Beyond Borders: EY Biotechnology Report 2023

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.

Early 2023 saw a landmark loss-of-exclusivity (LOE) event, with the US launch of Amgen’s first biosimilar version of AbbVie’s Humira (adalimumab), among the best-selling drugs¹ of all time. This event is just the beginning, as four other blockbuster monoclonal antibodies (mAbs) that commanded over US$14 billion in total 2022 revenues are also facing LOE and biosimilar market challenges by the end of 2023. Further, the next 5 years will see another 17 products, currently representing over US$145 billion in annual revenues, lose their patent protection and surrender market share to lower-priced competitors (see Figure 2). Since 2019, biosimilar uptake has reportedly soared in the US market, with biosimilar replacements of key oncology-branded mAbs such as Herceptin (trastuzumab) and Avastin (bevacizumab) crossing the 80% mark in the first half of 2022.

Faced with the loss of these products’ established income, the industry is confronting an innovation deficit and will be dependent on biotech’s capacity to innovate and replenish lost revenues to sustain growth. The industry has enjoyed notable success in developing and launching new products in recent years, with an annual average of 69 US FDA approvals for new molecular entities (NMEs) and biologics license applications (BLAs) over the five-year period from 2017 to 2021. In 2022, the number of FDA approvals dropped to 49 (37 NMEs and 12 BLAs; see Figure 3).

Reportedly, the dip in approvals was primarily driven by staffing shortages at the FDA, which was seeking to fill over 400 jobs in 2021. By the third quarter of 2022, the number of advertised roles had dropped to nearly 50, encouraging hopes that the agency’s approval and other regulatory processes will regain the momentum they lost during the pandemic crisis. The first quarter of 2023 did see a resurgence in approvals as 18 total products (13 NMEs and 5 BLAs) were authorized.

Despite the drop in approvals in 2022, biopharma innovation remains healthy. The clinical pipeline contains over 20,000 active drug candidates around the globe, according to one estimate.² Moreover, multiple new therapeutic modalities with high clinical and commercial potential are rapidly reaching maturity, with the list of new approvals for 2022 including, for example, new gene therapies developed by bluebird bio and CSL Behring. Cell and gene therapies are among the most prominent of the novel modalities, alongside new products developed through the mRNA platforms, new radiopharmaceuticals and the antibody-drug conjugates (ADCs), which made headlines in early 2023 when Pfizer agreed to acquire ADC specialist Seagen for US$43 billion.

These genuinely innovative new platforms are widely seen as critical to the industry’s strategies around negotiating the patent cliff and sustaining growth into the future. However, industry leaders will need to be mindful of the underlying health of the biotech sector, which largely fuels the sector’s R&D engines. After highly productive financing for the industry in 2020 and 2021 (with the industry raising nearly US$240 billion in two years), 2022 saw a 54% annual decline in the levels of capital available to the biotech sector in the US and Europe. The US$54.6 billion raised in 2022 represented the lowest annual investment in the industry since 2016 (see Figure 4), but this figure is broadly in line with pre-pandemic expectations (indeed, if 2020 and 2021 are omitted, total financing for 2022 is similar to the industry’s annual financing average over the previous decade). However, the two years of exceptionally high financing during the pandemic have created unusual conditions within the biotech sector, and companies must now adjust to the removal of those conditions.

The reduced levels of debt financing (down 10%) are a predictable response to rising interest rates. More concerning for smaller companies in the sector is the 63% drop in follow-on public offering capital raised, as well as the effective near disappearance of the biotech IPO market, which fell by 93% in 2022. By contrast, biotechs raised nearly US$21 billion in IPO financing in 2021. With the subsequent major correction in biotech valuations that had soared during the initial phases of the COVID-19 pandemic, these newly public companies have seen significant challenges.

Of the 223 companies taken public in 2020 and 2021, and still publicly traded at the end of 2022, 91% saw their market value at IPO drop, with an average decline of more than 50%. Alongside the sharp reduction in follow-on funding, this sounds an ominous note for the long-term prospects for many of these newly launched companies.

