- INVESTOR INTEREST CONTINUES AMID SOLID GROWTH AND SIGNIFICANT RETURNS -
Chicago – Amid robust growth opportunities and investor interest, biotech companies are increasingly focused on research and development (R&D), according to the fourth annual study from BDO USA, LLP. In fact, average R&D expenditure at biotechs increased 14 percent in 2013.
The 2014 BDO Biotech Briefing, which examined the most recent 10-K SEC filings of publicly traded companies listed on the NASDAQ Biotechnology Index, found that average R&D expenditures reached $56.5 million in 2013, up from $49.5 million in 2012 and $44 million in 2011. The increase in R&D spending coincides with an 11 percent increase in revenue. However, large companies (over $50 million in revenue) on the index are the ones fueling this revenue growth. Among large biotechs, average revenue increased 28 percent to $137 million, while small biotechs saw a decline in average revenue for the second year in a row.
Despite revenue growth overall, biotechs are seeing larger losses amid increased expenditures. On average, biotechs reported $65 million in losses, up from $53 million in 2012 and $38 million in 2011. Eighty-six percent of companies studied reported losses in 2013, down slightly from 2012.
"Biotech continues to be an industry to watch," said Ryan Starkes, partner and leader of the Life Sciences Practice at BDO. "R&D spending is on the rise as biotechs look to leverage cash reserves and capitalize on accelerated timelines and increased approvals from the FDA. Already this year, the FDA has approved 27 new molecular entities, which should bode well for industry investors and biotechs with late-stage projects well into 2015."
Additional findings from the 2014 BDO Biotech Briefing include:
Biotechs Find Success with Equity Financing. In 2013, 78 percent of biotechs secured financing, up slightly from 2012. Among companies who raised capital, nearly all (95 percent) did so through the equity markets. Companies seeking equity financing raised $81 million on average, 28 percent more than companies raised in 2012. Small biotechs were particularly successful, raising an average of $90 million, up from $68 million in 2012. Such successes highlight investor confidence in the long-term expectation of return on capital. Investors are rewarding biotechs that have long-term growth strategies by funding innovation and new products, despite short-term operating losses. The few companies that did pursue debt financing also found success, securing an average of $85 million, up notably from $58 million in 2012.
Headcount Holds Steady. Despite continued growth and investment in R&D, headcount at biotechs dipped slightly in 2013. Following two years of increases, biotechs reported an average of 218 employees, three percent lower than 2012 levels. While some biotechs may have right-sized their resources over the past few years, strong growth and significant interest among investors is promising for employment. Competition for top talent among biotechs remains fierce. BDO's second annual Life Sciences RiskFactor Report found that 94 percent of life sciences companies cite their ability to attract and retain talent as a critical risk to their business.
Liquidity Remains a Top Priority. As biotechs fund R&D and growth initiatives, cash reserves continue to be a priority. In 2013, biotechs reported an average of $159 million in liquid assets, up 26 percent from 2012 and 47 percent from 2011 levels. Biotech companies' prudent cash management affords them an equivalent of 2.8 years worth of R&D expenditures on hand. This is up slightly from about 2.5 years worth of R&D spending reported over the previous two years. Large biotechs were particularly prudent in 2013, reporting $174 million in liquid assets, nearly three years worth of R&D spending.
Strong Returns Help Fuel Biotech IPO Flurry. Biotechs continue to offer exceptional shareholder value. In 2013, biotechs reported an average total shareholder return of 85 percent. This trend is consistent with positive forecasts around biotech companies' earnings. According to S&P Capital IQ, the biotech sector's profits are expected to grow 35 percent in 2015. Small biotechs were a particularly strong investment, reporting over 100 percent in total shareholder return. In addition, the average market cap of companies in the study, as of the end of their most recent fiscal year, reached $881 million, a significant increase over the average market cap of the companies analyzed in 2013 ($653 million). Companies appear eager to capitalize on stellar returns and soaring investor interest in the biotech industry. According to Renaissance Capital, there have been 51 biotech IPOs this year, up 113% over the same period in 2013, and after a summer lull, the pipeline for new offerings looks robust.
"Despite investor fears over major patent losses and recent market setbacks, biotechs have adjusted well to these hurdles," said Aftab Jamil, partner and leader of the Technology & Life Sciences Practice at BDO. "The NASDAQ Biotechnology Index is up and even outperforming the S&P 500, making the environment more attractive to investors, ripe for IPOs and beneficial to companies looking for access to capital markets to fund future innovations."
About the 2014 BDO Biotech Briefing
The BDO Biotech Briefing examines the most recent 10-K SEC filings of companies listed on the NASDAQ Biotechnology Index. Companies reporting more than $300 million in revenue were excluded to ensure findings are representative of the vast majority of companies included in the NASDAQ Index. Remaining companies were divided into two groups—those with more than $50 million in revenue and those with less than $50 million in revenue—to identify trends and key metrics relevant to each group. The average market cap of companies in the study as of the end of their most recent fiscal year is $881 million.
About the Technology & Life Sciences Practice at BDO USA, LLP
BDO has been a valued business advisor to technology and life sciences companies for over 100 years. The firm works with a wide variety of technology clients, ranging from multinational Fortune 500 corporations to more entrepreneurial businesses, on myriad accounting, tax and other financial issues.
BDO is the brand name for BDO USA, LLP, a U.S. professional services firm providing assurance, tax, financial advisory and consulting services to a wide range of publicly traded and privately held companies. For more than 100 years, BDO has provided quality service through the active involvement of experienced and committed professionals. The firm serves clients through 52 offices and more than 400 independent alliance firm locations nationwide. As an independent Member Firm of BDO International Limited, BDO serves multi-national clients through a global network of 1,264 offices in 144 countries.
BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.