A complex path forward
This 33rd edition of our Beyond Borders report sees the US and European biotechnology (biotech) industry seeking a new path forward. At the time of publication in mid-2023, the priorities of biotech companies will vary based on the level of their commercial maturity. Biotech commercial leaders (companies with at least US$500 million in annual revenue), along with their big pharma counterparts, are in dire need of addressing innovation deficits and in search of new revenues to offset the massive wave of pending patent expirations. On the other end of the spectrum, emerging biotechs face a capital-constrained operating environment and are wholly focused on getting to the next value inflection point with minimal cash burn. However, the handful of fortunate emerging biotechs with de-risked, late-stage assets will likely attract lucrative multiples for partnering or outright acquisitions. These dynamics together mean a complex path forward for the biotech industry as a whole.
The biotech industry must navigate this complex path forward by driving efficient capital allocation and streamlining its core operations, from research and development to supply chain to commercial operations, while trying to maximize organic and inorganic growth through the use of M&A and alliances. Despite these challenges, biotech’s deep capabilities around innovation and the importance of its product offerings mean the industry still maintains a favorable mid- to long-term outlook. Companies that focus on the fundamentals will be poised to lead the next phase of expansion once the impact of the recessionary environment and tighter monetary policies subsides.
Amid surging product demand and investor focus on the sector, biotech performed extraordinarily well during the early waves of the global chaos caused by the COVID-19 pandemic by attracting an influx of new capital. By early 2022, however, the stimulus to the biotech market was fading fast. In the previous edition of this report, we wrote: “the financial environment for biotech has significantly shifted in the opening months of 2022, with valuations plunging and the IPO window closing.” This shift has since continued and intensified, with biotech now facing reduced capital availability in a landscape of higher interest rates, tightening credit conditions, and broader macroeconomic and geopolitical disruption. Moreover, the industry is bracing for a tougher regulatory environment in the wake of the US Inflation Reduction Act (IRA), as well as the action taken by the US Federal Trade Commission (FTC) to block Amgen’s acquisition of Horizon Therapeutics. The IRA will have significant implications for how the industry secures reimbursement for its innovation in the future, while the FTC’s activity is generating major concerns that regulation will stifle innovation by restricting therapies’ ability to scale through acquisitions by larger biopharma companies. By all measures, from revenues to financing, M&A investment and beyond, biotechs experienced declining performance and increasing challenges in 2022.
However, despite these challenges, the industry’s capacity to innovate as a whole remains robust. Biotech R&D continues to fuel an innovation renaissance in new biopharma products and platforms, and the pandemic emergency served to highlight the strategic importance of the sector to national and international health and security. As always, there will be winners and losers within the sector. Good science leading to differentiated products will always be the key to success in this R&D-driven industry, but as they plan ahead, biotechs must recognize the need to supplement scientific excellence with a strategic focus on achieving operational efficiency in all areas of the business.
The life sciences have changed beyond all recognition over the past century, yet the rate of change is now accelerating as the technologies to enable a data-driven intelligent health ecosystem begin to penetrate the industry. As companies seek the right model for future growth, they must also be mindful of this underlying turn toward a digitalized, data-driven, personalized care system. Companies that can best adapt to the current changing conditions, combining cutting-edge innovation with a newly tightened focus on efficiency and resilience in business fundamentals, will emerge from the downturn strengthened and in a position to drive the next wave of growth for the biotech industry as it evolves toward a smarter, more personalized future.
The year in review
After a huge revenue surge in 2021, driven by the booming market for COVID-19 vaccines, therapies and testing, biotech’s growth normalized in 2022. Public biotech companies in the US and Europe collectively amassed revenues of US$215 billion in 2022, down 1% from the previous year (see Figure 1). Two of the largest `biotechs, BioNTech and Gilead Sciences, saw revenues fall due to declining demand for their COVID-19 vaccine and antiviral treatment, respectively, while Regeneron’s loss of emergency use authorization and funding from the US government resulted in a US$5.8 billion decline in sales of its REGEN-COV treatment.
However, aside from the headwinds caused by the reduction in short-term demand for these pandemic-related products, the underlying industry maintained a stable growth trajectory. While the 1% revenue dip seen in 2022 is a stark contrast to the 35% growth registered in 2021, this dramatic change is almost entirely driven by fluctuations in demand for COVID-19 vaccines, antivirals and other products. Without the revenue impact of COVID-19 products in the portfolios of five leading biotechs alone, the industry’s revenues inched forward 3.7% in 2022, compared with 5.2% growth in 2021. As such, biotech’s fundamentals are expected to weather the current storm, and the industry’s continued growth should provide some much-needed reassurance as the broader biopharma industry braces itself to confront another major challenge in the form of a steep patent cliff rapidly approaching in 2023.