Biopharma giants need to launch new innovative treatments that can generate the revenues needed to offset the sales they will lose as longtime top-selling blockbuster drugs lose patent protection.
More than 20 products representing nearly $200 billion in annual sales are expected to lose patent protection by 2030. They include 11 Pfizer products led by Eliquis® (apixaban) and Ibrance® (palbociclib), the company’s two biggest revenue generators in 2022 outside its COVID-19 franchise; and three Amgen drugs led by Enbrel® (etanercept), whose sales fell 8% last year but still racked up $4.044 billion.
For those and other expiring blockbusters, few replacements appear in sight, as the number of new molecular entities (NMEs) and biologics license applications (BLAs) that won FDA approval last year dropped to 49 (37 NMEs and 12 BLAs), from the average 69 each year between 2017 and 2021.
More than half (55%) of emerging biotechs—companies with less than $500 million in annual revenue—face an even steeper hurdle: They lack the cash they needed to sustain their operations for the next two years, with 29% having less than one year’s cash remaining, up from 18% in 2021.
The parallel challenges faced by biotechs and biopharma giants were laid out in a state-of-the-industry report released Tuesday by EY, the global consultancy once known as Ernst & Young, to coincide with the recent 2023 BIO International Convention held in Boston by the Biotechnology Innovation Organization.
In its latest edition of its annual industry reports—“Beyond Border: A Complex Path Forward”—EY laid out a parallel set of challenges for small and giant biotechs alike.
“Biotechs are facing a complex path ahead. They need to prioritize their capital allocation to navigate distressed public and capital markets, increased regulatory scrutiny and macroeconomic disruptions. The good news is that the innovation capacity of the industry remains strong in the long-term.
Arda Ural, PhD, EY Americas Industry Markets Leader, Health Sciences and Wellness, a co-author of Beyond Borders, discussed the updated report with GEN Edge (This interview has been lightly edited for length and clarity).
GEN Edge: How will the biopharma giants pursue the innovation they need, and why?
Arda Ural: Big Pharma will be facing a large patent cliff to the tune of over $200 billion between 2023–2026. As a result, the industry has a massive gap between the topline that will be challenged and the pipeline to support it. As a result it needs to both increase its productivity from existing in-market products as well as accelerate its pipeline. However, the industry will also need to explore inorganic growth given the size of the gap through bolt-on acquisitions, M&A and alliances.
While 2022 showed a limited appetite for M&A deals—the $83.6 billion spent on 47 deals in 2022 fell below the five-year average of $107.2 billion—M&A still plays a critical role within the biotech ecosystem. Early 2023 showed more deal activity given the pent-up demand and backlog.
Emerging-stage biotechs are not seeing an abundance of financing facilities. About 55% of those companies do not have sufficient cash to sustain their operations and development more than two years.
GEN Edge: Will we see more collaborations (and with which types of partners?) or more M&A?
Ural: Since the market uncertainty, emerging-stage biotechs are unable to access capital via IPOs [initial public offerings] or SPACs [special purpose acquisition companies]. Debt financing also was negatively affected through SVB going down. The Venture Capital still exists but at lower valuations and leading to down-rounds. A large number of biotechs were acquired by other biotechs, which accounted for nearly 44% of all M&A spending in the sector (compared to over 28% in the last five years).
GEN Edge: We’ve seen so far a bit of a bounce back for M&A after a couple of down years. Can we expect that to further increase, in both dollar value and deal volume?
Ural: Biotech’s commercial leaders also focused two-thirds of their capital allocation in 2022 on growth investment, with $43 billion being spent on R&D in addition to the $36 billion spent on M&A—the sector’s highest spend on deal making since 2016. This gives us reason to believe that once the market conditions improve, biopharma leaders may return to large-scale dealmaking by the end of this calendar year.
Another reason to expect a resurgence is due to the amount of capital available. At the start of 2023, the biopharma sector held over $1.4 trillion in firepower (the measure of a company’s capacity to carry out M&A, based on the strength of its balance sheet).
If the major biopharma companies begin deal making in the near future, the increased injections of capital can strengthen biotech’s innovation ecosystem and enable the continued development of products and platforms that will help secure the biopharma industry’s future growth.
GEN Edge: How will more collaborations and/or M&A impact internal R&D efforts?
Ural: Cutting edge science leading to differentiated products that can show clinical outcomes will always be the key to success in this R&D-driven industry, but as biotechs plan ahead, they must recognize the need to supplement scientific excellence with a strategic focus on achieving operational efficiency in all areas of the business and that is achieved via alliances, partnerships and M&A. They also need to focus their portfolio on their lead drug candidates to rationalize their limited resources.
