Report: Global biotechnology industry needs new paradigm for drug R&D
The global biotechnology industry rebounded strongly in 2013, with public companies achieving double-digit revenue growth and a sharp increase in funds raised. 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. These are some of the key findings of Beyond borders: unlocking value, EY's 28th annual biotechnology industry report.
Glen Giovannetti, EY's Global Life Sciences leader, said, "The biotechnology industry, particularly in the U.S., is in the midst of a remarkable resurgence. Product successes have boosted revenues, drawn investors and motivated large companies to invest strongly in R&D. But the vast majority of firms continue to face a resource-constrained environment and heightened product scrutiny from payers and investors. More than ever, biotech companies of all sizes need to adopt strategies to capture more value from the discovery and development process."
Key results highlighted in the report include:
- Revenue climbs: Companies in the industry's established biotech centers (U.S., Europe, Canada and Australia) generated revenues of $98.8 billion, a 10% increase from 2012. However, virtually all of this growth came from 17 U.S.-based "commercial leaders," defined as companies with revenues in excess of $500 million.
- 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 U.S. 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 $0.8 billion, driven in part by the $3.7 billion increase in R&D expenditures during the year.
- Market capitalization skyrockets: Market capitalization grew 65% to $791.8 billion, catalyzed by strong performances from commercial leaders, which increased enthusiasm in the sector overall.
- Funding soars: Biotech companies in North America and Europe raised $31.6 billion in 2013, a sharp increase from the $28.7 billion raised in 2012 and the second highest total since 2003. Fifty biotechs debuted on the public markets in 2013, raising $3.5 billion, a 300% increase compared to 2012 and the highest one-year total since 2000. "Innovation capital"—defined as the amount of equity capital raised by companies with less than $500 million in revenues—increased by 36% and comprised the majority of total funding for the first time since 2010.
- VC holds steady: Venture capital raised by companies in North America and Europe totaled $5.8 billion in 2013, up slightly from the $5.5 billion raised the prior year.
- M&A—where's Pharma?: The total value of mergers and acquisitions involving U.S. or European biotechs equaled $55.7 billion, an increase of 106% from 2012. But that upswing was driven by three mega-mergers, with two of the year's largest deals coming from non-traditional acquirers—a medtech and an OTC company. Acquisitions by increasingly active biotech buyers ($21 billion) 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 $10.6 billion).
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. Meanwhile, other trends—including 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.
The report identifies three strategies for unlocking value from R&D:
- 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 multiple 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. A 2013 report from the Tufts Center for the Study of Drug Development estimated 20% of clinical trials being conducted today involve some type of adaptive design. But 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 that are 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, the National Biomarker Development Alliance estimates only about 100 biomarkers routinely are used in clinical care. Biotech companies should expand their use of these techniques.
- Precompetitive collaboration: Cross-industry collaborations to solve common 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.
Kristin Pothier, EY's Life Sciences Commercial Advisory Services leader, said, "At a time when it is critical for companies of all sizes to conduct R&D as efficiently as possible, adaptive trials, precision medicine and precompetitive collaborations have the potential to unlock additional value that is trapped in the pipelines of biotech companies. To accelerate the adoption of these strategies, companies should embrace new kinds of partnerships to fill capability gaps, solve logistical issues and tap into the industry's impressive track record of adaptability in the face of new challenges."
The key findings of this report are based on an EY analysis of companies whose main business is the commercialization of modern biotechnology, focusing on biotech companies in North America, Europe and Australia. Primary research is based on an annual company survey as well as publicly available information (company reports, web sites, etc.) and is supplemented as needed with data published by third-party databases as well as regional information resources.
In the U.S., revenues of publicly traded biotechs were $71.9 billion in 2013, a 13% increase from the prior year and the best showing since the start of the global financial crisis. R&D spending increased by 20% in 2013 to $23.3 billion. Net income decreased by 42% in 2013 to $2.6 billion. Market capitalization increased 75% in 2013. Three-quarters of companies—220 in all—grew their market cap, 46 of them by over 250% and 102 by more than 100%. Total U.S. funding reached $25.3 billion in 2013, a 7% increase from 2012 and the second highest total since 2003.
Total M&A value rose 16% over 2012, to $28.6 billion, with the number of deals jumping from 34 to 41, the highest total since 2009.
Revenues of European public biotechs grew by only 3% in 2013, to $21 billion. R&D expense decreased by 4% in 2013, to $4.8 billion. Net income of public companies soared by 462% to $1.03 billion, with 84 public companies achieving gains on the bottom line. Market capitalization increased 44%; two-thirds of European companies saw gains in market cap. European funding increased by 34% in 2013 to $5.7 billion, the highest total since 2007. Almost half of the capital raised, $2.4 billion, came from debt. Europe enjoyed the best year for M&A since 2007. The total value of the 21 European M&A deals in 2013 was $19.6 billion, up 487% over 2012 and more than the previous five years combined.