The US and Europe biotechnology industries set highs in key areas, such as revenue, net income, financing, and deal values in 2015. But will the good times continue?
In its annual review of the global biotechnology industry, Ernst & Young (EY) says the biotechnology markets appeared to have peaked in 2015 after three years of strong capital growth. So what is behind a possible slowdown? DCAT Value Chain Insights (VCI) examines the key trends
Strengths and weaknesses of US and Europe
For the third consecutive year, the US and European global biotechnology markets set new records in key financial barometers, such as revenue, net income, financing, and deal values, according to the EY analysis, Beyond Borders: Returning to Earth, the firm’s annual analysis of the global biotechnology industry. The report, however, points out that slowing growth in many of these indicators, together with eroding public investor interest, suggests that the industry's recent highs may have peaked in 2015 as growth in revenue and profitability slowed substantially and the public markets pulled back in the second half of the year.
“Despite another impressive performance in 2015, commercial-stage biotechnology companies face numerous challenges, particularly as pricing pressures increase due to payers' increasingly aggressive cost-containment efforts,” said Glen Giovannetti, EY Global Life Sciences Leader, in commenting on the report. “To restore investor confidence in the industry’s long-term prospects and to set the stage for future growth, biotech companies must demonstrate the value of their products to payers, physicians, patients and the public. To succeed, biotech companies will also have to embrace new kinds of partners, particularly payers, to co-create data that demonstrate product value.”
On the upside, the biotechnology industry set highs in revenues and net income, but growth rates are beginning to slow. US- and Europe-based biotech companies combined to deliver a 13% increase in revenue totaling a record $132.7 billion in 2015 (see Table I). The 13% year-over-year revenue growth was less than the 18% increase reported in 2014. Net income increased 18% in 2015 to $16.6 billion, also a record high. In contrast, net income increased 214% in 2014, driven largely by strong sales of hepatitis C drugs. R&D spending, a key indicator of the future health of the sector, outpaced the sector’s revenue growth, increasing 16% in 2015 to $40.1 billion. Sixty-six percent of this increase came from biotechnology companies with less than $500 million in revenue.
| Table I: US and European Biotechnology Market Performance (Publicly Traded Companies), 2015
| Public company data;
|| $132.7 Bn
|| $107.7 Bn
|| $25.0 Bn
| R&D expense
|| $40.1 Bn
|| $33.9 Bn
|| $6.2 Bn
| Net income
|| $16.6 Bn
|| $15.6 Bn
|| $1.0 Bn
| Market capitalization
|| $1,071.5 Bn
|| $889.3 Bn
|| $182.2 Bn
|Number of employees
| Number of public companies
Bn is billions; numbers are rounded.
Source: EY, “Beyond Borders” 2016 Biotechnology Report.
Merger and acquisition (M&A) activity set records for second consecutive year: M&A activity in 2015 climbed to new records in both potential value and volume. The year’s 89 biotechnology M&A deals represented a 10-year high. The cumulative deal value jumped 120% from the previous year to $100.2 billion, close to the combined value of the previous three years.
The potential value of strategic alliances reached $55.4 billion in 2015, a new record driven by 17 individual alliances valued at more than $1 billion. Biotech–biotech alliances also set a new record of $20.9 billion, driven by big biotechs that face growth challenges and can now compete with Big Pharma for deals.
Another important trend in 2015 was that alliance partners paid more up front. On average, in 2015, biotech in-licensors paid 11% of the total potential deal value up front, marking the fourth year in a row that biotechs realized greater value for their products at the initiation of the alliance. Significantly, these up-front payments included nearly $2 billion in equity, a sign that partners are increasingly interested in creating long-term relationships with smaller biotechs that are profit-and-loss-sparing.
