Beyond Borders 2023: Biotech is facing a complex path forward, says EY report

• Revenues normalized after the pandemic sugar high: As the demand for COVID-19 vaccines and antiviral treatments dropped, revenue leveled out in 2022 and public biotech company revenues were down 1% from the previous year.
• Steep patent cliff looming: 2023 will witness a total of five patent expirations of established biologic products worth billions of dollars in revenue. Additionally, over 20 products representing nearly $200 billion in annual product sales are expected to lose patent protection by 2030.
• Regulatory pressures ahead: Recent Federal Trade Commission (FTC) activity is generating major concerns that regulation will stifle innovation by restricting therapies’ ability to scale through acquisitions by larger biopharma companies. The industry is also bracing for a tougher pricing environment in the wake of the US Inflation Reduction Act (IRA), with significant implications for how the industry will secure reimbursement for its innovation in the future.
• FDA approvals fell: US Food and Drug Administration (FDA) approvals for both new molecular entities and biologics license applications experienced another drop in 2022, believed to have been driven by FDA staffing shortages. On a positive note, approvals were back to pre-pandemic levels in Q1 of 2023.
• Biotech financing hit a rough patch: In 2022, all types of biotech financing – venture capital investment, debt financing, IPOs, follow-on, etc. – decreased significantly. The biotech IPO market fell 93% from 2021, and an estimated 29% of public biotechs in the US and Europe had less than one year of cash on hand.

The 33rd edition of the Ernst & Young LLP (EY US) Beyond Borders report shows the biotech industry is facing a complex path forward as established big pharma companies are in need of addressing innovation deficits and in search of new revenues to offset the massive wave of looming patent expirations. Emerging biotechs, on the other hand, face a capital-constrained operating environment and are focused on getting to the next value inflection point with minimal cash burn. But nearly half of these companies are already cash-strapped.

The report, which serves as a snapshot of biotech’s business performance, highlights the challenges faced by the industry in this unusual business environment and key considerations for leaders moving forward. As outlined by the report’s authors, streamlining operations and driving efficiencies, from R&D through commercial, is imperative, but biotech’s inherent strengths will allow for continued growth.

Arda Ural, PhD, EY Americas Industry Markets Leader, Health Sciences and Wellness, says:

“Biotechs are facing a complex path ahead. They need to prioritize their capital allocation to navigate distressed public and capital markets, increased regulatory scrutiny and macroeconomic disruptions. The good news is that the innovation capacity of the industry remains strong in the long-term.”

Beyond Borders analyzes the state of the industry through a summary of US and European public company revenues, financing, M&A activity, alliances, product approvals and other factors. The report offers executives a deep dive into current affairs as well as a future-forward outlook.  

Ashwin Singhania, Principal, EY-Parthenon, says: “Innovation is the engine that drives the biotech industry. While the approaching patent cliff is an unavoidable challenge, the pipeline continues to be very robust and the pace of innovation continues to accelerate. If executives can prioritize streamlining processes and the ongoing investment in organic innovation and inorganic growth, they will set themselves up for future success.”

Other key findings include:

• Limited, but increasing, M&A appetite: Global macroeconomics, geopolitical tension and the FDA’s increased dealmaking scrutiny are all potential factors for the limited M&A activity. The increasing regulatory scrutiny imposed by the FTC will cast a long shadow on the market and will disrupt the inorganic growth efforts in the foreseeable future.
• Alliances are on the rise: In 2022, pharma alliance deals had a projected value of $132.1 billion – the third-highest total in the past decade. This reflects the industry’s recent preference toward accessing innovation through alliances and partnerships over straight-out acquisitions. However, one downside for biotech is that only 6% of the total potential value of alliances is in the form of guaranteed up-front payments.
• Banking woes: Biotechs and investors are still recovering from the impact by bank failures, particularly Silicon Valley Bank. It was a stark reminder for early-stage biotechs to revisit their liquidity policies and diversify their banking strategies.
• Decline in available capital: After skyrocketing capital levels in 2020 and 2021, 2022 witnessed a 54% decline in capital available to the sector. The $54.6 billion raised in 2022 represented the lowest annual industry investment since 2016. While this is in line with pre-pandemic norms, companies are still adjusting to these new conditions.
• What the IRA means for biotech: The IRA contains three key provisions from a biotech standpoint: 1) Medicare price negotiations (intended to reduce the price of high-cost single-source drugs); 2) inflationary rebates (manufacturers will need to provide rebates if their price increases exceed the Consumer Price Index for All Urban Consumers (CPI-U) inflation rate); and 3) Medicare Part D Redesign (this provision will place a $2,000 cap on the amount patients may pay out of pocket per year by January 2025).
• Plunging IPOs: Debt financing is down 10% as interest rates rise, but the 63% drop in follow-on public offering capital raised and the 93% decrease in IPOs means smaller companies are struggling to gain access to capital to get to their next value-generating inflection point. Of the 223 companies taken public in 2020 and 2021, and were still publicly traded at the end of 2022, 91% of them saw their market value at IPO drop, with an average decline of more than 50%.

Although 2022’s 1% revenue growth is a stark contrast to 2021’s 35%, it can be traced back to the decreasing demand for COVID-19-related products. Factoring these products out of the portfolios of the five leading biotechs, the industry’s revenues increased a modest 3.7% in 2022, compared with 5.2% growth in 2021. This view illustrates that biotech’s fundamentals remain healthy, and continued innovation may stave off any threats posed by the imminent patent cliff. The industry should rely on a combination of homegrown innovation and outside transactions to sustain growth and replace impending lost revenue.

However, there are concerns over the long-term viability for the wider sector, as 55% of public biotechs (excluding companies with more than $500 million in annual revenue) hold insufficient cash to tide them over for the next two years. A further sobering fact is that 29% of these biotechs have less than a year of cash on hand. With venture funding falling 29% in 2022 and investors pursuing products that can deliver clinical or commercial validation sooner, companies are facing a constrained financing environment. In this instance, M&A remains a viable strategy for biotechs; dealmaking slightly increased last year compared with 2021 although the overall number of deals fell.

While challenges lie ahead for the industry, confidence can be found in the potential for a more efficient operating environment. This can be achieved by focusing on capital allocation strategies to secure future growth, optimizing tax management, building better financial and operational resilience, and utilizing artificial intelligence and other technologies to streamline commercial engagement models and more.

“The biotech sector should expect challenges and transformations in next few years as we prepare to scale the patent cliff,” said Rich Ramko, EY US Biotech Leader. “Biotechs must rev up their innovation engines to pull ahead in this race and put themselves into a position of strength. Companies that can produce differentiated products will set themselves up for steady revenue streams and more stability. All this can be achieved while focusing on operational efficiency and financial discipline.”

To read Beyond Borders, visit www.ey.com/beyond-borders.

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