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A summary of key takeaways from EY’s new Beyond Borders report.
My colleagues at Ernst & Young LLP (EY US) recently published “Beyond Borders: EY biotechnology report 2022,” providing a snapshot of the current state of the industry and its strong fundamentals. I am pleased to share their key findings here.
Despite the current longest and steepest bear market for biotech indexes since their inception, the industry remains in a position of strength with unprecedented levels of capital funding an innovation renaissance, which offers a promising future for patients, fundamental performance, and industry sustainability.
With access to new capital in the public markets virtually nonexistent and over 215-plus companies having less than 12 months of cash, it is imperative that the sector navigates unchartered waters with discipline to stay the course, survive, and prosper. At the same time, large pharma has record firepower to fund investments in innovative biotechs through M&A, collaborations, and partnerships, and these have always been key pillars to achieving their growth targets.
A massive tide of dollars in venture capital and crossover and dedicated biopharma funds is also waiting in the wings to fund attractive opportunities. Biotechs must proactively take control of their destiny and manage cash, prioritize programs based on probability of success and ROI, and retain the talent needed to execute. It is on these metrics that the industry will likely become increasingly bifurcated.
Here are some additional insights the report reveals:
Blowout revenue growth in 2021. Public company revenues surged 35%, from $160.2 billion the previous year to $216.7 billion, and while largely driven by COVID-19 vaccines and antivirals, most companies beat revenue expectations and increased guidance across the board.
A tectonic shift in the financing environment, from hero to zero. In 2021, the industry raised a near-record $115 billion in capital, falling only 4% short of the record-breaking performance of 2020. Nearly $30 billion was invested in IPOs in this two-year period, which accounts for 29% of the total dollars raised for the sector in IPOs over the past 15 years. Valuations hit record highs in February 2021, but then the reopening of the economy, facilitated by vaccines, sparked a fierce rotation out of expensive growth sectors into depressed value sectors most leveraged to the impending V-shaped economic recovery. This acceleration, combined with a rapid rise in interest rates and inflation, sent biotech valuations plunging—and their door to accessing the capital markets shut decidedly and loudly in 2022.
Biotech remains the biopharma industry’s engine for innovation and growth. Over 50 new molecular entities (NMEs) were approved by FDA in both 2020 and 2021, up from an annual total of 29 a decade ago. Currently, biotech accounts for a record 65% of the approximate 6,000 clinical-asset candidates in active development. That group includes more than 2,000 cell and gene therapies projected to play an increasingly important role in driving revenue growth in the next decade.
“Since the onset of the pandemic, biotech has experienced significant growth with the advent of the mRNA vaccines, antivirals, virtualization of clinical trials, and more,” says Arda Ural, PhD, EY Americas industry markets leader, health sciences and wellness. “In parallel, the large cap biopharma industry is facing a fundamental growth gap as their internal pipelines are not sufficient to achieve their growth goals in the face of upcoming patent expirations for their leading blockbusters. With their balance sheets flush with record firepower to fund deals and a huge correction in the valuation of deal-target development-stage biotechs, now is an opportune time for Big Pharma to acquire biotech innovation.”
Ashwin Singhania, principal, Ernst & Young LLP, in the EY-Parthenon life sciences strategy practice, adds, “Biotech executives must have a clear vision of what they seek to accomplish to succeed post-pandemic. The unprecedented public health crisis coupled with the market downturn demonstrated biotech’s resiliency, but now companies must address pain points to optimize their potential.”
With massively lower valuations and few financing options, a buyer’s market has finally emerged. De-risked, late-stage biotech assets that fit naturally into a large pharma’s strategic pipeline will be an M&A priority, and strategic alliances may remain the preferred route to access the higher-risk early stage innovations over outright bolt-on acquisitions. A more robust and accelerated deal calendar seems inevitable.
Barbara Ryan is Founder, Barbara Ryan Advisors, and a member of Pharm Exec’s Editorial Advisory Board.