«Beyond borders – EY’s Global Biotech Report 2017»

Global biotech industry slowed down in 2016 but stays the course

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  • 2016 biotech revenue growth inches up by just 7% while net income halves
  • Industry financing dropped sharply in 2016 for the first time in four years
  • Capital flows begin to shift and more funds from China are deployed globally
  • Investment in R&D is up again, but firms need to use technologies such as artificial intelligence to remain productive
  • Swiss biotechs among the best positioned in Europe

ZURICH, 20 JUNE 2017 – Global biotechnology companies continued to invest in new treatments despite a pull back from capital markets in the US and EU, significantly lower valuations and increased pressure from payers. This development was supported by the industry's continuing maturation and positive macroeconomic trends, as the 31st edition of Beyond borders: staying the course, EY’s annual biotechnology industry report, shows. Still, revenue growth for public biotechnology companies analyzed in the report sharply declined for the second year in a row and net income plummeted by more than half. The industry continues to be challenged by research and development (R&D) productivity and the emergence of new business models.

Jürg Zürcher, EY EMEIA Biotechnology Leader, says: “We have seen a marked slowdown in top-line growth driven in large part by aggressive cost containment efforts by payers. Nevertheless, the global biotech industry was remarkably resilient to ongoing regulatory and political uncertainties in 2016. In particular, the ability of early-stage biotech companies to attract sizeable amounts of venture capital coupled with a record level of investment in R&D show that the industry is still poised for growth.”

Key results highlighted in the report include:

  • Revenue growth slows, with net income and financing declining: Revenue for US- and Europe-based biotech companies totaled US$139.4b in 2016, up just 7% from the prior year. Net income dropped 52% year-over-year to US$7.9b, while financing dropped 27% to US$51.1b, the first decline in four years, yet still the third highest historical total.
  • Market cap declines sharply: In 2016, the industry's cumulative market capitalization declined 17% to US$863b, the first time it slipped under the US$1 trillion threshold in three years. Nevertheless, so far in 2017 it has enjoyed a bounce in tune with the broader market, and the lure of tax reform and continued consolidation has helped to buoy the sector.
  • R&D spending reaches new heights: R&D spending, a key indicator of the future health of the sector, hit a record high of US$45.7b, a 12% jump from the prior year.
  • Early-stage venture capital remains plentiful: Investment in seed and Series A biotech venture rounds totaled US$3.6b in 2016, a record 36% of the total US$10b of venture capital raised. This total far surpassed the previous 15-year average of US$1.3b.
  • Capital flows emerge from the East, while innovation capital goes global: Cash raised by biotechs with revenues of less than US$500m (so called innovation capital) was down 37% to US$26.3 billion, but still higher than the prior 15-year average. As many traditional forms of capital became more difficult to access in 2016, biotechs are considering Asia, particularly China, as a potential source of capital. These companies are also exploring additional sources of innovation capital.
  • M&A activity strong, but guaranteed money drops: 79 deals in 2016 totaled US$94.4b, a decline from 2015's record year but still the second highest total ever in terms of both value and volume. Meanwhile, guaranteed money in alliances dropped sharply, with 17% of all M&A value being tied up in milestones that may not materialize.

The biotech industry's impressive financial commitment to R&D needs to be coupled with efficiency improvements to simultaneously increase return-on-investment and the affordability of drugs. “With pricing pressure expected to further escalate, firms will need to incorporate new digital and artificial intelligence technologies into their traditional drug target selection and overall R&D processes to achieve these returns,” explains Frederik Schmachtenberg, EY Switzerland Life Sciences Partner.

The payer-driven slowdown in revenue growth provides further evidence of the need for companies to accelerate their shift in business models toward fee-for-value. “Forming data-focused alliances with companies increasingly entering the healthcare space is central to successfully completing this transformation. Biotech companies need to embrace digital disruption as technology firms, wellness companies and other non-traditional players awash in consumer and patient data are encroaching on traditional biopharmaceutical territory,” says Frederik Schmachtenberg.

Looking ahead to 2018, the growth of the industry is increasingly global. The emerging venture ecosystem in China comprising strategic as well as financial investors is quickly funding a new generation of homegrown biotech competitors. These and other forms of competition – from digital technologies and pioneering biological technologies, including cell therapy and gene editing, to the impact of biosimilars – will further drive biopharma deal making. “The promise of M&A will boost investors’ outlook on the sector and willingness to finance a new burst of drug discovery and development, even as biotechs adapt to new regulatory and policy realities”, explains Jürg Zürcher.

Switzerland against global trends
2016 has been a very strong year for the local biotech landscape in Switzerland. After UK companies, Swiss biotechs came in as second European country in collecting money for their business activities. Vaud-based ADC Therapeutics collected US$105m venture financings, more than any other European company. AC Immune and CRISPR Therapeutics were also able to raise significant funds from private VCs. Moreover, when it comes to IPOs, Swiss biotechs were ahead of those in the rest of Europe: AC Immune’s September 2016 Nasdaq IPO was the largest European biotech IPO of the year. The Alzheimer’s-focused firm raised US$66m million to support therapeutic vaccine and antibody drug candidates it is developing. AC Immune was one of three Swiss biotechs in the top 10 European IPOs by dollar value, joined by CRISPR Therapeutics and GeNeuro.

“Unlike the global industry, the Swiss biotech sector can look back on a very successful 2016 and is as strong as ever. Future prospects are particularly encouraging: the trend toward increasing complexity and unprecedented strategic and policy uncertainty is creating new possibilities. Thanks to an excellent research environment within a small region, the Swiss biotech sector is ideally set up to convert complexity and uncertainty into economic growth,” concludes Jürg Zürcher.


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