Fueled by a desire for innovation and new medical breakthroughs, the biotech industry continues to enjoy substantial growth due to increased investment in R&D, according to the sixth annual study from BDO USA.
The 2017 BDO Biotech Briefing, which examines the most recent 10-K SEC filings of publicly traded companies included in the NASDAQ Biotechnology Index, found that average R&D spending across all mid-market biotech companies increased about 18% from 2015 to 2016, from an average of $65.9 million to an average of $80.6 million.
The uptick in R&D spending is one factor that can explain the recent surge of innovation across all areas of the biotech industry, including significant advances in biological sciences and pharmaceuticals, and the expansion of more effective drugs and curative and preventive treatments aimed at enhancing the quality of human life. In particular, a rising incidence of chronic illnesses due to an increasingly aging population continues to drive more advancements in drug products targeted at oncology and gene therapy to prevent and treat chronic illnesses. Recent legislative developments—such as the 21st Century Cures Act, aimed at streamlining FDA approval processes—will help speed up product development, and will potentially support novel innovation that can deliver efficacious drug therapies in the sector. Already in 2017, the FDA has approved 23 novel drugs, compared to 22 in all of 2016.
Broken down by size, small biotechs (those with less than $50 million in revenue) surged: R&D spending increased by 24%, from $65.4 million in 2015 to $81.2 million in 2016. Large biotechs (those with more than $50 million in revenue) followed suit, boosting R&D spending by 20% in 2016, from $66.4 million in 2015 to $80 million in 2016. The benefits of this increase are clear: Large biotechs have seen their average revenue increase 24%, from $113.7 million in 2015 to $141.1 million in 2016.
“A fresh perspective at the FDA driven by its new Commissioner Scott Gottlieb is expected to bring changes at the agency which are sure to have a ripple effect across the industry,” said Ryan Starkes, Assurance partner and leader of BDO’s Life Sciences practice. “Plans to continue to streamline approval processes, increase competition and transparency around drug pricing, and facilitate advancements in medicine and digital health technology are likely to expand innovations with the potential to improve treatment for millions.”
Additional findings from the 2017 BDO Biotech Briefing include:
Mapping innovation and venture capital investments. Boosting resources in scientific R&D, education, intellectual and investment capital, and commercialization, leading academic and research institutions form the operational center for many biotech companies, allowing them to recruit more easily and attract federal funding and private investments. The conglomeration of these resources allows for greater public-private partnerships that facilitate the path from research to commercialization. As a result, many biotech venture capital investments see opportunity in middle-market biotechnology companies, which are often headquartered in these major biotechnology regional clusters.
Biotech offers ample employment opportunities. Continued growth innovation, combined with financial support from state governments and regional economic development organizations, have made biotech companies competitive employers, providing high-wage, high-skilled jobs across a broad range of occupations. Hiring across mid-market biotech companies from 2015 to 2016 increased about 16%, from an average 205 employees to about 238. Among large biotech companies, hiring grew from an average 290 employees to about 327, or 13%, while small biotech companies saw hiring increase about 24%, from an average 121 employees to about 150. This hiring trend is likely to escalate as companies continue to recruit and hire top talent.
Equity dips in favor of debt financing. Overall, equity raises showed a large decline from 2015 to 2016, falling almost 35% across all mid-market biotech companies, from $117.2 million to $75.7 million. Among large biotechs, equity raises declined from $103.7 million to $52.1 million; among small ones, from $130.6 million to $99.4 million. A large portion of the equity raises were found among companies specializing in oncology, CNS and gene therapy—the areas that seem to draw the most investor interest.
Debt financing, meanwhile, increased slightly among large biotech companies, while showing a more noticeable increase among small ones. Debt financing among large biotechs increased, on average, from $134.8 million to $135.6 million. Among small biotechs, it increased, on average, from $34.8 million in 2015 to $96.5 million in 2016.
Where is the focus? Medical advances that continue to revolutionize diagnostics of genetic diseases, alongside consistent efforts to address safety challenges in gene therapy, will positively support an increase in companies entering the field of gene therapy. As the cost to develop a new drug now exceeds $2.5 billion, according to the Tufts Center for the Study of Drug Development, continued equity and financing activities will be critical. Past and current trends suggest that companies specializing in oncology, gene therapy, rare diseases and immunology will continue to remain areas of growing investor interest as treatment personalization and efficacy continue to improve, according to data compiled from Nasdaq.
Less cash reserves, more investment. Biotech companies have always prioritized cash reserves to demonstrate their ability to fund the clinical studies necessary to bring a new product to market. In 2016 and in line with the decline in equity and debt financings overall, they have shown a decrease in total years’ worth of R&D spending in liquid assets: from 2.88 in 2015 to 2.49 in 2016. This indicates that while deals will continue to be completed, biotech companies may have to raise capital with terms or at levels that are not as favorable as in the past.
Healthcare-driven trends for biotech to watch. Biotech companies evaluating their near-and-long-term strategies should pay attention to several proposed national and international regulatory changes in healthcare, including those related to the Medicare Access and CHIP Reauthorization Act (MACRA), the Identification of Medicinal Products (IDMP) and the Cures Act, among others. Of great note is the ongoing shift towards value-based reimbursement, which will increasingly tie health systems, biotech companies, payers and providers to not only their own outcomes, but also to the outcomes of their partners across the care spectrum under new risk-sharing arrangements. At the same time, companies must be mindful of growing cybersecurity risk stemming from the growing integration of technology into care delivery. According to the 2016 BDO Life Sciences RiskFactor Report, about 89% of companies cited cyber concerns as a risk to business, up by 19 percentage points from 2015 and 43 percentage points from 2013.
About the 2017 BDO Biotech Briefing
Produced by BDO’s Life Sciences practice and The BDO Center for Healthcare Excellence & Innovation, the BDO Biotech Briefingexamines the most recent 10-K SEC filings of companies listed on the NASDAQ Biotechnology Index (NBI). Companies reporting more than $300 million in revenue were excluded to ensure findings are representative of the vast majority of companies included in the NASDAQ Index. Remaining companies were divided into two groups—those with more than $50 million in revenue and those with less than $50 million in revenue—to identify trends and key metrics relevant to each group. The average market cap of companies in the study, as of the end of their most recent fiscal year, is $857.8 million.