EY Biotechnology Report 2017: Beyond borders - Staying the course

Biotechnology Industry Report 2017

Staying the course

Beyond borders

Biotechnology Industry Report 2017 | Beyond borders

Beyond borders 2017Key trends and implications


Despite multiple uncertainties, the biotech industry stays the course in 2016

Industry financing dips 27%, but …

… is third highest total in 31 years

Decline in IPOs and follow-ons, but …

… robust early stage VC investment

Deal milestones more common, but …

… M&A total second highest in history

Market cap falls below US$1t, but …

… rebounded in 2017

Net income drops 52%, but …

… R&D spending hits new record

FDA approvals drop sharply, but …

… FDA remains science and access focused

Ongoing drug pricing pressure, but …

… industry adapting to value-based payments


In the dynamic biotech landscape, the only certainty is uncertainty

“I can’t think of a period that has been characterized by so much uncertainty as the past six to nine months. … The uncertainty is a factor that comes up in every board meeting I attend.”

– Alan Mendelson, Partner

Latham and Watkins

Successful companies have “learned to filter that [uncertainty] out and focus on the things that are right for the company. There may be tax reform. There may be repatriation. But you can’t count on it – and you can’t wait for it either.”

– John Milligan, CEO

Gilead Sciences


Key performance metrics for US and EU biotechs (US$b)

Numbers may appear inconsistent because of rounding.

Commercial leaders are companies with revenues in excess of US$500m.

Sources: EY; S&P Capital IQ and company financial statement data.


Financial performance of US biotechnology commercial leaders and other companies (US$b)

US biotechnology: commercial leaders and other companies (US$b)

2016 2015 US$ change % change

Commercial leaders

Revenues 98.8 93.7 5.1 5%

R&D expense 21.9 18.8 3.1 16%

Net income (loss) 29.1 32.0 (2.9) (9)%

Market capitalization 522.0 660.3 (138.3) (21)%

Number of employees 87,930 77,823 10,107 13%

Other companies

Revenues 13.4 13.7 (0.3) (2)%

R&D expense 16.9 15.2 1.8 12%

Net income (loss) (19.9) (16.6) (3.2) 19%

Market capitalization 176.7 231.0 (54.3) (24)%

Number of employees 47,846 52,316 (4,470) (9)%

Numbers may appear inconsistent because of rounding.

Commercial leaders are companies with revenues in excess of US$500m.



Financial performance of European biotechnology companies (US$b)

European biotechnology: commercial leaders and other companies (US$b)

2016 2015 US$ change % change

Commercial leaders

Revenues 23.6 19 4 23%

R&D expense 3.5 3.8 (0) (8)%

Net income (loss) 2.0 3.0 (1) (32)%

Market capitalization 120.9 43.3 78 179%


Other companies

Revenues 3.7 3.6 0 3%

R&D expense 3.4 2.9 0 16%

Net income (loss) (3.3) (2.0) (1) 66%

Market capitalization 43.2 132.3 (89) (67)%


Source: EY, S&P Capital IQ and company financial statement data.


FinancingInvestors downshift in 2016


2016 was another strong year for “innovation capital” in the US and Europe

Sources: EY; S&P Capital IQ and VentureSource.


VC investment in early stage US- and EU-based biotechs is a reason for optimism



US and European venture investment by round

Sources: EY; S&P Capital IQ; VentureSource.


New sources of capital are emerging, especially in Asia

Size of bubbles shows number of financings per regionInnovation capital is the amount of equity capital raised by companies with revenues of less than US$500 million.

Sources: EY; S&P Captial IQ and VentureSource.


DealmakingDealmaking remains active, though not as lucrative, for biotechs


2016 was another strong year for biotech M&A

Chart excludes transactions where deal terms were not publicly disclosed.

Sources: EY; S&P Capital IQ; MedTRACK and company news.


US M&As (2007–16)




European M&As (2007–16)




Top biotechnology IPOs by region (2016)

Sources: EY; BioCentury; S&P Capital IQ and VentureSource.


Navigating complexity: key issues for biotechs


Continued success requires the ability to navigate complexity on multiple fronts

1Product

reimbursement

2R&D

efficiency

3Digital

strategy

4Deal-

making

How can

biotechs

accelerate

value-based

payment

models?

How can biotechs

improve the ROI for

their R&D spend?

What deal structures

and partners give

companies the most

optionality?

What technologies

should companies

invest in today?

5Financing

volatility

What sources of

financing are most

relevant?


Complexity: product reimbursementAs conversations shift from price to value, what steps do biotechs need to take?

