E&Y: Biotech budget hawks rule the roost in year of mixed performance

Public biotech companies around the world stayed on a healthy pace last year, boosting top and bottom-line revenue together and extending a solid improvement in the industry's financial performance into its third year, according to Ernst & Young's annual checkup on the numbers. But with drug developers tapping their foot on the brake for R&D spending and a significant drop in debt funding, most companies are clearly watching every dollar, pound and euro in the budget like a hawk. And some of the economizing may prove costly if they fail to understand the major shift now underway in R&D requiring a much bigger focus on demonstrating the value of new treatments.

By the numbers, E&Y found that:

  • R&D spending growth slowed to 5%, down from a 9% hike the year before. Commercial leaders in the field are acting bullishly, says E&Y, but the average pre-commercial biotech cut spending. The caution in R&D helped push net income to $5.2 billion, up from $1.4 billion the year before.

  • Debt funding plunged by a third, which was primarily responsible for the drop in the total amount of cash raised in Europe and the U.S., down to $28.2 billion in 2012 from $33.3 billion the year before.

  • The IPO market, which has begun to show signs of life in early 2013, put in another poor performance in 2012, raising a meager $805 million after posting $857 million the year before.

  • Venture funding, meanwhile, shriveled by 5%. But E&Y counts that as a victory, given the rather bleak long-term trend in fundraising among VCs in general. M&A, though, bumped up 9% to $27.4 billion in 2012 – provided you drop the two megamergers in 2011. That jump helps demonstrate the growing importance of M&A to rank and file companies during a time of weak IPO performance.

E&Y also had a clear warning for developers: Anyone looking to eventually market a new therapy needs to understand that they must demonstrate value if they ever expect to generate revenue, as payer risks continue to rise.

"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 Glen Giovannetti, Ernst & Young's Global Life Sciences Leader. "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."

- here's the release
- and the full report (PDF)

Special Reports: Biopharma's Top R&D Spenders - 2012 | The Biggest R&D Spenders in Biotech

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