Analyst: Biotech Companies' Successes May Have Peaked

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By John T. Aquino

June 6 — U.S. and European biotechs set financial performance records in 2015, but payer pressures suggest industry success may have peaked, an Ernst & Young executive said June 6.

“In many ways, things have never been stronger,” Glen Giovannetti, EY global life sciences leader, told Bloomberg BNA at the BIO International Convention in San Francisco the day the company's new biotech report was released.

“But in other ways, we've come down off the heights. We've been in a bull market for biotech investors for a very long time. Now our new report is showing that pricing and accessing growth are influencing every decision a company makes,” Giovannetti said.

Drug Pricing Is the New Uncertainty

The company's annual biotech report, EY's 30th, said that 2015 biotech revenue and profitability hit historic highs of $132.7 billion and $16.6 billion, respectively. The value of merger and acquisition (M&A) deals topped $100 billion, while large biotech companies became more active in strategic alliances.

But the growth of net revenue and the industry’s market cap declined, the report said.

“The biotech industry has returned back to Earth,” Giovannetti said.

“Drug pricing is the new major uncertainty,” said Ellen Licking, an EY senior analyst. “It used to be regulations. But the Food and Drug Administration has worked with the industry. Now the hurdles of uncertainty have been pushed further downstream to payer reimbursement,” she said, referencing the concern of Medicare and the health insurance industry about high drug pricing.

Revenue, Market Cap Growth Down

The report said that U.S. and Europe-based biotech companies combined to deliver a 13 percent increase in revenue totaling a record $132.7 billion in 2015.

According to the report, the 2015 revenue of Gilead Sciences , which dominates the hepatitis C market, is 76 percent greater than the entire industry's revenue in 2000. AbbVie Inc., Merck &Co. and others continue to challenge Gilead's market share, the report said.

However, the 13 percent year-over-year revenue growth for the industry in 2015 was less than the 18 percent increase reported for 2014, the report said.

Net income increased 18 percent in 2015 to $16.6 billion, also a record high. In contrast, net income skyrocketed 214 percent in 2014, driven largely by strong sales of hepatitis C drugs.

In 2015, the industry's cumulative market cap grew just 5 percent to nearly $1.1 trillion, far below the 65 percent and 28 percent growth rates seen in 2013 and 2014 respectively, the report said. As of May 31, 2016, the biotech industry’s cumulative market value had fallen roughly 25 percent to $918 billion from July 2015.

However, research and development (R&D) spending, a key indicator of the future for the sector, outpaced the sector’s revenue growth, increasing 16 percent in 2015 to $40.1 billion. Sixty-six percent of this increase came from biotechs with less than $500 million in revenue.

“Companies who have seen good profitability from the heights have been plowing it back into R&D,” Giovannetti said.

Other Numbers Set Records

Other key results highlighted in the report include:

  •  M&A activity in 2015 climbed to record numbers 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 percent 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 record driven by 17 individual alliances valued at more than $1 billion. Biotech-biotech alliances also set a record of $20.9 billion, driven by big biotechs that faced growth challenges and can now compete with big pharma for deals.
  •  On average, in 2015, biotech in-licensors paid 11 percent 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 upfront payments included nearly $2 billion in equity, a sign that partners are increasingly interested in creating long-term relationships with smaller biotechs.
  •  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 U.S. and European biotechs with revenues of less than $500 million— eclipsed $41 billion, its highest-ever total.

 

The report noted that Celgene's $7 billion acquisition of Receptos and Teva Pharmaceuticals's $3.5 billion acquisition of Auspex Pharmaceuticals “illustrate the value of late-stage clinical assets as more mature companies cast about for growth.”

“It's a story of strong performances, but even a strong story can prove to be fragile,” Giovannetti told Bloomberg BNA.

Collaboration Between Industry, Payers Needed

Giovannetti said, “Companies will now have to have highly differentiated products to get reimbursement from payers. They'll have to create innovative pricing models and move to stronger collaborations with payers.”

Licking noted that the drug industry hasn't been as advanced in its agreements with payers as health providers have been.

“There are complex problems behind this, but they will have to work them out,” Giovannetti said.

Licking noted that there are also regulations in place that make conversation difficult.

To contact the reporter on this story: John T. Aquino in Washington at jaquino@bna.com

To contact the editor responsible for this story: Randy Kubetin at rkubetin@bna.com