Despite Challenging Economic Environment, Biotechs Are Booming
By Aftab Jamil and Ryan Starkes
The U.S. economy has been unstable for many years now, and this year, the U.S. experienced the first government shutdown since late 1995, causing many investors to become wary of the market. In spite of economic uncertainty over the budget deficit, biotechs remained a “safe haven,” according to CNBC.
The biotech industry experienced tremendous growth in 2013, and amid this robust period, BDO studied the most recent 10-K filings of publicly traded companies listed on the NASDAQ Biotechnology Index to examine common trends. The 2013 study split the companies into two categories: small biotechs with revenues under $50 million and large biotechs with revenues over $50 million. Companies reporting more than $300 million in revenue were excluded to ensure findings are representative of the vast majority of companies included in the NASDAQ index.
Our analysis found that biotech companies overall are increasing their number of employees, delivering strong shareholder return, and continuing to remain committed to R&D efforts, which reinforces the biotech boom we are currently experiencing.
Biotech Industry Spurs
Notwithstanding the current economic environment, the number of employees at biotechs increased 13 percent from 2011 to 2012. According to EP Vantage's recent report, some companies reported staff increases of over 60 percent between 2007 and 2010. Compared to a 2.9 percent decline in overall U.S. private-sector jobs, U.S. employment in the biotech sector grew by 6.4 percent, or more than 96,000 jobs between 2001 and 2010, cites the Battelle/BIO State Bioscience Industry Development report. Of the companies on the biotech index, large biotechs were the big job creators in 2012, with overall headcount up a notable 23 percent and a 7 percent growth in R&D professionals.
In 2014, we expect to see R&D spending and employment levels remain in an upward trend in the biotech industry. With a strong pipeline of products in development and M&A activity continuing throughout the industry, the need for and ability to identify talent will remain.
Biotech IPO Market Thrives
Biotech companies reported very strong total shareholder return (TSR) in 2012. Average TSR for all companies in BDO's study was 39 percent with smaller biotechs generating even larger increases. Positive returns have continued in 2013, contributing to significant interest among investors and a notable rise in initial public offerings. According to Forbes, the biotech sector saw over 30 new biotech offerings this year and more than $2.5 billion raised, making 2013 the best IPO market since 2000.
One important factor contributing to this growth is the enactment of the JOBs Act on April 5, 2012. Many small biotechs took advantage of the JOBs Act's reduced reporting requirements and found success and capital in the public markets. According to Biotech Now, a total of 34 domestic biotech companies have gone public in the 16 months since the act was signed into law, constituting a 79 percent increase in the number of biotech IPOs since the JOBs Act took effect.
While the increase of offerings is a great sign for companies, newly listed public companies have a challenging road ahead as they work to navigate clinical trials, FDA approvals, and increased demand following healthcare reform — all under the watchful eye of investors.
Committed to R&D
Although pharmaceutical companies have held off and sometimes even cut R&D spending for years, biotechs are committed to R&D efforts, spending an average of $54 million in 2012. Smaller biotechs led the charge despite seeing a decline in revenue last year. Small companies saw a 9 percent increase in average R&D spending overall and spent more on R&D per employee. In 2012, they spent $342,000 per employee, 42 percent more than the overall average in the study, and 90 percent more than larger companies spent per employee in 2012.
The results of this increased R&D effort were recently identified in a report from the Pharmaceutical Research and Manufacturers of America (PhRMA), which noted that U.S. biopharmaceutical research companies are currently developing 452 new medicines and vaccines for the treatment of rare diseases, all of which are now in human clinical trials or under review by the FDA.
As biotechs continue to prioritize prudent cash management, companies reported $134 million in liquid assets in 2012, up 7 percent from 2011. This allowed biotechs to hold on average an equivalent of 2.49 years of R&D spending in 2012.
This September, the NASDAQ Biotechnology Index hit a record high, up over 46 percent. Big biotechs are attracting more investors in light of new drug approvals, positive data, and growth in sales and earnings. Heavy merger and acquisition activity continues, but at some point the increase in valuations may slow down the pace of M&A activity. As we enter 2014, we expect investor appetite for the biotech sector will remain very strong and companies will continue to pursue the public markets as a vehicle for obtaining the capital needed to continue product development. The challenge for these new public companies will now include meeting the expectations of their new investors and operating under the scrutiny of public markets.