Mixed Fortunes for the Global Biotechnology Industry


From DCAT Value Chain Insights (VCI)

By Patricia Van Arnum posted 07-01-2014 16:26

  

A recent analysis by Ernst & Young, released last week at the Biotechnology Industry Organization’s (BIO) International Convention in San Diego, offers a mixed review for the global biotechnology industry. Commercial leaders, defined as companies with revenues in excess of $500 million, have performed well, but other companies have not fared as well. An examination of public and private financing trends for the US and European biotechnology markets.

The global biotechnology industry rebounded strongly in 2013, according to a recent analysis by Ernst & Young. 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, which the report says increases the need for other companies to develop greater efficiency in their drug-development efforts.

Charting the industry’s performance
So how did the industry perform in 2013? According to the Ernst & Young analysis, the industry’s established biotech centers (the US, Europe, Canada, and Australia) generated revenues of $98.8 billion in 2013, 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 $500 million. Overall, R&D spending rebounded in 2013, 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, according to the report. Net income, however, declined by $800 million, driven in part by the $3.7-billion increase in R&D expenditures during the year. On a global basis, market capitalization grew 65% to $791.8 billion, catalyzed by strong performances from commercial leaders, which increased investor interest in the sector overall.

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 (in the US, Canada and Europe) 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. 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.

The total value of mergers and acquisitions involving US 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 medical technology and over-the-counter company. Meantime, 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).

Table I and Table II highlight US public and private financing trends. In 2013, the US biotechnology industry's revenue growth rebounded to 13%, the best showing since the start of the financial crisis and an improvement over the 8% revenue growth in 2012, according to the Ernst & Young analysis. A full percentage of this increase came from the IPO class of 2013, which collectively added $662 million to the industry's revenues, according to the report. Three companies, Amgen, Biogen Idec, and Gilead Sciences, were the largest contributors to overall revenue growth. Nearly 75% of the US biotechnology's total 2013 revenue growth came from just five companies (Gilead Sciences, Biogen Idec, Amgen, Celgene, and Regeneron Pharmaceuticals). Overall, the 17 largest US companies accounted for $7.9 billion of the $8.2 billion increase in revenues. The other 322 US public companies accounted for the remaining 4% of revenue growth.

Overall strong revenue and product developments helped to increase the US biotechnology industry's market capitalization by 75% in 2013. Three quarters of companies (220 companies) increased their market capitalization, with 46 of those companies increasing their market capitalization by 250%, and 102 increasing their market capitalization by 100%, according to the Ernst & Young report.

R&D spending for US-based biotechnology companies increased 20% in 2013 compared to 2012, with nearly 60% of US-based companies (247 companies of 339 publicly traded US-based companies) raising their R&D spending in 2013; commercial leaders (defined as companies with revenues of $500 million or more) increased R&D by 25%. The rise in R&D spending contributed in part to a decline in net income, which also reflected declining sales of some companies, according to the Ernst & Young report. Only 43% of the 339 publicly trade US-based biotechnology companies recorded positive net income, and 176 companies reported a decline in net income in 2013 compared to 2012. The net income of the commercial leaders increased 7% in 2013, but the rest of the industry's net income decline 35%.


  • Table I: US Biotechnology At a Glance, 2012–13 (US $billion)

     

    2013

    2012

    Percentage change

    Public Company Data

    Revenues

    71.9

    63.7

    13%

    R&D expense

    23.3

    19.4

    20%

    Net income

    2.6

    4.4

    -42%

    Market capitalization

    633.0

    361.3

    75%

    Number of employees

    109,530

    99,910

    10%

    Financing

    Capital raised by public companies

    19.7

    18.9

    4%

    Number of initial public offerings (IPOs)

    41

    12

    242%

    Capital raised by private companies

    5.6

    4.8

    17%

    Number of companies

    Public companies

    339

    316

    7%

    Private companies

    2,010

    2,061

    -2%

    Public and private companies

    2,349

    2,377

    -1%

    Source: Ernst & Young (EY)  and company financial statement data.

    Numbers may appear inconsistent because of rounding.


