Fueled by a desire for innovation and new medical breakthroughs, the biotech industry continues to enjoy substantial growth due to increased investment in research and development (R&D), according to the sixth annual study from BDO USA, LLP.
The 2017 BDO Biotech Briefing, which examines the most recent 10-K SEC filings of publicly traded companies included in the NASDAQ Biotechnology Index, found that average R&D spending across all mid-market biotech companies increased about 18 percent from 2015 to 2016, from an average of $65.9 million to an average of $80.6 million.
The uptick in R&D spending is one factor that can explain the recent surge of innovation across all areas of the biotech industry, including significant advances in biological sciences and pharmaceuticals, and the expansion of more effective drugs and curative and preventive treatments aimed at enhancing the quality of human life. In particular, a rising incidence of chronic illnesses due to an increasingly aging population continues to drive more advancements in drug products targeted at oncology and gene therapy to prevent and treat chronic illnesses. Recent legislative developments—such as the 21st Century Cures Act, aimed at streamlining Food and Drug Administration (FDA) approval processes—will help speed up product development, and will potentially support novel innovation that can deliver efficacious drug therapies in the sector. Already in 2017, the FDA has approved 23 novel drugs, compared to 22 in all of 2016.
Boosting resources in scientific R&D, education, intellectual and investment capital, and commercialization, leading academic and research institutions form the operational center for many biotech companies, allowing them to recruit more easily and attract federal funding and private investments. The conglomeration of these resources allows for greater public-private partnerships that facilitate the path from research to commercialization. As a result, many biotech venture capital investments see opportunity in middle-market biotechnology companies, which are often headquartered in these major biotechnology regional clusters.
Among the findings, while equity raises showed a large decline from 2015 to 2016 -- falling almost 35 percent across all mid-market biotech companies -- debt financing increased among large biotech companies, showing a more noticeable increase among small ones. Debt financing among large biotechs increased, on average, from $134.8 million to $135.6 million. Among small biotechs, it increased, on average, from $34.8 million in 2015 to $96.5 million in 2016.
Biotech companies have always prioritized cash reserves to demonstrate their ability to fund the clinical studies necessary to bring a new product to market. In 2016 and in line with the decline in equity and debt financings overall, they have shown a decrease in total years’ worth of R&D spending in liquid assets: from 2.88 in 2015 to 2.49 in 2016. This indicates that while deals will continue to be completed, biotech companies may have to raise capital with terms or at levels that are not as favorable as in the past.
Broken down by size, small biotechs (those with less than $50 million in revenue) surged: R&D spending increased by 24 percent, from $65.4 million in 2015 to $81.2 million in 2016. Large biotechs (those with more than $50 million in revenue) followed suit, boosting R&D spending by 20 percent in 2016, from $66.4 million in 2015 to $80 million in 2016. The benefits of this increase are clear: Large biotechs have seen their average revenue increase 24 percent, from $113.7 million in 2015 to $141.1 million in 2016.
“A fresh perspective at the FDA driven by its new Commissioner Scott Gottlieb is expected to bring changes at the agency which are sure to have a ripple effect across the industry,” said Ryan Starkes, Assurance partner and leader of BDO’s Life Sciences practice. “Plans to continue to streamline approval processes, increase competition and transparency around drug pricing, and facilitate advancements in medicine and digital health technology are likely to expand innovations with the potential to improve treatment for millions."