Overall biotechnology companies raised nearly $71 billion in 2015 due to a record level of venture capital financing and the increased presence of crossover investors. Innovation capital, cash raised by US and European biotechs with revenues of less than $500 million, eclipsed $41 billion, its highest-ever total. In 2015, the biotechnology industry's cumulative market cap grew just 5% to nearly $1.1 trillion, far below the 65% and 28% growth rates seen in 2013 and 2014, respectively. As of May 31, 2016, the biotech industry’s cumulative market value had fallen roughly 25% to $918 billion from the high in July 2015.
“No longer in its infancy, the biotech industry must tackle more ‘grown-up’ matters, including sustaining growth and promoting innovation at a time when resource constraints alter definitions of biopharma product value,” said Giovannetti.
Focus on the US
The US, by far the largest biotechnology market, saw revenues of publicly traded companies grow in 2015. In the US, revenues of publicly traded biotechs were $107.7 billion in 2015, a 16% increase from the prior year. Net income increased by 45% in 2015 to $15.6 billion, although the gains were largely due to one company: Gilead Sciences and the success of its hepatitis C franchise. Gilead’s $18.1 billion in net income in 2015 was greater than the cumulative net income from all other US companies that turned a profit: 49 other companies netted a total of $16.3 billion. Combined, these 50 companies (the 49 companies and Gilead Sciences) represented only 11% of all US biotechs, according to the EY analysis. The remaining 89% of US biotechs had a cumulative net loss of $18.8 billion.
The R&D spending of US biotechs increased by 18% in 2015 to $33.9 billion. For the second year in a row, R&D spend by companies with revenues of at least $500 million, defined by EY as “commercial leaders,” lagged behind companies below this level. Seventeen US biotechs qualified as commercial leaders in 2015, and collectively, the commercial leaders increased their R&D investment by 10% to $18.9 billion; all other companies’ cumulative R&D investment rose 28% to $15 billion.
Market capitalization of US publicly traded biotechnology companies increased 4% in 2015, with 43% of companies seeing a year-over-year increase in valuation. One interesting development was the valuation given to non-commercial companies. Thirty pre-commercial companies ended 2015 with market capitalizations in excess $1 billion, up from 25 in 2014.
In 2015, total M&A value of US biotechnology companies rose 123% in 2015 to $90 billion. The number of deals jumped from 50 to 64, the highest total in 10 years. Through the first four months of 2016 (January–April 2016), the US biotechnology industry had $54 billion of M&A, which included Shire’s $32 billion acquisition of US-based Baxalta.
US-based biotechs captured roughly 90% of all M&A dollars and 78% of alliance value, a metric that includes milestones and earn-outs but not royalties. US-based biotechs set multiple records in the venture capital financing category, including total dollars raised ($9.4 billion), the largest number of venture rounds (441), and average deal size ($21.2 million). Although US-based biotechs attracted $61.1 billion in financing in 2015, only about 8% of this total came in the fourth quarter, a sign of shifting investor sentiment, according to the EY analysis.
Focus on Europe
In Europe, revenues of European public biotechs grew by 4% in 2015, to $25 billion. European biotechs generated about a quarter as much revenue as their US counterparts and grew also about a quarter of the rate of US-based biotechnology companies, according to the EY analysis. Net income of public companies plummeted 72% to $900 million. R&D expense increased by 11% in 2015, to $6.2 billion. Market capitalization increased 12% to $182.1 billion with 45% of companies achieving an increase in their market cap. European biotechs signed 41 M&A deals in 2015, a new record and nearly double the 10-year average of 23. The total value of these deals was $15 billion, the second highest total since 2006.
European biotechs in 2015 set a new record for the potential value of strategic alliances, with a value of $17.8 billion. Europe-based biotechs raised $9.9 billion in financings in 2015, an all-time high driven by record venture funding ($2.5 billion) and follow-on financing ($3.7 billion) totals. Innovation capital accounted for more than 90% of the financing dollars. Corporate venture capitalists and non-traditional investors helped drive venture capital investment in European biotechs to $2.5 billion, a new record.