The global biotechnology industry set records in several financial metrics in 2014 and reached an historical first, $1 trillion in market capitalization. So will the good times continue? DCAT Value Chain Insights looks into the performance of the global biotechnology industry and what may lay ahead.
In its annual global biotechnology study, EY highlighted record-setting performance for the global biotechnology industry and strong performance for developed markets, particularly the US and Europe. Overall revenues, financing (including IPOs), and the value of mergers and acquisitions all were up. So what were the numbers and will it continue in 2015?
A look at the numbers
The global biotechnology industry performed well in 2014, setting records in several major financial metrics, including revenues, profitability, and capital raised. These positive performance indicators, combined with several high-profile product successes and a strong year for new drug approvals, drove the industry’s total market capitalization above the the $1 trillion mark the first time in the history of the biotech industry, according to EY’s 29th biotechnology industry report, Beyond Borders: Reaching New Heights. The positive financial metrics were accompanies by a strong year in new drug approvals, with the US Food and Drug Administration’s Center for Drug Research and Evaluation approving 41 new molecular entities (NMEs) (small molecules and biologics) in 2014, up from the 27 approvals in 2013.
“The global biotechnology industry’s outstanding performance and maturation are driving optimism that a new age of biotech innovation will create long-term value for companies, their investors, and patients,” said Glen Giovannetti, EY’s Global Life Sciences Leader, in commenting on the study, and who spoke at the Biotechnology Industry Organization's (BIO) International Convention, being held this week in Philadelphia, Pennsylvania. “Investors are bullish on the future, investing historic amounts in the smaller players that will drive future breakthroughs.” However, he noted that “unprecedented product approvals have also brought unprecedented pricing pressures. Companies will need to continually demonstrate how their products deliver value and contribute to the overall sustainability of healthcare systems.”
Companies in the industry’s established biotech centers (the US, Europe, Canada and Australia) generated revenues of $123 billion, a 24% increase from 2013, and a new high. Excluding the unprecedented growth of one industry leader, Gilead Sciences, revenues in 2014 would have increased a healthy 12%. Net income reached a historic high of $14.9 billion, a 231% increase from the prior year. Much of this increase was attributable to the strong performance of Gilead Sciences and Sovaldi, the company's drug to treat chronic hepatitis C infection, which was the company's top-selling drug in 2014 and one of the industry’s top-selling drugs with 2014 sales of $10.28 billion, making it one of the most successful first-year launches for a NME. Sovaldi, which was approved by the US Food and Drug Administration in December 2013 and in the European Union in January 2014, was the first drug that demonstrated safety and efficacy to treat certain types of hepatitis C virus infection without the need for co-administration of interferon, which is administered by injection. The gains from Gilead accounted for 82% of the gains in the increase in net income. Excluding the impact of Gilead, however, overall net income for the global biotechnology industry still doubled in 2014. In contrast to 2009-2012, when biotechnology companies achieved profitability via cost cutting, the increase in aggregate net income in 2014 was driven by solid sales of newly launched products.
R&D spending, a key indicator of the health of the sector, increased by 20%. This was the second year in a row that R&D spending outpaced the sector’s revenue growth (adjusted for the skewing factors previously mentioned), and smaller companies in both the US and Europe drove the uptick, according to the EY analysis.
On the financing front, biotech companies in the US and Europe raised $54.3 billion in 2014, a 72% increase from the strong funding results achieved in 2013. Companies raised a record $28.3 billion in non-debt financing, driven by the strong market for initial public offerings (IPOs) and follow-on offerings. A record-breaking 94 US and European biotech companies went public in 2014, surpassing the previous record of 79 IPOs in 2000. The $6.8 billion raised from these IPOs was the second-highest total in the industry’s history, surpassed only by the $7.8 billion raised during the genomic bubble of 2000. While the IPO field in 2014 raised less capital than those in 2000, the IPO field of 2014 was more mature with 81% of the members of the 20I3-2014 IPO class having lead candidates in Phase II or later. The IPO window, which began in 2013, remained strong for eight consecutive quarters, another new record. Capital raised from follow-up offerings increased by 49% to $13.8 billion, setting a new record.
“Innovation capital,” defined as the amount of equity capital raised by companies with less than $500 million in revenues and a key metric of the sustainability of earlier-stage biotechnology companies, hit an all-time high of $27.6 billion. That amount represented a 120% increase from the annual average achieved from 2009-2012.
Another positive indicator was the increase in venture capital funding. US and European companies raised $7.6 billion in venture capital, a 28% increase from the prior year and just short of the all-time record of $7.9 billion raised in 2007. In a positive sign for innovation, companies raising early-stage rounds captured $1.8 billion, the greatest amount in at least the last decade, according to the EY analysis.
