Biotech's Big Day: The Industry Is Finally Profitable, Mostly Thanks to Cost-Cutting -- Not Higher Sales

The biotechnology industry is finally profitable, according to a new report out today from Ernst & Young.

The report states that biotech companies in the world's largest hubs -- the United States, Europe, Canada and Australia -- achieved collective profitability in 2009, marking the first year the industry has ever crossed into the black. The companies in those regions posted an aggregate net profit of $3.7 billion in 2009, compared to a net loss of $1.8 billion in 2008.

Here's the amazing part: this swing to profitability occurred during a wretched economy, during which revenues of publicly-traded biotechs actually fell to $79.1 billion from $86.8 billion in 2008.

Of course, the revenue decline didn't really have anything to do with the fact that people couldn't afford their medications. It was actually caused by Roche's $46.8 billion acquisition of biotech industry bellwether Genentech, best known for blockbuster cancer drugs like Avastin (bevacizumab), Rituxan (rituximab) and Herceptin (trastuzumab). Genentech had posted $13.4 billion in 2008 revenues -- all of which had to be excluded from E&Y's 2009 biotech figures after the acquisition.

Absent the Genentech factor, biotech revenues would have been up eight percent instead of down nine percent, E&Y reports. But Genentech was indeed a factor, and the collective revenues were indeed down. So how come profitability was up?

E&Y says it was "due largely to the adoption of new cost-cutting and efficiency measures."

The dirty little secret of the biotech industry is that, before 2008, money was not exactly in short supply. There was a time when venture capitalists complained about too much money flowing into the system, when the public markets were enamored of biotech, when there was plenty of funding to build big research labs and explore all sorts of science.

Then the economic crisis hit in 2008, and the private and public cash dried up. Biotechs had to actually figure out which products in their pipelines seemed most likely to succeed and focus their efforts instead of throwing money at everything. They had to learn to operate virtually and save money on research and development. And in the end, the recession pushed the industry to profitability.