The global biotechnology industry showed a slowdown in 2016. So what do the numbers show?

A recent analysis by EY showed a pull-back in capital markets, lower valuations, and declines in revenue growth and net income for publicly traded biotechnology companies. DCAT Value Chain Insights examines the fortunes of the global biotechnology industry.

Inside the biotech market
Global biotech companies continued to invest in new treatments despite a pull-back from capital markets in the US and the European Union, lower valuations, and increased pressure from payers, according to EY‘s annual analysis of the global biotechnology industry, Beyond Borders: Staying the Course. In 2016, overall financing was down, but early-stage venture financing remained healthy. The biotechnology industry experienced its third-best financing year ever despite a drop in proceeds from initial public offerings and follow-on rounds. On the downside, revenue growth for public biotech companies failed to reach double digits for the first time in two years, and net income fell by 52% as the industry continues to be challenged by R&D productivity and the emergence of new business models, according to the EY report. The industry’s collective market capitalization fell in 2016, but thus far in 2017, it has seen a bounce in line with the broader market and the lure of tax reform and continued consolidation.

“Despite a marked slowdown in top-line growth driven in large part by aggressive cost containment efforts by payers, the global biotech industry displayed notable resiliency to ongoing reimbursement and regulatory and political uncertainties in 2016,” said Glen Giovannetti, EY Global Biotechnology Leader, in commenting on the report. “In particular, the ability of early-stage biotechs to attract sizeable amounts of venture capital, coupled with a record level of investment in R&D, show that the industry is still poised for growth. At the same time, the industry continues to shift from clinical science supported by data to a data-driven science supported by clinicians. And, because of this change, biotech companies need to adopt emerging technologies as well as business model innovations to help ensure their continued success.”

Crunching the numbers
The EY report highlights several key revenue and financing trends. Revenue for US- and Europe-based biotech companies totaled $139.4 billion in 2016, up 7% from the prior year. Net income dropped 52% year-over-year to $7.9 billion while financing dropped 27% to $51.1 billion in 2016, the first decline in four years, yet still the third highest industry total.

Revenues from commercial leaders (those companies generating at least $500 million in revenue) increased 8% to $122.4 billion in 2016, representing 88% of all biotech revenue. Since 2011, the amount of revenue generated by commercial leaders has doubled from $61 billion; in that same span, the number of commercial leaders in the US and Europe has grown from 23 to 27. Revenue for noncommercial leaders dropped 0.5% to $17.1 billion as four companies (Acorda Therapeutics, AMAG Pharmaceuticals, and Opko Health in the US as well as Swedish Orphan Biovitrum [Sobi] in Europe) moved to commercial-leader status. Three commercial leaders were lost to mergers and acquisitions (M&A) in 2016: oncology-focused Medivation was acquired by Pfizer, the diagnostic company Cepheid was acquired by Danaher, and Sweden’s Meda, a specialty pharmaceutical company, was acquired by Mylan.

At the same time, early-stage venture capital remains strong. Investment in seed and Series A biotech venture rounds totaled $3.6 billion in 2016, a record 36% of the total $10 billion of venture capital raised and higher than the previous 15-year average of $1.3 billion.

Last year also saw a rise in capital outside the US and parts of Europe. As many traditional forms of capital became more difficult to access in 2016, biotech companies are considering Asia, particularly China, as a potential source of capital. These companies are also exploring additional sources of innovation capital, defined as cash raised by biotech companies with revenues of less than $500 million. While US biotech companies raised 81% of the $26.3 billion of the total innovation capital in the US and Europe, the UK and China each raised more than $1 billion in innovation capital.

M&A activity was strong in 2016, but guaranteed money declined. In 2016, there were 79 deals that totaled $94.4 billion, a decline from 2015’s record year but still the second-highest total ever for both value and volume. Meanwhile, guaranteed money in alliances dropped sharply, with 17% of all M&A value being tied up in milestones that may not materialize. Still, this was higher than the previous year’s 12% of deals with these earn-out payments, according to the EY analysis.

Research and development (R&D) spending, a key indicator of the future health of the sector, hit a record high of $45.7 billion in 2016, a 12% jump from the prior year. However, the industry’s cumulative market capitalization slipped under $1 trillion for the first time in three years to $863 billion, a 17% decline. In the US alone, 29 companies each lost more than $1 billion in market capitalization.

“The biotech industry’s financial commitment to R&D, while impressive, needs to be coupled with efficiency improvements to achieve better returns and ultimately to drive greater affordability of its products,” said Pamela Spence, EY Global Life Sciences Leader. “With pricing pressures expected to escalate, firms will need to incorporate new digital and artificial intelligence technologies into their traditional drug target selection and overall R&D processes to achieve those returns or risk being outdone by firms that do. Furthermore, the payer-driven slowdown in revenue growth industry-wide provides further evidence of the need for companies to accelerate their shift in business models to fee-for-value from fee-for-service. Fundamental to the success of this transformation will be to form data-focused partnerships with the digital technology companies increasingly entering the health care space.”

Inside the US and European biotechnology industries
In 2016, revenue growth in the US biotechnology sector declined for the second year in a row with revenues up only 4% to about $112.2 billion (see Table I) as competition and reimbursement pressure in the hepatitis C (HCV) market slowed as evidenced by changing fortunes by one of the leading companies in the HCV market, Gilead Sciences. Gilead’s success in the HCV market from 2013 to 2015 boosted the US biotech sector as its own revenue, net income, and market capitalization increased. As the EY report points out, as Gilead comes off its growth peak, the financial metrics of the US aggregate biotech sector are following. Net income at Gilead dropped sharply (down $4.6 billion) due to a revenue decline and a 41% increase in R&D expenses, which in turn, accounted for nearly three quarters of the total decline in US biotech net income, according to the EY report.

The vast majority of US revenue came from the commercial leaders (those biotechs with at least $500 million in revenue). US commercial leaders, with the exception of Gilead, all grew their revenue lines during 2016, led by Celgene (up $2 billion) and Amgen (up $1.3 billion). The commercial leader/non-commercial leader split was less evident in other metrics as each group saw R&D expenses rise and net income and market capitalization fall. The number of commercial leaders in the US jumped to 17 during 2016 as the acquisitions of Cepheid and Medivation were offset by growth at Opko Health, AMAG Pharmaceuticals, and Acorda Therapeutics. Organic growth at AMAG and Acorda inched each company over the $500-million threshold. Opko surged to $1.2 billion in 2016 revenues following the close of its 2015 acquisition of BioReference Laboratories for $1.5 billion. Other commercial leaders posting strong 2016 growth included Vertex Pharmaceuticals and Incyte. Overall revenues of US commercial leaders increased 5% in 2016 from $93.7 billion in 2015 to $98.8 billion in 2016. Non-commercial US companies’ revenues increased 2% from $13.7 billion in 2015 to $13.4 billion in 2016.

Overall European industry revenue jumped 19%, up significantly from 2015’s 4% growth (see Table II). Without considering the merger of Shire and Baxalta and resulting revenue growth of $5 billion to $11.4 billion or 42% of the entire European sector revenue, aggregate revenue for European companies would have actually dropped $0.6 billion on the year. Meanwhile, Mylan’s acquisition of Sweden’s Meda erased $2.3 billion in European biotech revenue. Removing these deals from Europe’s revenue numbers shows underlying growth of 12%.