Concerns over long-term viability extend beyond this group of newly public biotechs to the wider sector. Analysis suggests that as of 2022, 55% of emerging biotechs (companies with less than US$500 million in annual revenue) held insufficient cash to sustain them for the next two years, with 29% having less than one year’s cash remaining. This figure is an increase from 2021, when only 18% of biotechs had less than a year’s cash in reserve, and it emphasizes the need for companies to keep a close eye on cash reserves.

Venture funding for the sector fell 29% in 2022, but the venture funding total of US$18.9 billion remains well above the previous 10-year average. Further, a potential commitment of US$3 billion went to the high-profile, longevity-focused startup Altos Labs — a huge outlier in terms of historic venture capital (VC) investment in the sector. While the ongoing injection of VC and private equity funding will help to sustain biotech’s innovation ecosystem, investors are likely to pursue de-risking strategies such as targeting products that can deliver clinical or commercial validation sooner.

This shift in investment priorities may present challenges for new modalities, which are still seeking commercial validation since these platforms are likely to require novel infrastructure and manufacturing processes. As Lorence Kim, cofounder and managing partner at Ascenta Capital, notes, “with the emergence of new modalities, there are important questions around how you handle the scaling up of processes, capacity and availability.”

Biotechs and their investors continue to be impacted by a string of bank failures, most notably by Silicon Valley Bank (SVB), the bank of choice for many in biotech. While a catastrophe was largely avoided, early-stage biotechs need to revisit their liquidity policies and diversify their banking strategies. SVB’s collapse has taught biotechs to spread their money across multiple startup-friendly banks rather than relying on only one. The bank’s demise also leaves smaller biotechs without an alternative lender since many other banks have raised their funding thresholds to points that make investment difficult for smaller entities. SVB’s absence may mean that fewer companies receive financing, and some biotechs may need to pare back pipelines of medicines in development. However, those companies with sound management and strong pipelines will continue to be funded.

The constrained financing environment for small biotechs, particularly those focused on new modality platforms, highlights the importance of M&A for biotech. With lower capital availability, the obvious exit route for biotechs is to seek acquisition. However, the industry’s larger players had little appetite for major dealmaking in 2022, with M&A investment increasing slightly compared with 2021 but still well below the levels witnessed between 2018 and 2020. Moreover, the total number of deals fell in 2022, with investment value heavily dependent on a few large-scale deals, most notably Amgen’s US$27.8 billion proposed takeout of Horizon Therapeutics. In all, around 56% of the deals in 2022 saw larger pharma companies acquiring biotechs, with the remainder consisting of consolidation within the biotech sector itself. The generally subdued M&A environment continued into the first quarter of 2023, when Pfizer’s acquisition of Seagen masked very low levels of deal value across the sector.

The ongoing uncertainties in the geopolitical and global macroeconomic environment are likely to limit appetite for dealmaking in the near term, with low levels of M&A investment mirrored in other sectors worldwide. However, the US regulatory environment is also a factor. For example, the US Federal Trade Commission’s greater scrutiny around antitrust may have implications for large-scale mergers. Most recently, the agency announced it would attempt to block the Amgen acquisition of Horizon Therapeutics, potentially upending the rare disease business model that has dominated the industry for the last 40 years. The advent of the IRA has also increased uncertainty around drug pricing, making it more difficult for acquirers to evaluate potential targets and their portfolio assets into the future.

Moreover, the industry has shown a strong preference in recent years to access innovation through alliances and partnerships rather than outright acquisition. Life sciences companies signed alliance deals with a potential value of US$132.1billion — the third-highest total in the past decade — over the course of 2022.

For biotechs, the downside of this alliance activity is that only 6% of the total potential value of these 2022 deals came in the form of guaranteed up-front payments, with subsequent payments dependent on future milestones. With reduced options for accessing capital, biotechs are generally not negotiating these partnership arrangements from a position of strength, and the terms of these deals offer little immediate additional capital for small companies.

The industry may ultimately emerge strengthened from these challenges. Andrew Hack, a partner with Bain Capital Life Sciences, anticipates that the current operating environment “will ultimately lead to a more efficient ecosystem of companies advancing truly innovative products. … as an industry, we will come out of this as better stewards of capital, as well as disciplined organizations that will deliver more with less.”

Creating a more efficient biotech ecosystem that focuses on the fundamentals and takes a new path forward will involve addressing many challenges and transformations, some of which are explored in this report. These include: