After stepping up their R&D spending last year, biotechnology companies worldwide must deploy that capital to create more value from their research, EY concluded in this year’s 28th annual edition of its industry report, released Tuesday at the Biotechnology Industry Organization (BIO)’s 2014 International Convention in San Diego.
Beyond Borders: Unlocking Value focused on three strategies for creating more value—“Adaptive” clinical trials that allow biotechs to tweak their hypotheses and shift R&D spending based on clinical data; “Precision medicine” that identifies patient subgroups most likely to benefit from a new therapy; and cross-industry collaborations during precompetitive phases, spearheaded by big pharma.
Those three strategies are yet to be widely practiced, the report acknowledged, but will grow in importance to the biotechs going forward, the report added.
“These trends are only going to continue, and the pressure is only going to build,” Glen Giovannetti, EY’s global life sciences leader, told GEN. “Adaptation in the broad sense will come in response to pressure to deliver more results to shareholders and to the market, and ultimately to patients.”
Giovannetti said companies face more pressure—from payers to demonstrate the value of their products, and from regulators to contain prices, which carries the risk of shrinking profits. Those pressures will compel companies to ensure they aren’t losing or “leaking” value from their research.
“We still see too many late-stage clinical trial failures. There are trends that put the premium on companies adjusting their R&D models to become more capital efficient,” he said. “The big hurdle is still scientific; it’s creating an efficacious drug. We now know that payers expect you to demonstrate that it’s going to be efficient for the healthcare system as well. You really have to have a strategy to make both points while you’re doing your clinical development.”
Biotechs worldwide spent 14% more on R&D in 2013 than in the previous year—with U.S. companies spending 20% more than in 2012.
R&D spending last year was driven by the 25% jump among 17 U.S.-based biotech giants or “commercial leaders,” defined as companies with revenues in excess of $500 million. Many of those companies enjoyed successful product launches. Biogen Idec racked up $876 million in first-year sales for its MS drug Tecfidera (dimethyl fumarate), and is expected to reach billion-dollar sales or “blockbuster” status this year, along with Gilead Sciences’ hepatitis C treatment Sovaldi (sofosbuvir).
Giovannetti said the health of the biotech industry can be better judged by the remaining 300+ biotechs, which boosted their research spending by 12%.
“Companies have more confidence that capital will be there to fund their R&D, and therefore more willing to invest in multiple programs. When the financial crisis hit, people pared back so significantly that they were often just advancing their lead asset,” Giovannetti said. “I see it [R&D spending growth] as mostly attributable to a strong financing cycle.”
That strength is reflected by the 10% increase in funding raised by biotechs last year—from $28.8 billion to $31.6 billion, the second highest total since 2003. No less than 50 biotechs went public last year, raising $3.5 billion—up 300% from 2012, and the highest one-year total since 2000. And equity capital raised by companies with less than $500 million in revenues zoomed 36%, and accounted for the majority of total funding for the first time since 2010.
Another reflection of the strong financing cycle is the skyrocketing market capitalization of biotechs. Market cap grew 65% during 2013, to $791.8 billion, again driven by commercial leaders.
One consequence of the R&D spending spurt was a decline in collective net income of public biotechs totaling $800 million. And in Europe, R&D spending actually fell by 4%, to $8.4 billion, as European investors have not shown the same appetite as their American counterparts for biotech IPOs or smaller-capitalization, higher-risk biotechs, Giovannetti said.
In Europe and other regions where the industry is established—such as the U.S., Canada, and Australia—biotech generated revenues of $98.8 billion, up 10% from 2012. Last year was the first since the meltdown in which R&D growth has outpaced revenue growth.
Even more so than with R&D spending, revenue growth reported by EY was driven primarily by the 17 commercial leaders.
Other highlights of Beyond Borders:
M&A sees double—The total value of mergers and acquisitions involving U.S. or European biotechs stood at $55.7 billion, more than double the 2012 value. That value jump was driven by three mega-mergers, EY said, though its figure excluded two of last year’s largest mega-mergers—Thermo Fisher/Life Technologies ($13.6 billion), and Perrigo/Elan ($8.6 billion)—since the acquirers were defined as neither pharma nor biotech.
VC investment climbs—Venture capital raised by biotechs in North America and Europe rose 5% in 2013, from $5.5 billion to $5.8 billion. VC lagged in 2013 behind two other financing sources, debt ($12.8 billion, down 10.6% from 2012), and follow-on and other financing ($9.4 billion, up 18.4% from 2012). But VC generated more capital for biotechs than IPOs ($3.5 billion, up four-fold from $880 million in 2012).