EY Biotechnology Report 2017: Beyond borders - Staying the course

Biotechnology Industry Report 2017
Staying the course
Beyond borders

Biotechnology Industry Report 2017 | Beyond borders
Beyond borders 2017
Key trends and implications

Despite multiple uncertainties, the biotech industry
stays the course in 2016
Industry financing dips 27%, but …
… is third highest total in 31 years
Decline in IPOs and follow-ons, but …
… robust early stage VC investment
Deal milestones more common, but …
… M&A total second highest in history
Market cap falls below US$1t, but …
… rebounded in 2017
Net income drops 52%, but …
… R&D spending hits new record
FDA approvals drop sharply, but …
… FDA remains science and access focused
Ongoing drug pricing pressure, but …
… industry adapting to value-based payments

In the dynamic biotech landscape, the only certainty is
uncertainty
“I can’t think of a period that has been
characterized by so much uncertainty as the past
six to nine months. … The uncertainty is a factor
that comes up in every board meeting I attend.”
– Alan Mendelson, Partner
Latham and Watkins
Successful companies have “learned to filter that
[uncertainty] out and focus on the things that are
right for the company. There may be tax reform.
There may be repatriation. But you can’t count on
it – and you can’t wait for it either.”
– John Milligan, CEO
Gilead Sciences

Key performance metrics for US and EU biotechs (US$b)
Numbers may appear inconsistent because of rounding.
Commercial leaders are companies with revenues in excess of US$500m.
Sources: EY; S&P Capital IQ and company financial statement data.

Financial performance of US biotechnology commercial
leaders and other companies (US$b)
US biotechnology: commercial leaders and other companies (US$b)
2016 2015 US$ change % change
Commercial leaders
Revenues 98.8 93.7 5.1 5%
R&D expense 21.9 18.8 3.1 16%
Net income (loss) 29.1 32.0 (2.9) (9)%
Market capitalization 522.0 660.3 (138.3) (21)%
Number of employees 87,930 77,823 10,107 13%
Other companies
Revenues 13.4 13.7 (0.3) (2)%
R&D expense 16.9 15.2 1.8 12%
Net income (loss) (19.9) (16.6) (3.2) 19%
Market capitalization 176.7 231.0 (54.3) (24)%
Number of employees 47,846 52,316 (4,470) (9)%
Numbers may appear inconsistent because of rounding.
Commercial leaders are companies with revenues in excess of US$500m.

Financial performance of European biotechnology
companies (US$b)
European biotechnology: commercial leaders and other companies (US$b)
2016 2015 US$ change % change
Commercial leaders
Revenues 23.6 19 4 23%
R&D expense 3.5 3.8 (0) (8)%
Net income (loss) 2.0 3.0 (1) (32)%
Market capitalization 120.9 43.3 78 179%
Other companies
Revenues 3.7 3.6 0 3%
R&D expense 3.4 2.9 0 16%
Net income (loss) (3.3) (2.0) (1) 66%
Market capitalization 43.2 132.3 (89) (67)%
Source: EY, S&P Capital IQ and company financial statement data.

Financing
Investors downshift in 2016

2016 was another strong year for “innovation capital” in
the US and Europe
Sources: EY; S&P Capital IQ and VentureSource.

VC investment in early stage US- and EU-based biotechs
is a reason for optimism

US and European venture investment by round
Sources: EY; S&P Capital IQ; VentureSource.

New sources of capital are emerging, especially in Asia
Size of bubbles shows number of financings per region
Innovation capital is the amount of equity capital raised by companies with revenues of less than US$500 million.
Sources: EY; S&P Captial IQ and VentureSource.

Dealmaking
Dealmaking remains active, though not as lucrative, for biotechs

2016 was another strong year for biotech M&A
Chart excludes transactions where deal terms were not publicly disclosed.
Sources: EY; S&P Capital IQ; MedTRACK and company news.

US M&As (2007–16)

European M&As (2007–16)

Top biotechnology IPOs by region (2016)
Sources: EY; BioCentury; S&P Capital IQ and VentureSource.

Navigating complexity: key issues for biotechs

Continued success requires the ability to navigate
complexity on multiple fronts
1
Product
reimbursement
2
R&D
efficiency
3
Digital
strategy
4
Deal-
making
How can
biotechs
accelerate
value-based
payment
models?
How can biotechs
improve the ROI for
their R&D spend?
What deal structures
and partners give
companies the most
optionality?
What technologies
should companies
invest in today?
5
Financing
volatility
What sources of
financing are most
relevant?