► As emphasis on demonstrating value grows, biotechs should consider:

► Investing in real-world evidence to capture patient-centric data during

development

► Using biomarkers to segment populations to demonstrate improved efficacy

► Incorporating stakeholders’ definition of value into pricing decisions

► Around-the-product services that will enable better outcomes

► Proactive pay-for-performance deals with payers (depending on therapeutic area)

Future strategiesTraditional strategies Emerging strategies

Rebates

and

discounts

Patient

assistance

Indication-

specific pricing

Financial-

based risk

sharing

Performance-

based risk

sharing

Annuity

models

Capitation

1


Complexity: R&D efficiencyHow can companies improve efficiency via new technologies and capabilities?

► Right drug to right

patient at right time

► Highest use in

oncology

► Shortened

development time

► Increased probability

of success

► Increase probability

of success

► Reduce capital

invested

► Shortened

development time

► Increased sales

► Using technology to

monitor trials

remotely

► Increased regulatory

compliance

► Shortened

development time

► Use social, mobile

and big data

► Develop disease

models and

advanced

therapy solutions

► Targeted clinical

recruitment

► Real world efficacy

and safety

Precision medicine

Biopharmas must overcome challenges to transform the R&D process.

Emerging

understanding of

disease

Data security and

governance issue

Partnering with new

players

Lack of FDA

guidance-

regulatory fears

Lack of resources

(talent and funds)

2

New trial designsRisk-based

monitoringData analytics


Complexity: digital strategyTechnological advances will change biotech value chain

Smart and connected

Sensors

Device miniaturization

Artificial intelligence

Cheaper sequencing technology

Block chain

3-D printing

Cloud computing

Robotics

Memory processing

More data has been created in the past

two years than in the entire previous

history of the human race.

Empowered by data

Data-focused companies are disrupting

the retail, entertainment and

transportation industries.

Data generation + new technology will

disrupt traditional biotech R&D and

commercial activities.

3


Complexity: dealmakingWhat deal structure give biotechs the greatest optionality?

► A significant portion of biotechs will be acquired at some point:

► From 2012-16, 10 of 37 commercial leaders (US and EU) were acquired

► How can companies be more strategic to realize full value from portfolio?

M&A

optionality

Option to buy

LLC model

Single asset co Sell minority stake

Divest business

Spin out assets

Biogen/Bioverativ

JNJ buys Actelion; spins out

Idorsia

Lonza sells peptide biz

to PolyPeptide

Roche/Genentech

Gilead/Nimbus Apollo

program in NASH

Takeda/Maverick

Therapeutics

Medicxi funds Kymo

Therapeutics through POC

4


Complexity: financing volatilitySharp decline in US and EU IPOs underscores financial volatility

5



Complexity: financing volatilityHow can biotechs build access to multiple pools of capital?

► Ongoing market volatility driving financial volatility:

► IPO window didn’t slam shut in 2016-17, but for many, it’s not open

► Tougher climate for follow-ons

► Private companies tapping a more diverse set of investors (by type

and geography):

► Traditional venture vs. corporate venture/biopharma business

development

► Foundations/family endowments vs. growth investors

► Life sciences vs. technology

► US vs. Europe vs. China/Asia-Pacific

► Long time cycles and cash required to bring products to market still

bias to public listings

5


EY survival index for US and EU biotechs (2015–16)

Chart shows percentage of biotech companies with each level of cash. Numbers may appear inconsistent because of rounding.



Beyond borders 2017: key findings

Payers’ cost containment efforts result in slowing top-line

growth for biotechs.Product reimbursement1

R&D investment increased but FDA approvals dropped;

improving R&D efficiency is an ongoing area of focus.R&D efficiency2

Partnering with new technology entrants to access new

digital capabilities is a key topic.Technological change3

Capital markets pull back significantly in 2016; biotechs

must take advantage of a broader investment pool.Financing4

M&A activity remains strong, but up-front commitments for

alliances decline as biotech valuations fall.Dealmaking5


When the only

certainty is

uncertainty, is

staying the course

your best bet?


Additional resources

Contact an EY advisor:

► Glen Giovannetti

EY Global Biotechnology Leader

[email protected]

► Jürg Zürcher

EY Biotechnology Leader,

Germany/Switzerland/Austria

[email protected]

► Ellen Licking

EY Global Life Sciences Senior Analyst

[email protected]

Also:

► Download the report:

ey.com/beyondborders

► Explore/subscribe for new content:

ey.com/VitalSigns

► Follow us on Twitter:

@EY_LifeSciences

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EY Biotechnology Report 2017: Beyond borders - Staying the course

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