There May Be Trouble Ahead For Biotechs
New survey research from Ernst & Young reveals most biotech SMEs are having difficulties demonstrating the value of products under development.
This ‘implementation gap’ can have a negative impact on the ability of these companies to raise capital and achieve growth partnerships.
The path of recovery continued for the global biotechnology industry in 2012 as public companies in the sector achieved substantial growth for the third year running, despite the pressure on R&D spending at many firms. Entities located in established biotech centres (the US, Europe, Canada and Australia) achieved revenues of $89.8 billion last year, an 8% increase from 2011. Yet this record profit does not portray a very favourable image of an industry where innovation is crucial. According to the firm’s annual biotechnology industry report, R&D spending in the sector was well below the 9% growth rate achieved in 2011, with substantially reduced spending amongst pre-commercial entities.
R&D spending is the engine of future growth, warns Glen Giovannetti, the global life sciences leader at Ernst & Young (E&Y). “There were higher sales on the one hand but lower R&D costs – that’s what’s driving the profitability,” Giovannetti said. “In 2009, immediately following the crisis, that was the first year the industry showed profitability, because they were cutting R&D costs. To me, that’s not a sign of health.”
Mind the gap
The business of drug development across the biotech industry is currently undergoing a major shift in dynamics as factors such as increased scrutiny of global health-care costs and an increasingly risk averse Big Pharma takes their toll. Simply proving that a new drug or treatment is safe and effective for the marketplace is no longer sufficient – companies must be able to sell ‘good outcomes’, and at lower costs for the relevant healthcare system. This is changing how innovators even approach new research.
Smaller biotech companies (with less than $500 million in annual revenue) were found to be inadequately prepared to demonstrate the value of their new drugs in this new environment, according to the annual repost, creating what E&Y has coined the ‘implementation gap’. Of 62 companies surveyed, almost two-thirds said they consider it very important to prioritize products that may exceed what’s currently available and to demonstrate the value of products to payers. Yet 50% of respondents said they would be unlikely to add people with reimbursement expertise to their management, clinical development team or board.
“In today's increasingly outcomes-focused, evidence-driven health care systems, biotech companies cannot afford to pursue an R&D strategy that only focuses on whether or not their drug works. They need to also understand whether it will be valued and reimbursed by payers,” said Giovannetti. “If you wait to address questions of value only as a product launch approaches, you do so at your own peril because pharma alliance partners – still the most viable exit option for most biotechs – now consider such data to be key drivers of their product and company valuations.”
Challenging times
Big pharmaceutical companies regularly form partnerships with biotechs to get access to valuable technology they don’t have – and these positive growth indications are abound. Venture funding across North America and Europe experienced a much slower decline in 2012 (down 5% to US$5.4 billion in 2012) than was expected. Furthermore, the total value of biotech M&As across the modern Western landscape equalled $27.4 billion, an increase of 9% from 2011 (two megamergers in 2011 aside). Nevertheless, unless the value of the individual biotech is adequately demonstrated, Big Pharma will overlook them as a potential candidate.
Biotechnology has long thrived on its record of creating life-saving drugs but the industry currently faces many challenges. Under the new US health care system, a medical device tax imposed to help pay for the Affordable Care Act, is causing anxiety as it may stifle innovation already under threat due to this recent outlook towards R&D. Because the tax is imposed regardless of a company’s size or profitability, this disproportionately hurts new companies, which are major providers of new ideas and products. Furthermore, the Supreme Court is drawing close to a decision on the controversial issue of gene patenting, considered necessary by most biotech companies to provide incentives for new products.