Beyond borders: Returning to Earth
Biotechnology report 2016
The US and European global biotechnology clusters set new records in key financial barometers such as revenue, net income, financing and deal making. However, growth slowed in many of these indicators, followed by a swift erosion of public investor interest, pointing to future challenges.
2015 highlights from key financial barometers:
- US and Europe-based biotechs delivered a record US$132.7b in revenue, up 13% over 2014, but less than the 18% increase in 2014.
- Research and development (R&D) spending soared to US$40.1b, increasing 16% in 2015 and outpacing the sector’s revenue growth.
- M&A activity climbed to new records in both potential value and volume.
- Big biotechs flexed their deal-making muscles as the potential value of strategic alliances reached a record US$55.4b.
- Alliance partners paid more up-front and used more equity, suggesting deal structures that are profit-and-loss-sparing are increasingly important.
- Biotechs’ financial reservoirs are full as they raised nearly US$71b due partly to record setting venture capital financing.
- Market capitalization growth weakended to just 5%, far below the 65% and 34% growth rates seen in 2013 and 2014 respectively.
Year in review: the 5 key trends from 2015
After five years of market cap gains and increasingly buoyant capital markets, biotech’s fortunes peaked in 2015. The biotech industry’s cumulative market cap has dropped precipitously over the past nine months. And, although new records were set in cumulative revenue, net income and R&D spend, growth rates in all three categories have slowed.
Signs of a financing slowdown have also been evident. After three years of strength, the IPO market has weakened significantly, although it hasn’t entirely evaporated. Follow-on financing and debt decreased even more markedly toward the end of 2015 and into 2016.
Although strategic and venture investors remain committed to the sector, pharma companies and commercial-stage biotechs struggle to make value-based arguments for their medicines as payer-driven cost containment efforts increase. Fear that biopharmas as a whole will ultimately fail in their arguments has contributed to ebbing investor sentiment.
Biopharma companies and the health care ecosystem are grappling with a variety of new payment models. Outcomes-based payments remain a topic of fierce discussion as hurdles to implementation, including agreeing on the outcomes to be measured and building data collection and analytics capabilities, have limited broad adoption. As a result, most biopharmas deploy value-based pricing collaborations defensively, as a hedge when reimbursement is delayed.
To gain market access in Europe, it’s often necessary to reach a so-called managed access agreement with local health technology assessors. And, to prepare for curative therapies such as gene and cell therapy, annuity-style payment models may be required.
Biotech companies are harnessing the immune system to destroy cancers, replacing or editing genes to thwart rare diseases, and harvesting the results of decades of “omics” efforts. 2015 was the second consecutive year the FDA approved more than 40 new drugs; 22 of those were approved with orphan drug designation.
The FDA also approved nearly 50 breakthrough-designated drugs since the pathway’s creation in 2012. These approvals can be viewed in part as a victory for good policy, for more narrowly defined diseases and for more savvy development strategies. But they’re also the result of biopharma companies’ massive investments in biological research and big science, which has surged in recent years, and increasingly large early-stage rounds of venture capital.
The biotech sector has matured and its largest players are now at the deal table effectively competing with traditional pharma buyers. Of course, with maturity comes challenges: like many pharmas, some commercial-stage biotechs struggle to grow. They risk disruption, from both smaller biotechs with cutting-edge technologies and technology players that see opportunities in managing the flow of health data.
To compete commercially and reignite growth, companies believe they must be the dominant players in fewer therapeutic strongholds. This win-or-go-home mentality will continue to drive industry’s M&A and divestiture agenda.