The industry has shown a strong preference in recent years to access innovation through said alliances and partnerships along with traditional acquisitions. Life sciences companies signed alliance deals with a potential value of over $132 billion—the third-highest total in the past decade—over the course of 2022.
These types of alliances have many benefits for biotechs, allowing the companies to access some of the expertise, knowledge and resources of its pharma partners. For biotechs, the downside of this alliance activity is that only 6% of the total potential value of these 2022 deals came in the form of guaranteed up-front payments, with subsequent payments dependent on future milestones. With reduced options for accessing capital, biotechs are generally not negotiating these partnership arrangements from a position of strength, and the terms of these deals offer little immediate additional capital for small companies (they lean more longer term), therefore alliances are not always a relief for temporary capital constraints.
In the final analysis, this industry works best when the innovation is led by smaller and less risk-averse biotechs, advancing their products to regulatory submission and commercialization stage where Big Pharma can pay a premium for these de-risked late stage assets and scale up so more patients can benefit from these novel therapies faster.
GEN Edge: How have smaller biotechs adjusted to the downturn in the market that started two years ago?
Ural: After a strong 2020 and 2021, financing for small and midsize biotechs declined significantly in 2022. This drop-off was due to many factors, including the non-traditional investors exiting biopharma after the ‘sugar high’ the pandemic created, rising interest rates, the global macroeconomic uncertainty, and investors shifting their focus away from life sciences to growth stocks.
Now, we estimate that 30% of emerging biotechs in the US and Europe have less than one year of cash on hand at the end of 2022. This shift may present challenges for new modalities as well, which are still seeking commercial validation since their platforms are likely to require novel infrastructure and manufacturing processes. With resources already tight, being extremely strategic and disciplined will be pivotal for the scaling up of processes, capacity and performance.
GEN Edge: How have the more successful ones been able to generate the capital they need for their operations?
Ural: Some of the more successful smaller biotechs have been calculated with their cash-flow and streamlined inefficiencies. Collaboration agreements have also been a major source of financing for early-stage biotech companies. These agreements usually have a cash infusion at the beginning of their contracts followed by supplemental financing for milestones achieved. We see less up-front payments as a way for investors to lower their technology risk exposure.
GEN Edge: And what have the less successful companies had to do (find a buyer? shrink operations? pursue chapter 11?)
Ural: As far as underperforming early-stage biotechs, we will see a purge or merge situation. They may merge or reverse-merge to preserve cash, some may be acquired, and others may not survive into 2024. The industry may ultimately emerge strengthened from these challenges. For the ecosystem of those who remain will be more efficient with a focus on the fundamentals.
GEN Edge: How will artificial intelligence impact both the biopharma giants and the smaller biotechs? Might that allow the smaller biotechs to shrink workforces and/or operations, potentially saving a few of them?
Ural: Artificial intelligence (AI), machine learning (ML) and digital capabilities are in their early phases of making a broader impact but the potential is massive. Today’s digital, outsourcing and intelligent automation capabilities have been more embraced in other industries, but despite the biotech being a pioneer in innovation, its adoption of these digital tools has lagged significantly. This can be explained by the risk-averse nature of the industry touching human lives.
For operational biotechs, AI and ML offer a chance to cut back administrative spending via streamlining back-office processes, automation and the utilization of shared services— ultimately aiming to free up capital that biotechs can use to fund continued innovation.
GEN Edge: What about larger biotechs? Might AI aid the giants by saving them more money that they can use toward acquiring innovative programs or developing new drugs, both alone and with partners?
Ural: For larger biotechs, typical use cases will include drug discovery, in silico trials, efficient drug development by virtue of more targeted clinical enrolment or designing more precise protocols. These advancements are likely to cause significant improvements in their insights as well as provide critical information faster than before.
AI and ML have already begun transforming the way life sciences companies handle drug development, commercial and regulatory processes, diagnostics, clinical trials and the supply chain. However, we must remember that AI requires the right inputs to succeed. For AI-driven models to drive revenue, experts in each subject matter area or product must work with data scientists to have positive outcomes.
GEN Edge: Any concern that the public and political attention now being drawn to AI may impede its development and expanded use by drug developers?
Ural: As far as public and political attention, I can assume that we will see additional regulations as these technologies become more and more mainstream. However, these technologies are here to stay. In fact, an EY survey from two years ago noted that 70% of executives had already invested in AI and ML, and that number would be much higher today.
In the years to come, we can only expect to see more improvements in these emerging technologies and the industry is just scratching the surface on the potential uses.
