EY - Beyond borders: unlocking value

Beyond borders: unlocking value

Global biotechnology report 2014

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The global biotechnology industry rebounded strongly in 2013. Public companies achieved double digit revenue growth and there was a sharp rise in funds raised. Product successes have boosted revenues, drawn investors and motivated large companies to invest strongly in R&D.

However, much of the industry’s growth was driven by a relatively small group of commercial stage companies, increasing the urgency for the rest of the industry to achieve greater efficiency in their drug development efforts.

Key findings

Several findings emerged in our analysis of key performance indicators:

  • Revenue climbs: Companies in the industry’s established biotech centers (the US, Europe, Canada and Australia) generated revenues of US$98.8b, a 10% increase from 2012. However, virtually all of this growth came from 17 US-based “commercial leaders,” defined as companies with revenues in excess of US$500m. European topline growth slows, but profits soar.
  • R&D spending rebounds: R&D spending rebounded forcefully, up 14% from the prior year, driven primarily by a 20% increase in spending in the US. This is the first time since the onset of the global financial crisis that R&D growth has outpaced revenue growth.
  • Net income slips: Net income declined by US$0.8b, driven in part by the US$3.7b increase in R&D expenditures during the year.
  • Market capitalization skyrockets: Market capitalization grew 65% to US$791.8b, catalyzed by strong performances from commercial leaders, which increased enthusiasm in the sector overall.

EY - US biotechnology: commercial leaders and other companies, 2012–13

  • Funding soars: Biotech companies in North America and Europe raised US$31.6b in 2013, a sharp increase from the US$28.7b raised in 2012 and the second highest total since 2003. Fifty biotechs (in the US, Canada and Europe) debuted on the public markets in 2013, raising US$3.5b, a 300% increase compared to 2012 and the highest one-year total since 2000.

    EY - US biotechnology IPOs by year

    “Innovation capital” — defined as the amount of equity capital raised by companies with less than US$500m in revenues — increased by 36% and comprised the majority of total funding for the first time since 2010.

EY - Innovation capital in the US by year

  • VC holds steady: Venture capital raised by companies in North America and Europe totaled US$5.8b, up slightly from the US$5.5b raised the prior year.
  • M&A: Where’s pharma?: The total value of mergers and acquisitions involving US or European biotechs equaled US$55.7b, an increase of 106% from 2012. But that upswing was driven by three mega-mergers, with two of the year’s largest acquisitions coming surprisingly from a medtech and a specialty pharma/OTC company.

    Meantime, acquisitions by increasingly active biotech buyers (US$21b) dwarfed those by big pharma companies as the value of pharma-biotech acquisitions grew by only 2% from 2012 to 2013. Excluding the Amgen/Onyx Pharmaceuticals mega-merger, biotech-biotech deal making increased in value 68% during the same period (to US$10.6b).

The challenge of unlocking value

Despite the strong overall financial results, most biotech companies operate in a resource-constrained environment, increasing the need to conduct R&D in capital-efficient ways. In fact, R&D remains a central — if not the central — point of value leakage for biopharmaceutical companies.

Critically, the failure rate for drugs in Phase III is too high — around 40%, according to a team of researchers at Sagient Research Systems and Biotechnology Industry Organization (BIO). Since the cost of R&D increases sharply from one phase of clinical development to the next, failing in Phase III is a very inefficient use of capital that could have been better deployed on other assets.

Meanwhile, other trends — e.g., market entry agreements in which payers reimburse companies based on the performance of their products or strategic alliances with milestones tied to commercial performance rather than clinical trial results — make it imperative for companies to better measure and capture the value that their products create.

To unlock value from R&D, we recommend three strategies:

  • Adaptive clinical trials: The long-standing clinical trials system of sequential Phase I, II, and III studies creates few learning opportunities and it results in R&D funds being tied up for an average of three years and viewed as a sunk cost that is only reexamined as the drug advances to the next phase. Adaptive trial designs enable biotech companies to refine their hypotheses and reallocate R&D dollars in real time based on data generated in the clinic. While an estimated 20% of clinical trials being conducted today involve some type of adaptive design,1 these efforts are being led primarily by global pharmaceutical companies, with many smaller and mid-cap biotechs lagging in bringing adaptive trials to earlier-stage drug development.
  • Precision medicine: Biomarkers and targeted therapies allow companies to identify patient sub-groups most likely to benefit from a particular therapy, thereby mitigating drug development risk and potentially increasing valuations from stakeholders.

    Precision medicine can also provide companies with more certainty in risk-sharing deals, such as market entry agreements with payers or commercial-milestone deals with strategic partners. Yet, it is estimated that only about 100 biomarkers are routinely used in clinical care.2 Biotech companies should expand their use of these techniques.
  • Precompetitive collaboration: Cross-industry collaborations to solve industry-wide problems, such as establishing uniform clinical trial methodologies and developing standards for capturing real-world data, have flourished in the last few years. As with adaptive clinical trials, these consortia have been spearheaded by large pharmas, with most biotech players not yet engaged in meaningful ways. While participation in these efforts requires the commitment of resources, including capital and senior leadership time, it can offer benefits for companies seeking to avoid wasting precious resources on common challenges.

    In addition, involvement in such initiatives can help companies build trust with key stakeholders, which is particularly valuable at a time when payers and regulators are bringing more scrutiny to products.

Never has biotech’s agility been more important than now, as the current challenges facing the industry are more persistent and consequential than in decades past. Health care’s move to value is, in part, driving biotech’s need to unlock value.

Adaptive trials, precision medicine and precompetitive collaborations have the potential to unlock additional value that is trapped in the pipelines of biotech companies. Getting there will also require the sector to tap into its long-standing values — its foundation in data-driven approaches, willingness to partner creatively and, ultimately, its adaptability in the face of new challenges.

1 “The Adoption and Impact of Adaptive Trial Designs,” Tufts Center for the Study of Drug Development, 2013.

2 “Launch of a Transformative Health Care Initiative: The National Biomarker Development Alliance (NBDA),” PR Newswire, 13 January 2014