With research and development money growing increasingly scarce, Ernst & Young suggests in its latest Beyond Borders report that the traditional biotech business model may be under new pressures, but is still profitable. According to the report, companies in this sector operating in Australia, Canada, Europe, and the United States “had a record-breaking aggregate net profit of US$4.7 billion, a 30% increase from the previous year.” Funding is skewed, however, with just 20 percent of U.S. biotechs garnering 82.6 percent of funding. And while the number of mergers and acquisitions slowed across the United States and Europe, Ernst & Young predicts that deals in the $1 billion to $5 billion range will likely be most attractive to drug companies.

Ernst & Young offers the following advice to biotech companies: (i) “Prove it or lose it.” Companies must differentiate their products and “demonstrate comparative effectiveness for regulators,” while being “willing to engage in creative pricing approaches for payers including outcomes-based pricing approaches.” (ii) “Do more with less.” Companies must creatively raise, optimize, preserve, and invest capital, “from new ways of monetizing existing intellectual property to pursuing ‘virtual’ company models to reduce fixed infrastructure.” (iii) “Build new competencies.” Managers must be aware of changing market dynamics and have the ability to measure and communicate value. They must also have “the creativity to develop new models and approaches.” (iv) “Collaborate for coordinated action.” Biotech companies must take coordinated action with other stakeholders, including “encouraging a system of adaptive clinical trials and conditional drug approvals; realigning payment mechanisms around health outcomes; developing incentives to retain biotech investors; and working on transparency and access to build trust.” See The New York Times, June 14, 2011.