Mergers and acquisitions (M&A) activity in 2014 reached a 10-year high in deal volume as pharmaceutical companies increased their buying activity. There were 68 biotechnology M&A deals with a total value of $49 billion in 2014, a 46% increase over 2013. Adjusting for megadeals (defined as transactions valued at more than $5 billion), pharma companies spent more on biotech acquisitions than at any time in the previous seven years.Showing the strength of the market from a seller's view, acquirers paid significantly higher premiums and more up front. On the alliance front, biotech companies entered 152 licensing deals worth $46.8 billion in 2014, making it the most lucrative year for those seeking alliances. As was the case for biotech M&A deals, in 2014, biotech companies captured more of the total potential value at a deal's signing than at any time since the financial crisis. As a percentage of total deal value, up-front payments reached 11% while the total dollars paid up front increased 96% to $5.1 billion.
Despite all these positive signs, however, there are some mitigating factors. “A number of mature biotech companies may face additional headwinds,” said Jeffrey Greene, EY’s Global Life Sciences Transactions Advisory Services Leader, in commenting on the results. “As firms deal with pricing pressures and increased competition, including from biosimilars, they will need new sources of growth. Achieving such growth through deals and acquisitions will likely be more costly and challenging. Today’s M&A landscape is clearly a seller’s market. Assets that could tangibly affect a buyer’s financial performance are scarce, and they will command premium prices.”
The strength of the US and Europe
The strength of the global industry was paralleled in the largest biotech market, the US. In the US, revenues of publicly traded biotechs were $93.1 billion in 2014, a 29% increase from the prior year or 12% if normalized with Gilead's strong results. Adjusted for Gilead's performance, the unusually large number of IPOs and the acquisition of Life Technologies by Thermo Fisher, US revenue growth would still have been 18% in 2014. R&D spending increased by 22% in 2014 to $28.8 billion, with nearly 70% of biotech companies increasing their spending, slightly above the historical average of about 66%. Net income almost tripled and increased by 293% in 2014 to $10.6 billion. Market capitalization increased a healthy 34% in 2014, with 58% of companies seeing a year-over-year increase in valuation. Total US funding reached an all-time record of $45.1 billion in 2014. Records were also set for the amount of funds raised through IPOs ($4.9 billion) and debt financing ($23.3 billion). Innovation capital, a key metric of amounts raised by earlier-stage companies, also set a record of $21.1 billion. Venture financing totaled $5.6 billion, a 27% increase from the previous 10-year average of $4.4 billion. Total M&A value rose 50% over 2013, to $42.9 billion, the third highest annual deal total since 2007. The number of deals jumped from 42 to 51, the highest total in eight years.
The uptick in US biotech valuations drove a spike in the number of pre-commercial-stage companies with valuations greater than $1 billion. As of December 31, 2014, 26 US companies reached this threshold, up from just three in 2007.
In Europe, key financial metrics were also strong. Revenues of European public biotechs grew by 15% in 2014, to $23.9 billion. R&D expense increased by 14% in 2014, to $5.6 billion. Net income of public companies jumped 199% to $3.2 billion. This percentage increase did not match the steep of growth of 2013, when net income increased by 462%. Adjusted for the $1.6-billion break-up fee when AbbVie terminated its merger proposal with Shire, net income growth in Europe was still a strong 52% in 2014 compared to 2013. Market capitalization increased 41%, with 59% of companies achieving an increase in their market cap. Total European funding reached $9.2 billion, a 53% increase over 2013 and 97% more than the previous 10-year average. IPOs raised $1.9 billion, more than the previous seven years combined. Venture financing totaled $2 billion, $30 million shy of the record achieved in 2006. Europe enjoyed a second strong year for M&A. The total value of the 27 European M&A deals in 2014 was $6.9 billion. Excluding megadeals, this was the second highest total since 2007.
More than a bubble?
Since much of 2014's strong performance came from a strong stock market and a surge in IPOs, the EY analysis examined how much the industry has matured since the last IPO surge in 2000 (the so-called genomics bubble). Several positive signs emerged to reveal an ongoing strength of the biotech sector. Total revenues for US and European biotechs increased 61% over the past 14 years. Adjusting for inflation, the revenues generated by the top 10 biotech companies in 2014 were 4.6 times greater than the revenues generated by the top 10 in 2000. Despite notable acquisitions, the number of commercial leaders (defined as companies with revenues of more than $500 million) in the US expanded from seven in 2000 to 19 in 2014, with average revenue per commercial leader increasing from $1.6 billion to $4.3 billion. The number of European commercial leaders increased from two in 2000 to nine in 2014, and the average revenue per commercial leader increased from $1.2 billion to $2.2 billion. In looking at a narrow time windown, since 2009, the number of companies with market capitalization of more than $500 million increased from 80 companies in 2009 to 144 in 2014. During this same time, the 20 US-based biotech companies with the largest market capitalization had their valuations increased by $488 billion. The strengthening of public markets, combined with increasing competition for commercial-stage assets, has made it a seller's market, according to the EY analysis, with pharma companies paying large acquisition premiums comparative to even two years ago.