a result, the industry's market capitalization shrank to $13.7-billion (U.S.) in 2004 from $13.8-billion in 2003, despite an 8-per-cent increase in the value of the Canadian dollar, Ernst & Young said. Moreover, industry financings plunged to $520-million last year from $1.1-billion in 2003.
Even though the biotech sector lacks maturity in Canada, it has started to focus on bringing products to market in a drive to reach profitability, the review found.
Fifteen Canadian drugs entered late-stage trials in 2004, raising the possibility of near-term revenue. Another 25 compounds entered mid-stage testing, which could create opportunities for strategic alliances. Moreover, seven new products were approved for sale.
As a result, the industry generated revenue of $2.1-billion last year, up 21 per cent from $1.7-billion in 2003, while posting an overall loss of $408-million, down 30 per cent from $586-million in 2003.
Mr. Budd said the financial turnaround reflects product introductions by major biotech companies. That generates revenue and leads to development of new products. And as revenue grows and operating costs are controlled, the bottom line improves, he added.
