Will You Sink, Survive, Or Thrive In This Biotech Market Correction?

By Arda Ural, EY

Over the past 18 months, biotech has undergone a major transformation, down from the “sugar high” of the biotech bull market and steady flow of capital in the early pandemic years. And looking from the past to the future, both biotechs and Big Pharma must address innovation deficits and search for new revenues to offset the coming wave of patent expirations. All of this is amidst reduced capital availability in a landscape of higher interest rates, tightening credit conditions, and ongoing macroeconomic and geopolitical turmoil.

According to our recent analysis of biotech, the sector can forge ahead by driving capital allocation, streamlining core operations, and maximizing both organic and inorganic growth.

Setting The Stage: Biotech Financing Today

After a huge revenue surge in 2021, driven by the booming market for COVID-19 vaccines, therapies, and testing, biotech’s growth has normalized. Public biotech companies in the U.S. and Europe collectively amassed revenues of $215 billion in 2022, down 1% from the previous year. But despite the reduction in short-term demand for pandemic-related products, the underlying industry maintained stable growth. Last year, without the revenue impact of COVID-19 products in the portfolios of five leading biotechs alone, the industry’s revenues inched forward 3.7%.

Recent macroeconomic headwinds have further challenged the sector. Reduced levels of debt financing, down 10% year-over-year, are in response to rising interest rates. More concerning for smaller biotechs is the 62% drop in follow-on public offering capital raised, as well as the effective near disappearance of the biotech IPO market, which fell by 93% in 2022.

According to our analysis, 55% of public biotechs tracked have less than two years of cash on hand, as proven out by announcements of layoffs over the last six months. But this is a story of the “haves” and “have-nots,” as those biotechs with strong data have been able to tap into the $1.4 trillion in capital from Big Pharma, resulting in $76 billion in announced deals thus far in 2023.

How To Navigate The Complex Path Ahead

The coming waves of patent expirations will further challenge life sciences companies, from emerging biotechs to the largest pharma players. Biotechs are an integral part in this crucial innovation engine, with entrepreneurial biotechs driving R&D while larger established biopharma companies are best at drug development, manufacturing, and commercialization.

January 2023 saw a landmark loss of exclusivity with the U.S. launch of Amgen’s first biosimilar version of AbbVie’s Humira (adalimumab), among the best-selling drugs of all time. This event is just the beginning, as four other blockbuster monoclonal antibodies that commanded over $14 billion in total 2022 revenues are also facing patent expirations and market challengers by the end of 2023. Further, the next five years will see another 17 products, currently representing more than $145 billion in annual revenues, lose their patent protection and surrender market share to lower-priced competitors.

Faced with the loss of these products’ established income, the industry will be dependent on biotech’s capacity to replenish lost revenues to sustain growth. The industry has enjoyed notable success in developing and launching new products in recent years, with an annual average of 69 FDA approvals for new molecular entities (NMEs) and biologics license applications (BLAs) over the past five years. In 2022, the number of FDA approvals dropped to 49 (37 NMEs and 12 BLAs), driven by staffing shortages. From January to June 2023, the FDA has approved 26 NMEs and 10 BLAs, showing a strong return to previous years’ performance. But despite fluctuating approval rates, biopharma innovation remains healthy; according to one credible estimate, the global clinical pipeline contains over 20,000 active drug candidates.

However, this innovation ecosystem has come under scrutiny from recent actions by regulators. The Inflation Reduction Act is forcing manufacturers to take increased price concessions from Medicare, and the Federal Trade Commission is trying an unprecedented argument that acquisitions would limit access to medications. These regulatory challenges may stifle the R&D engine that fuels biotech and pharma’s growth. Financing for early-stage biotechs may decrease further as pharma realizes the effects of pricing power constraints, and it may influence the prioritization of sequence product candidates, given the nine years of protection for small molecules vs. 13 years for biologics.

Creating a more efficient biotech ecosystem that focuses on the fundamentals and takes a new path forward will involve “doing less with more.” With opportunities for additional funding looking increasingly scarce, biotechs — particularly those in the early stages of maturity — need to manage their cash burn to reach their next value-inflection point. Biotechs that want to attract capital or be acquired by a large pharma in this environment must demonstrate solid clinical trial results and have a strong management team.

Companies can take several actions to operate more efficiently during the current market correction and demonstrate their overall resilience until investment in the sector cycles back to more prosperous times.

• Show data-driven value: Biotechs need to be able to articulate a clear, data-driven value proposition that shows how current cash will get them to the next milestone and how that next milestone will continue advancing that value proposition. Being able to validate a product or technology in the clinic or through partnership with a larger player will help attract further investment. Many large pharmas are opting to forgo traditional acquisitions and create alliances that let them de-risk an asset or explore a platform. These types of alliances have many benefits for biotechs, allowing the smaller company to access some of the expertise, knowledge, and resources of its larger pharma partner.
   
• Manage the cash burn: Preserving cash to deploy to core R&D activities is essential, and it requires companies to deploy variable cost structures for non-core activities. Key actions include using resources such as contract research organizations as well as contract development and manufacturing organizations to further reduce infrastructure and talent costs. Smaller companies have a lot of opportunities to pool their resources with other smaller biotechs at incubators or places that offer labs as a service. Utilizing the biotech ecosystem can help these enterprises capitalize on the efficiencies of scale by sharing office space, lab space, expensive lab equipment, and support staff, thus cutting much of their back-office expenses.
   
• Rely on technology: Advances in technology give biotechs the freedom and power to connect with patients in any geography and allow operations to run more efficiently, enabling staff to focus on more value-added tasks. Biotechs also can tap into data from wearable technology or use virtual clinical trial models to help them move their product or platform to the next stage more quickly.
   
• Grow responsibly: One of the most expensive costs for a small company is talent. Smaller companies should consider operating leaner at first. Instead, they can expand the team slowly and rely more heavily on the operational knowledge of their VC investors, who often have access to highly skilled talent pools and can participate in company management. Further, they typically bring a wealth of expertise gleaned from their participation in a variety of startups. As such, VC firms don’t just provide capital investment; they also frequently invest time and know-how.

Ultimately, while biotechs must evolve their operating models due to the current changing landscape, innovation will remain the core strength of the industry and the heart of the biotech business model. The challenge of the patent cliff could be an inflection point for the industry, as biotech’s innovation renaissance becomes the critical revenue driver for the wider biopharmaceutical industry.

As biotechs adjust their operations to focus on their fundamentals, they must fuse their innovative energies with a greater focus on discipline and efficiency. If they do, the industry has an opportunity to become an even more essential — and resilient — component of the biopharma ecosystem.

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. He 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.