Early biotech financing healthy, but R&D productivity needs to look left field

The report finds that investment in seed and series A biotech venture rounds totaled $3.6 billion in 2016.

It’s the summer; it’s the BIO convention, and so too it’s time for Ernst & Young’s annual biotech health report, and when it comes to financing for early-stage biotechs and research spending, things are looking strong, although it’s a mixed bag across the whole sector.

Last year and, continuing into 2017, has been a strong period for many biotechs attracting big money raises, according to EY’s report "Beyond borders: staying the course," but the authors note that this comes amid some major challenges, many of which are ongoing.

Totting up the numbers, the report finds that investment in seed and series A biotech venture rounds totaled $3.6 billion in 2016, a record 36% of the total $10 billion of venture capital raised, and higher than the previous 15-year averages of $1.3 billion.

But this came amid a major slowdown for biotech IPOs, which had a dismal year, and has only just in the past few months shown something of a turnaround. It also comes amid some major regulatory and political changes, with a new FDA head in the form of Scott Gottlieb, picked by the reforming President Donald Trump, who wants to speed up FDA approval times and cut back on what he sees as regulatory red tape.

Last year also saw little major biopharma M&A activity, not that unusual in an election year and the uncertainty it brings, but the issues of drug pricing (or gouging) and a potential upheaval of healthcare in the U.S., served to only further dampen big mergers.

Glen Giovannetti, EY’s global biotechnology leader, tells me: “A robust public financing market is primarily driven by interest from “generalist” investors who rotate into the sector because they believe it is poised to out-perform the overall market. At the moment, the uncertainty around topics like healthcare reform and tax reform (including the possible impact on M&A) may keep overall enthusiasm tamped down. As you note, venture financing on the other hand is very strong by historical standards so private companies should have reasonable access to capital to bridge to an IPO transaction.”

R&D spending, a key indicator of the future health of the sector EY notes, hit a record high of $45.7 billion last year, a 12% jump from the prior year. 

But while financing was up for some biotechs, revenues for U.S.- and Europe-based biotech companies hit $139.4 billion in 2016, nudged up just 7% from the prior year.

Net income, meanwhile, dropped an eye-watering 52% year-over-year to $7.9 billion, and financing overall dropped 27% to $51.1 billion in 2016, the first decline in four years, although this is still the third highest industry total, the authors say.

The U.S. remains, as ever, the “biggest source of innovation”, according to the report, but both China (which has an embryonic but rapidly developing biotech sector) and a pre-Brexit U.K. are also producing the good, EY notes.

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But, as always, the question over biotech’s research model lingers, and Giovannetti explains: “R&D productivity is a continuing challenge for the industry and this challenge will continue to grow as top-line revenue and margins are impacted by payer pressure on drug pricing and access. Quite simply, the industry can no longer afford the high level of inefficiencies in its R&D operations that it could when it was commanding premium prices for its products. Companies have sought to address these challenges in a number of ways – starting with their R&D strategy and a focus on rare diseases or other segmented patient populations (for example based on a biomarker).”

He says that there remains “significant opportunity to drive incremental efficiencies across the R&D process,” including decisions regarding which drugs will advance into the clinic, through clinical development, and from trial design through execution.

“In part, digital technologies including advanced analytics, artificial intelligence and even social media are tools that will increasingly be leveraged in pursuit of higher productivity.”