Complexity: product reimbursement
As conversations shift from price to value, what steps do biotechs need to take?
► As emphasis on demonstrating value grows, biotechs should consider:
► Investing in real-world evidence to capture patient-centric data during
development
► Using biomarkers to segment populations to demonstrate improved efficacy
► Incorporating stakeholders’ definition of value into pricing decisions
► Around-the-product services that will enable better outcomes
► Proactive pay-for-performance deals with payers (depending on therapeutic area)
Future strategiesTraditional strategies Emerging strategies
Rebates
and
discounts
Patient
assistance
Indication-
specific pricing
Financial-
based risk
sharing
Performance-
based risk
sharing
Annuity
models
Capitation
1

Complexity: R&D efficiency
How can companies improve efficiency via new technologies and capabilities?
► Right drug to right
patient at right time
► Highest use in
oncology
► Shortened
development time
► Increased probability
of success
► Increase probability
of success
► Reduce capital
invested
► Shortened
development time
► Increased sales
► Using technology to
monitor trials
remotely
► Increased regulatory
compliance
► Shortened
development time
► Use social, mobile
and big data
► Develop disease
models and
advanced
therapy solutions
► Targeted clinical
recruitment
► Real world efficacy
and safety
Precision medicine
Biopharmas must overcome challenges to transform the R&D process.
Emerging
understanding of
disease
Data security and
governance issue
Partnering with new
players
Lack of FDA
guidance-
regulatory fears
Lack of resources
(talent and funds)
2
New trial designs
Risk-based
monitoring
Data analytics

Complexity: digital strategy
Technological advances will change biotech value chain
Smart and connected
Sensors
Device miniaturization
Artificial intelligence
Cheaper sequencing technology
Block chain
3-D printing
Cloud computing
Robotics
Memory processing
More data has been created in the past
two years than in the entire previous
history of the human race.
Empowered by data
Data-focused companies are disrupting
the retail, entertainment and
transportation industries.
Data generation + new technology will
disrupt traditional biotech R&D and
commercial activities.
3

Complexity: dealmaking
What deal structure give biotechs the greatest optionality?
► A significant portion of biotechs will be acquired at some point:
► From 2012-16, 10 of 37 commercial leaders (US and EU) were acquired
► How can companies be more strategic to realize full value from portfolio?
M&A
optionality
Option to buy
LLC model
Single asset co Sell minority stake
Divest business
Spin out assets
Biogen/Bioverativ
JNJ buys Actelion; spins out
Idorsia
Lonza sells peptide biz
to PolyPeptide
Roche/Genentech
Gilead/Nimbus Apollo
program in NASH
Takeda/Maverick
Therapeutics
Medicxi funds Kymo
Therapeutics through POC
4

Complexity: financing volatility
Sharp decline in US and EU IPOs underscores financial volatility
5

Complexity: financing volatility
How can biotechs build access to multiple pools of capital?
► Ongoing market volatility driving financial volatility:
► IPO window didn’t slam shut in 2016-17, but for many, it’s not open
► Tougher climate for follow-ons
► Private companies tapping a more diverse set of investors (by type
and geography):
► Traditional venture vs. corporate venture/biopharma business
development
► Foundations/family endowments vs. growth investors
► Life sciences vs. technology
► US vs. Europe vs. China/Asia-Pacific
► Long time cycles and cash required to bring products to market still
bias to public listings
5

EY survival index for US and EU biotechs (2015–16)
Chart shows percentage of biotech companies with each level of cash. Numbers may appear inconsistent because of rounding.

Beyond borders 2017: key findings
Payers’ cost containment efforts result in slowing top-line
growth for biotechs.
Product reimbursement1
R&D investment increased but FDA approvals dropped;
improving R&D efficiency is an ongoing area of focus.
R&D efficiency2
Partnering with new technology entrants to access new
digital capabilities is a key topic.
Technological change3
Capital markets pull back significantly in 2016; biotechs
must take advantage of a broader investment pool.
Financing4
M&A activity remains strong, but up-front commitments for
alliances decline as biotech valuations fall.
Dealmaking5

When the only
certainty is
uncertainty, is
staying the course
your best bet?

Additional resources
Contact an EY advisor:
► Glen Giovannetti
EY Global Biotechnology Leader
glen.giovannetti@ey.com
► Jürg Zürcher
EY Biotechnology Leader,
Germany/Switzerland/Austria
juerg.zuercher@ch.ey.com
► Ellen Licking
EY Global Life Sciences Senior Analyst
ellen.licking@ey.com
Also:
► Download the report:
ey.com/beyondborders
► Explore/subscribe for new content:
ey.com/VitalSigns
► Follow us on Twitter:
@EY_LifeSciences

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All Rights Reserved.
EYG no. 04481-174Gbl
CSG no. 1706-2348176
ED None
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EY Biotechnology Report 2017: Beyond borders - Staying the course

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