The 34th edition of the Ernst & Young LLP (EY US) Beyond Borders report finds US and European biotech companies are seeing early signs of a thaw in the financing and dealmaking environment. Change in fiscal policy by lowering the interest rates in the months ahead can accelerate this positive shift within the second half of the year. In addition, the pressing need to replenish the revenue of big pharma to counteract the loss of exclusivity of products totaling more than US$300 billion, and continued scientific innovation, will drive the sector forward by meeting unmet medical needs. For the last two years, the industry saw significant challenges around a constrained financing environment, leading to many emerging and early-stage biotechs having to restructure their operations by cutting staff, merging with other companies or narrowing R&D focus by shelving some of their pipeline assets.

Arda Ural, PhD, EY Americas Life Sciences Sector Leader, says:

"Despite the Federal Reserve delaying action on interest rates, biotechs still have grounds for continued cautious optimism. The combination of record-level dealmaking capacity seen throughout 2023, firepower of big pharma and the healthy innovation capacity of the sector, including possibilities from artificial intelligence, will ultimately help the biotech sector to not only survive but thrive in the mid- to late-term."

Revenues still reflect pandemic's one-time historical comparisons: While the aggregate sector revenue was down for a second consecutive year, historically it trended upward at 4.8% per year for the last decade. Between 2015-2021, it grew at 9.2% per year, due to the spike from the COVID-19 vaccine and therapeutics launched in 2021. Breaking away from this long-term secular trend, the revenue decreased in 2023 along with the decline in pandemic medication sales. We believe the revenue level will return to its historical trend, once free of these pandemic-related disruptions.

Innovation remains robust: In 2023, the U.S. Food and Drug Administration (FDA) approved 80 novel biopharma products across the Center for Drug Evaluation and Research (CDER) and the Center for Biologics Evaluation and Research (CBER), representing one of the highest total approvals matched only by 2018. The enthusiasm about vaccines, mRNA-based technologies and autologous cell therapies (ACTs) have been replaced by cardio-metabolic products, especially GLP-1 receptor agonists, radiopharmaceuticals and antibody-drug conjugates (ADCs). Oncology and immunology are still the top of the therapeutic areas in terms of investment, and neuroscience is quickly emerging based on the tremendous unmet need within the therapeutic area.

Continued cautious optimism for the deal outlook: Healthy deal activity early in 2024 was an indication of a pent-up demand, and when the macro conditions normalize with the Fed tapering the interest rates, further activity is expected. The shift to dealmaking will be supported by underlying secular demand from the big pharma for technologically de-risked assets to replenish and fuel topline growth, and the record level firepower, currently estimated more than US$1 trillion at the end of the first quarter of 2024, will be further deployed through the back half of 2024. When the deals do get done the deal premiums (difference between the share price one day prior to announcement and the offer price) are at an all-time high of 83%, suggesting that the late-stage, good quality assets can garner significant investor interest.

Access to public or private funding remains an existential challenge to fuel early-stage innovation: IPOs will continue to be selective and below the historical annual average. Public markets kept the Biotech Index flat when baselined to January 2020, while the S&P recorded major gains of 57% in the same period thanks to tech companies fueled by the generative artificial intelligence (GenAI) tailwind. Venture funding is anemic, the follow-on financings appear to have improved over the 2022-2023 period, yet at suppressed valuations. As a result, our analysis suggests that almost a third of biotechs do not have sufficient cash to sustain their operations over a year.

Beyond Borders analyzes the state of the industry through a summary of US and European public company revenues, financing, M&A activity, alliances, product approvals and other factors. The report offers executives a deep dive into current affairs as well as a future-forward outlook.  

Rich Ramko, EY US Biotech Leader, says: "With the patent cliff for big pharma and uncertainty around the IRA, faith in innovation will be one of the key pillars in biotechs' strategies for continuing recovery from the tough times experienced in 2022 and 2023. For now, financing is still catching up, and capital access remains an issue for many companies in the sector. However, biotechnology remains an innovation-driven industry, and innovation is thriving."

Other key findings include:

• An uptick for IPOs: Following a drastic fall of 93% in IPOs from 2021 to 2022, IPO investment in biotechs nearly doubled to US$2.9 billion in 2023. Although still extremely modest, 2024 is showing signs of further IPO recovery continuing into the year.

• Venture activity remains stagnant: Venture financing stayed flat at US$18.9 billion in 2023, below the five-year historical pre-pandemic average of US$47.5 billion. Early-stage venture investment in 2023 was down 8.7% from 2022, with early-stage assets bringing in only US$12.48 billion for the full year. However, companies that have strong scientific rationale and an experienced management team have still been able to bring in venture investments in a challenging financing environment. The first quarter of 2024 saw biotechs bringing in US$5.8 billion in venture financing.

• Alliances take high-profile role since COVID-19: As big pharma compensates for decreased M&A spending from 2020 to 2022, alliance spending has become the leading alternative. Furthermore, alliances have offered companies a lower-cost, lower-risk approach to accessing innovation in parallel with the rise in M&A spending, suggesting big pharma partners may be pivoting back towards outright acquisition. The total potential value for 2023 alliances was US$125.3 billion, which is still more than the totals committed to these partnership deals prior to the pandemic but falls below the level seen in 2020, 2021 and 2022.

• Oncology remains dominant commercial focus for pharma: As both the largest and fastest growing sector among the major therapeutic areas, oncology will account for 33% of biopharma's overall growth in the next five years. Its central importance is reflected in the number of new products reaching the market, the number of clinical trials targeting cancer and the higher M&A investment in oncology products than any other biopharma assets.

Although 2023 revenues for European and US public companies dropped 10.7% from 2022 after a profitable spell throughout COVID-19 for vaccine makers, debt and follow-on financings in 2023 surpassed that of 2022, jumping nearly US$9 billion to US$29.4 billion.

However, the decline in revenue still remains top-of-mind for executives across the sector, forcing leadership to make hard decisions about securing the future of their companies. In 2023, the number of biotechs publicly traded across the US and European Union (EU) dropped by 5.3%, with some companies forced to file for bankruptcy. While not all biotechs were driven to these extremes, many companies still had to cut staff, dropping 1.7% of the work force to conserve cash and create efficiencies. In this instance, companies have looked to strategically adapt their business models to become more optimized, driving a flurry of deal activity and an 86% increase in M&A compared to the previous year, and a 38% increase on the previous five-year average.

The utilization of commercialization activities is another trend of focus for biotechs who have been affected by the lack of M&A activity over the last two years. And though M&A has started to thaw in 2024, many companies are now choosing to leverage social media and the internet with creative co-promotional partnerships and hyper-personalization for patients to make an impact. User-generated content and success stories or endorsements by key opinion leaders and influencers has proven useful to bolster name recognition and create positive buzz around a product – often at no cost to the company.

"We're seeing about one-third of product launches coming from companies that are commercializing their first-ever product, so it's becoming even more critical to be effective," says Ashwin Singhania, Principal, EY-Parthenon, Ernst & Young LLP. "Especially due to the lack of M&A and dealmaking issues, companies must remain strategic and adaptable in their efforts, and let's remember that 31% of biotechs have less than two years of cash on hand. This turbulence has caused many companies to fail fast and pivot their strategies quickly, which in turn proves the durability of the sector heading further into 2024."

To read Beyond Borders, visit www.ey.com/beyond-borders.