    Table II: US Biotechnology: Commercial Leaders and Other Companies (2012─2013), US$ Billions

    Commercial Leaders

     

     

    2013

    2012

    Change (US$)

    Percentage Change

    Revenues

    61.8

    54.0

    7.9

    15%

    R&D expense

    14.4

    11.5

    2.9

    25%

    Net income (loss)

    12.9

    12.1

    0.8

    7%

    Market capitalization

    473.3

    271.3

    201.9

    74%

    Number of employees

    76,185

    67,610

    8,575

    13%

    Other companies

    Revenues

    10.1

    9.8

    0.3

    3%

    R&D expense

    8.9

    8.0

    1.0

    12%

    Net income (loss)

    (10.3)

    (7.6)

    (2.7)

    35%

    Market capitalization

    159.8

    90.0

    69.7

    77%

    Number of employees

    33,367

    32,329

    1,038

    3%

    Source: Ernst & Young (EY) and company financial statement data.

    Numbers may appear inconsistent because of rounding. Commercial leaders are companies with revenues in excess of US $500 million.


    Table III and Table IV highlight European public and private financing trends. In contrast to the US, which saw strong revenue growth and a rise in R&D with a decline in net income, the European biotechnology industry had relatively weak revenue growth and declining R&D spending in 2013 but a strong improvement in net income. European public biotechnology companies increased their revenues by only 3% in 2013, below both the US revenue growth of 13% in 2013 and the European performance of 8% revenue growth in 2012, according to the Ernst & Young analysis. On the upside, 75% of European biotechnology firms generated at least some revenues, and 43% of companies grew their top lines. Two top performers in 2013 were Jazz Pharmaceuticals, which relocated its headquarters to Ireland in 2012, and Eurofins Scientific, which collectively accounted for $572 million in revenue growth in 2013.
  • R&D spending by European public companies declined 4% in 2013. Although 55% of European companies increased their R&D spending in 2013, the same percentage of US companies, the increase among European companies was more modest and other companies made significant cuts in R&D, according to the Ernst & Young analysis. In terms of market capitalization, two-thirds of European companies saw their market capitalization increase in 2013.  

    Table III: European Biotechnology At a Glance, 2012–13 (US $Millions)

     

    2013

    2012

    Percentage change

    Public Company Data

    Revenues

    20,959

    20,397

    3%

    R&D expense

    4,834

    5,020

    -4%

    Net income

    1,033

    184

    462%

    Market capitalization

    115,131

    80,098

    44%

    Number of employees

    55,030

    52,540

    5%

    Financing

    Capital raised by public companies

    4,231

    2,972

    42%

    Number of initial public offerings (IPOs)

    8

    3

    167%

    Capital raised by private companies

    1,484

    1,295

    15%

    Number of companies

    Public companies

    168

    169

    -1%

    Private companies

    1,915

    1,934

    -1%

    Public and private companies

    2,083

    2,103

    -1%

    Source: Ernst & Young (EY) and company financial statement data.

    Numbers may appear inconsistent because of rounding.


    Table IV: European Biotechnology: Commercial Leaders and Other Companies (2012─2013), US$ Millions

    Commercial Leaders

     

     

    2013

    2012

    Change (US$)

    Percentage Change

    Revenues

    17,046

    16,413

    633

    4%

    R&D expense

    2,729

    2,726

    3

    0%

    Net income (loss)

    2,278

    1,987

    291

    15%

    Market capitalization

    77,924

    52,787

    25,138

    48%

    Number of employees

    42,367

    38,952

    3,415

    9%

    Other companies

    Revenues

    3,924

    4,003

    (80)

    -2%

    R&D expense

    2,117

    2,315

    (198)

    -9%

    Net income (loss)

    (1,234)

    (1,783)

    550

    -31%

    Market capitalization

    37,253

    27,378

    9,875

    36%

    Number of employees

    12,685

    13,619

    (934)

    -7%

    Source: EY and company financial statement data.

    Numbers may appear inconsistent because of rounding. Commercial leaders are companies with revenues in excess of US $500 million.


    Strategies for value creation
    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, according to the Ernst & Young analysis. 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 important for companies to better measure and capture the value that their products create, says the report. The report identifies three strategies for unlocking value from R&D: adaptive clinical trials, precision medicine, and precompetitive collaboration.

    Adaptive clinical trials: As outlined by Ernst & Young, 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 re-examined 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, 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, according to the Ernst & Young analysis.

    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. 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. The report indicates that 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 advanced in the last few years, notes the report. As with adaptive clinical trials, these consortia have been spearheaded by large pharmaceutical companies, 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 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, concludes the report.

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