The biotech industry remains poised for growth, EY said in its annual industry report released today, despite continuing pressure from payers to contain drug prices and an investor pullback from capital markets that helped deflate profits and slow down revenue growth for public companies last year.
“Beyond Borders: Staying the Course” observed that while biotechs will continue to pursue the prices they seek for new drugs by citing their value—either in patient outcomes or lower costs—so too will payers seek to contain those prices.
Biotechs will need to decide how to respond—through a proactive approach of negotiating prices, or a more defensive approach of allowing prices to be based on treatment results.
“Right now, for the most part, we’re bridging that gap through negotiations and traditional rebate discount type mechanisms,” Glen T. Giovannetti, EY global biotechnology leader, told GEN. “The world is moving toward more value-based pricing arrangements, where there will be an element of risk based on actual patient outcome—not theoretical but actual measurement of how much were costs reduced? Did patient outcomes demonstrably improve?”
Those criteria, he added, could include measuring cost savings over some period of time elsewhere in the healthcare system, reduced hospitalization, less time spent hospitalized, or avoidance of some other therapeutic intervention.
For developers of curative therapies such as gene therapies, Giovannetti said, high prices may create opportunities to create novel models of payment models that address developer and payer concerns: “Maybe they need to look at some sort of an annuity payment model, for example.”
An annuity model could be along the lines of one proposed in 2014 by gene therapy pioneer James M. Wilson, M.D., Ph.D., professor of pathology and laboratory medicine, Perelman School of Medicine, University of Pennsylvania, and CVS Health evp and CMO Troyen A. Brennan, M.D., J.D. Writing in Nature Biotechnology, Drs. Wilson and Brennan said annuity payments should be limited to a defined time period and be contingent on evidence that the treatment remains effective.
Strengths in VC, R&D
On the bright side for biotechs, “Beyond Borders” cited the ability of earlier-stage companies to continue attracting venture capital financing, as well as increases in R&D spending.
EY recorded the second-highest-ever annual amount of U.S. VC investment in 2016, $8 billion—an 18% drop from 2015’s nearly $10 billion. When European VC is included, the 2016 figure reached $10 billion—of which $3.6 billion consisted of investments in seed and Series A financings.
“Venture capital investors, in particular, have a long-range outlook, and they’re investing based on the macro trends,” Giovannetti said. “The macro trends around drug development—the excitement around the science, the large number of unmet needs, the fact we are getting older and there is still a huge market for better pharmaceutical—all of that is bringing investor interest.”
As biotechs have been more able to raise capital in recent years, they have used significant portions toward R&D. EY’s report also recorded a record-high $47.5 billion being spent for R&D in 2016, up 12% from a year earlier.
“What we’re seeing now is reflective of the fact that we’ve been in a relatively strong capital environment, and there’s still reasonable confidence that money will be there,” Giovannetti said. “The VC side, as you noted earlier, is strong, and VC itself has been able to raise significant new funds. Where we have to keep an eye is on the public markets, and the overall sentiment of investors toward the sector.”
Investor interest in public biotechs cooled during 2016, driven by fears that either Hillary Rodham Clinton would follow through on promises to curb drug prices, or that Donald Trump would do so. As of the last trading day December 30, the iShares Nasdaq Biotechnology Exchange-Traded Fund (IBB) stood at $265.11, down 22% from $339.88 a year earlier. The First Trust New York Stock Exchange Arca Biotech Fund (FBT) fell 20%, to $90.88; and the PowerShares Dynamic Pharmaceuticals ETF (PJP) closed at $56.00, also down 20%.
Last year’s stock market swoon lowered the valuations of public biotechs. The industry’s cumulative market capitalization last year fell below $1 trillion for the first time in three years, sinking 17% from 2015 to $863 billion. Twenty-nine public biotechs lost more than $1 billion in market cap, EY reported.
The result for many public companies was a sharp slump in profits and slowed revenue growth. Net income of biotechs sank 52% last year, to $51.1 billion, the third-highest total recorded by EY despite the number being the first decline in four years. Revenues recorded by U.S. and European biotechs stood at $139.4 billion in 2016, up 7% from 2015.
A Comeback Year, So Far
This year, so far, has seen the makings of a comeback year for all three funds. Since the start of the year, IBB has climbed nearly 11% to 293.80. FBT has jumped almost 20%, to $108.72, while PJP has increased just 5.8, to $59.28.
Buoying the markets in recent months has been investor confidence that Trump’s administration will enact tax cuts and industry-friendlier regulations, such as his proposed lowering from 35% to 10% the income tax rate of corporations that repatriate profits earned overseas—capital expected to be used in part toward biotech M&A.
With the administration focused on repealing and replacing the Affordable Care Act, not to mention the controversy stoked by Trump critics over Russia’s involvement in the 2016 election, investors have had to wait for Washington to deliver.
How long will investors stay patient?
“I think there probably is a timespan on that,” Giovannetti said. “The market for biopharma responded well post-election, with the prospect of tax reform happening. If that gets pushed out too far, that probably will have some deflationary effect on stock prices. I don’t know exactly where that point is: Is it the rest of 2017? Is it 2018?”
Other highlights of Beyond Borders:
- M&A volume dips: 2016 saw 79 deals totaling $94.4 billion, the second-highest volume ever recorded, yet less than one-third of 2015’s record high of more than $300 billion—a year skewed by inclusion of Pfizer’s planned $160 billion acquisition of Allergan, which fell through in April 2016 following a crackdown on tax-slicing “inversion” mergers by the administration of Trump’s predecessor, Barack Obama.
- Less upfront money: M&A deals saw 17% of value parceled out as milestone payments rather than paid upfront, up from 12% in 2015.