Biotechs waded a storm in 2016, but can they stay the course?
- The biotech industry delivered a solid performance in 2016 despite regulatory and pricing headwinds, offering optimism that the smaller drugmakers should be able to power through future uncertainties, a new report suggests.
- In the latest installment of its Beyond Borders report, professional services provider Ernst & Young (EY) found financing of U.S.- and Europe-based biotechs dropped 27% last year, compared to 2015. The industry's market capitalization also fell 17% to $863 billion, while revenues sunk to single-digit growth.
- Still, "biotech largely stayed the course in 2016 and was able to deliver historically strong results across a number of key metrics," the report concluded. Particularly noteworthy was the $45.7 billion those medicines makers spent on R&D — a 12% increase year-over-year and a signal of the industry's future health.
The U.K. exiting the European Union, the potential repeal of the Affordable Care Act, the Trump Administration's stance on funding the National Institutes of Health. These factors and many others are contributing to a atmosphere of uncertainty for the pharmaceutical sector, an atmosphere that biotechs must learn to navigate.
Thus far, they've done a pretty good job, according to EY. Financing, for example, fell because of fewer initial public offerings and follow-on venture funding, yet a medley of investments from Asia helped 2016 become the third best financing year on record.
What's more, the extensive timetable between when researchers discover drugs and when companies bring them to market means short-term political or economic instabilities aren't as impactful to decision makers at early-stage biotechs.
"That question of what's in your control and what's not in your control is probably the threshold point," Glen Giovannetti, global biotechnology leader at EY, said in an interview. "You can't predict when tax reform will happen or if it will happen, you have to keep your eye on things like healthcare reform that could affect budgets and so forth. But there are other elements — like the specific drug you're developing and its likelihood to actually be paid for if you're successful — is something that needs to be taken into account."
A key area biotechs will have to reckon with sooner rather than later is R&D efficiency. It costs drugmakers between $1 billion and $2.5 billion to usher a single product from discovery to commercialization, and traditional solutions for offsetting that cost, such as increasing a medicine's list price, are now harder to rely on, given the growing pushback from pharmacy benefit managers (PBMs), payers and lawmakers.
To that end, both biotechs and pharma need to cut R&D expenses or risk having the return on investment for their products "eventually fall to levels that threaten the sector’s viability," EY argued.
Employing artificial intelligence (AI) during the discovery phase to better identify drug targets is one potential cost-saving action. Another is adopting various predictive analytics and diagnostics in the clinical setting to hasten trials or determine which patients have the best chance of responding to treatment.
Some companies have already started those processes too. In September 2015, Berg Health, a Boston-based provider of AI technology, announced a partnership with Genomics England under which it would join a consortium of healthcare stakeholders to help process data from thousands of sequenced genomes, with the ultimate goal being accelerated drug development. Big pharmas have also entered the consortium, including AbbVie, AstraZeneca and Roche.
Though technology may be vital for lowering R&D costs, it also presents its own challenges. Namely, big tech companies including Apple and Alphabet are moving deeper into the realm of pharmaceuticals and could be market disrupters.
In some ways, the disruption has benefited existing players. Take Johnson & Johnson, which entered into a deal with IBM Watson over two years ago that aimed to improve the parties' understanding of patient behavior and targeted therapies.
EY warned, however, that there will likely be downsides.
"But make no mistake: technology firms, wellness companies and other nontraditional players awash in consumer and patient data are encroaching on traditional biopharmaceutical territory," EY said in the report. "It’s not hard to imagine a near future where a digital tool can improve patient outcomes as well — or almost as well — as a traditional drug therapy."
"Convincing regulators, physicians, payers and patients to adopt such a digital therapeutic instead of or prior to drug therapy is no idle threat to certain biopharma business models — especially when that intervention comes at a much lower price, and certainly without the threat of unwanted side effects or drug-drug interactions," EY added.
- EY Report
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