Pressure from healthcare purchasers preventing further growth despite record earnings by biotech companies worldwide
The boom in the global biotech industry continued in 2015: revenue generated by the companies analyzed by EY in Europe and the US rose by 13% to US$132.7 billion, while earnings were up by 18% to US$16.6 billion. In addition, the industry had over 33,000 more jobs in 2015 than in the previous year. Although market capitalization increased slightly in 2015, one-quarter of the value has been lost since last summer. Other indi-cators have also been declining this year, not least because of aggressive measures to cut costs in the healthcare sector. The industry’s fortunes look to have already peaked.
Zurich, 9 June 2016 – For the third year running, global biotech companies have set new records in indicators such as revenue, net income, financing and deal value. This year, however, the numbers and investor interest are losing momentum, so the sector is unlikely to set any new records for the time being, writes the advisory firm EY in its latest report, entitled Beyond borders – Returning to earth.
“Despite another impressive performance, biotech companies in the commercial phase are facing numerous challenges: one particular concern is the growing price pressure from increasingly aggressive practices of health insurers and other healthcare purchasers. To boost investor confidence in the industry’s long-term potential and to create the basis for future growth, biotech companies will have to clearly demonstrate the value of their products to healthcare purchasers, doctors, patients and the general public,” comments Jürg Zürcher, Biotech Leader for EMEIA and Life Sciences Leader for EY Switzerland.
Revenue and earnings on the up
The biotech firms analyzed grew revenue by 13% to US$132.7 billion in 2015 (prior-year increase: 18%), a new record. Net income rose by 18% to US$16.6 billion in 2015, another all-time high. In 2014, net income had surged by a spectacular 214%, largely due to strong sales in innovative hepatitis C drugs.The finances of biotech companies are on a firm footing. They raised almost US$71 billion in 2015, thanks to risk capital funding at close to record levels and heightened interest from investors outside the sector. The capital raised by smaller biotech companies (revenue of less than US$500 million) climbed to an all-time high of US$41 billion. In light of the more cautious approach adopted by investors, this source of funding comes at just the right time for future research and development.
Biotech and its jobs miracle
Expenditure on research and development (R&D) is a key indicator of the shape the industry is in. In 2015, it rose by 16% to US$40.1 billion, of which two-thirds was spent by biotech firms with revenue of less than US$500 million. This meant that R&D growth even outstripped revenue growth. The sector is investing heavily in future active ingredients and therapies and is confident that these will find buyers.
The biotech industry also experienced a real jobs miracle in 2015. All in all, the companies surveyed employed 203,850 staff as at the end of last year, up 19% from the previous year. This huge increase on both sides of the Atlantic is partly explained by the fact that companies believe in their future, have secured key specialist staff and have expanded their production capacity. Eurofins Scientific, a specialist in bioanalytical services, recruited some 5,400 employees alone, while biotech giants Regeneron and Gilead Sciences each hired around 1,000 new people. The statistics also included 4,000 new employees due to their companies’ IPOs.
Need to emphasize the value of new therapies more clearly
In future, biotech companies will have to do a better job of demonstrating the value of their products, while at the same time focusing their business models. One promising approach is to achieve a dominant position in a very small number of selected therapeutic areas with a view to being commercially competitive and driving growth. This emphasis on focused business models made a significant contribution to the exceptionally favorable deals climate in 2015.
As a result, mergers and acquisitions (M&A) were at a record high for the second year running. At 89 deals, M&A activity in the biotech sector came in well ahead of 2014’s figure of 69 deals, which at the time was a ten-year high. The cumulative deal value soared by 120% year-on-year to US$100.2 billion, which was very close to the average of the last three years.
Zürcher is convinced that, “We will continue to see strong activity on the M&A market, even though tightened US tax legislation has made it less lucrative to relocate corporate headquarters for tax reasons.” The rationale for deals, he adds, has started to shift back from tax to strategic reasons: “Many pharmaceutical firms can only maintain their growth if they bring in companies and therapies from outside. The major biotech firms are now financially strong enough to implement ambitious acquisition strategies this year and next.”
Alliances increasingly important
Major biotech companies are backing strategic alliances: the potential value of strategic alliances reached a new high of US$55.4 billion in 2015. Alliances within the biotech industry also climbed to a fresh high of US$20.9 billion. “This is further proof that major biotech firms are ready to compete, and underscores how they, too, are turning increasingly to alliances to overcome their growth challenges,” comments Zürcher.
For example, 17 agreements with a potential value of more than US$1 billion were concluded in 2015. There were only 12 such deals in the preceding year, and only 5 in 2013. The most valuable strategic partnership, at a total of US$2.63 billion, was agreed between Basel-based CRISPR Therapeutics and Vertex Pharmaceuticals. “In partnerships such as this, the larger party generally secures access to innovative technology platforms. Monetary payments are usually made once development targets – which are contractually specified – have been achieved or specific active ingredients have proven successful in a therapeutic context,”
On average, biotech licensees paid 11% of the potential total transaction value in advance, with this value rising for the fourth time in succession. Significantly, these advance payments include almost US$2 billion in equity – a sign that partners are increasingly interested in establishing long-term relationships with smaller biotech companies.
Sharp decline in market capitalization
In 2015 as a whole, the sector’s cumulative market capitalization rose by just 5% to US$1.07 trillion, which is well below the growth rates seen in 2013 and 2014 of 65% and 34% respectively. On 19 July 2015, after five years of growth in market capitalization, the industry’s value recorded an all-time high of US$1.23 trillion, but had fallen back one-quarter to US$918 billion by 31 May 2016. “Biotech valuations fell due to numerous factors, which certainly included the reservations expressed in the US presidential race over drug prices, growing uncertainty on the global market and sector rotation by investors. And US stocks suffered more than their European peers,” explains Zürcher.
Ability to cooperate with healthcare purchasers and other partners
To be successful in the future, biotech companies need to engage with new partners – from outside the industry as well – and especially with healthcare purchasers, so that they can collect data that proves the value of their products. Today, several drugs are available in every therapeutic area. When they are launched, new drugs are generally classified as “potentially adding value” rather than “proven to add value”. To close this evidence gap, new, data-supported commercial models are required that will accelerate the transition from “potential” to “proven” and convince healthcare purchasers of the respective relevant therapeutic effectiveness. In developing models such as these, biotech firms need to establish partnerships with technology firms.
“Biotechnology came of age a long time ago and needs to address issues that many mature industries face. The key is to safeguard sustainable growth and to create genuine innovations in an age when resource constraints are changing the value of products and therapies and new, digitally operating firms are disrupting the sector. To continue growing in this climate, it can no longer be business as usual – instead, companies must invest in new capabilities, revamp their research and development strategies and continuously update their business models,” concludes Jürg Zürcher in his assessment of the industry situation.
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