Move over, Big Pharma. Big Biotech is coming for you.
As drug developers and investors from around the world gather in San Francisco this week for the annual BIO International Convention, a new look at the biotech industry shows the biggest players are starting to behave more and more like pharmaceutical giants.
There are 17 biotech companies in the US that generate more than $500 million per year in revenue. And they’re increasingly focused on buying innovative new products through mergers and acquisitions, rather than developing them in house, according to a report from EY (formerly Ernst & Young) released Monday.
“We now have multiple big biotechs that have the financial firepower to compete with big pharma,” said Ellen Licking, a senior analyst in EY’s life sciences practice.
Traditionally, the term “biotech” referred to a company that tinkered with biological building blocks to make drugs, for instance by genetically engineering proteins. Pharmaceutical companies, on the other hand, focused on medicinal chemistry, screening huge libraries of compounds to find those that might prove useful at fighting disease. In the last decade or so, this line has been increasingly blurred.
Many pharma companies now work on manufacturing drugs inside living cells and “biotech” has become a catchall phrase for startup companies working on all manner of drugs and medical devices. But as the EY report indicates, these companies are not necessarily small.
Thanks to past biotech booms on the stock market and a series of breakthrough therapies — such as Gilead’s blockbuster hepatitis C drug Sovaldi — many biotech companies are now sitting on huge swaths of cash. Some have been around more than three decades and have a global reach.
At the same time, stock gyrations have deflated the value of many true biotech startups — companies that haven’t even begun to earn revenue. This means that potentially valuable technologies at small biotechs are up for grabs at increasingly competitive prices — and both big biotech and big pharma are biting.
The 17 big biotechs identified in the EY report (down a bit from the 19 big biotechs identified in 2014) collectively raised more than $32 billion in debt financing last year; much of that is available for mergers and acquisitions.
Another telling statistic: The biotech behemoths grew their spending on research and development last year by just 10 percent. That lags the broader biotech industry in the US, which expanded its collective R&D spending by 28 percent. The disparity suggests that the big biotechs are acting more like pharma, seeking to buy new ideas through acquisitions rather than innovation.
Biotech company Celgene (CELG), for instance, raised $8 billion in debt last August to help pay for its $7.2 billion acquisition of Receptos — a startup with a promising immunotherapy drug to treat ulcerative colitis, an autoimmune disease that attacks the intestine.
Part of the strategy for both big pharma and big biotech, the report says, is to consolidate its focus: Instead of developing drugs for a wide variety of diseases, these companies are narrowing their focus to specialize in certain areas. So Receptos’s ulcerative colitis drug fits nicely within Celgene’s broader portfolio of medications that treat inflammatory disease.
Life sciences giant AbbVie (ABBV) is prime example of industry players straddling the line between pharmaceuticals and biologics: Just this past April, AbbVie entered a $10.2 billion deal to acquire Stemcentrx, a biotechnology startup developing drugs to attack cancer-causing stem cells. AbbVie also develops traditional pharmaceutical drugs for neurologic and liver disease.
The bigger, older biotech companies are also feeling the same kinds of growth challenges that big pharma’s dealt with for years: Staying innovative and ahead of smaller lither competitors, keeping the drug pipelines padded, contending with hospitals that balk at high drug prices — and, of course, keeping shareholders happy.
“We’re starting to see more pronounced pressures on some of the bigger biotechs that we haven’t seen in the past,” Licking said. “They’re victims of their own success: Big biotech has seen enormous growth in recent years, but those growth rates are hard to sustain.”
In terms of market capitalization, the upper echelon biotechs are just as highly valued as many traditional drug makers.
Biotech titan Gilead, for instance, enjoys a market cap of $114 billion, and Celgene sits at about $83 billion. That puts them in league with, or ahead of, global pharmaceutical companies: GlaxoSmithKline’s market cap is $104 billion and Eli Lilly’s is $79 billion.
The EY report describes the biotech industry overall as quite healthy. The regulatory environment in the US leans in favor of biotechnology, with the Food and Drug Administration offering fast-track approval for some breakthrough drugs, especially those targeting rare diseases. And the science is moving quickly, opening up opportunities for drug development in the fields of gene editing, gene therapy, and cancer immunotherapy in particular.
But the report also notes growing pressure on the industry to keep that momentum going.
“The bigger biotechnology companies are being held to standards by Wall Street that are difficult to keep up with in perpetuity,” Licking said.