By Arda Ural, Ph.D., EY
The last five years have been disruptive regardless of sector, yet biotech managed to weather the storm, demonstrating resiliency and innovation despite both intrinsic and extrinsic challenges. In 2017, when EY last published a comprehensive analysis of the U.S. and European biotech sectors, looming issues included the impact of Brexit and the intensifying U.S. debate over the future of healthcare.
Five years later, there is no question that biotech has not only survived but thrived throughout these and subsequent disruptions — most notably the worldwide turbulence caused by the COVID-19 pandemic. But nearly three years into the pandemic, additional challenges place pressure on biotech leaders – from the emergence of new variants and the rise of monkeypox, to global geopolitical tensions, to a bear market, inflation, and a potential recession.
Based on our analysis of the biotech sector today, the industry’s performance over the past five years demonstrates a firm foundation ready to weather any storms. Here’s what we found and how leaders can navigate future headwinds.
Biotech Revenues And Overall Industry Growth
The facts show that over the past five years, biotech has delivered impressive financial growth. In 2021, the last full calendar year, the industry’s revenues were 55% higher than we reported in 2016; biotech market capitalization had risen 84%; financing levels had surged 116%, with huge increases in the industry’s levels of VC investment and the biotech IPO market; and annual drug approvals were up 80%.
Even year-over-year performance from 2020 to 2021 was notable, with biotech revenues up 35% to $216.7 billion in 2021 mainly due to COVID-19 vaccines and therapeutics. Nearly 19% of the total revenue — more than $40 billion — came from vaccines, where a year prior, they were responsible for just $1.4 billion.
Biotech financing was another large area of growth. In 2021, biotech raised $115.3 billion while IPOs and venture financing broke records. Last year alone, there were 143 biotech IPOs and $26.2 billion of venture financing.
Meanwhile, M&A reached a new high in 2021 from the previous record set 15 years prior, but the total value of deals dropped, hitting the lowest level since 2017 and declining for the second straight year. In the first half of 2022, inflation, recession, and political complexities were just a few factors affecting the financial climate for biotechs. The industry is seeing a correction as patent expirations come into play, companies have weak product pipelines, stock valuations drop, and IPOs are almost at a standstill, though this could lead to additional dealmaking in the months ahead. There is long-term optimism as companies continue to raise capital, create partnerships, and keep strong cash reserves.
What Executives Should Consider In The Months Ahead
While M&A takes a back seat, alliances will come to the forefront as an opportunity for leaders to access higher-risk early-stage innovation over acquisitions. Over $152 billion in alliances were reported in 2021, which is only slightly below the record of $161.6 billion set in 2020. These business arrangements contribute significant value to the companies involved by increasing capital leverage and building better growth opportunities. Additionally, this ecosystem approach provides advantages beyond just innovation and R&D, such as cost reduction and increased efficiencies, the creation of new joint products, and greater access to talent. Executives can act now by building an ecosystem development function with a designated budget and looking into promising early-stage assets with options to acquire at Phase 2.
Growing R&D investments are also supporting the late-stage clinical pipeline. Biotech remains the biopharma industry’s engine of innovation and growth: the industry had over 50 new molecular entities approved by the FDA in both 2020 and 2021, up from an annual total of 29 a decade ago. Biotechs currently account for a record 65% of the approximate 6,000 clinical asset candidates in active development, including more than 2,000 cell and gene therapies that are projected to play an increasingly important role in driving revenue growth in the next decade. Industry insiders can keep a finger on the pulse in this area by watching VC firms, as they are flush with cash and ready to deploy it in these early-stage companies. Another route is evaluating long-term asset portfolios to ensure there is room for growth and development.
Supply Chain Challenges And Opportunities
Supply chain resiliency should also be top of mind for the industry moving forward. Biotechs and their CDMOs should holistically assess their current strategies and portfolios, considering factors such as existing product-level manufacturing, manufacturing capacity, launch plans, financial forecasts, and other impacts. Attempting to reshape a supply chain is an expensive and lengthy process, but some potential approaches include joint warehousing operations, hub-and-spoke manufacturing models, and the use of digital technology to build end-to-end transparency.
In the coming months, biotech can likely expect more economic turbulence as well as continued supply chain disruption, talent competition, increasing ESG regulations, and other operating challenges. However, the silver lining is that the biotech industry remains the innovation engine of biopharma, with a greater percentage of FDA-approved products originating from biotechs as the industry faces a patent-cliff to the effect of $250 billion.
Leaders know that capital will follow strategy and science, and biotech sits at this intersection. Companies that remain resilient, agile, and lean will emerge from the uncertainty of the immediate future.
About The Author:
Arda Ural, Ph.D., is the EY Americas Industry Markets leader for EY’s Health Sciences and Wellness Practice. He has nearly 30 years’ experience in pharma, biotech, and medtech, including general management, new product development, corporate strategy, and M&A. Prior to joining EY, he was a managing director at a strategy consulting firm and worked as a VP of strategic marketing and a BU lead at a medtech company. Ural holds a Ph.D. in general management and finance and an MBA from Marmara University in Istanbul, as well as an MSc and BSc in mechanical engineering from Boğaziçi University.
The views expressed by the authors are not necessarily those of Ernst & Young LLP or other members of the global EY organization.