Biotech Fever Drives Boom in R&D Spending and Revenues, BDO USA Analysis Finds

November 2015

Sally Slater
Bliss Integrated
sally@blissintegrated.com

Chicago – November 4, 2015 – With investor spotlight on biotech, the industry's spending on research and development (R&D) continues to climb, according to the fifth annual study from BDO USA, LLP. Average R&D expenditure at biotechs increased 18 percent in 2014, compared to a 16 percent growth rate reported in the prior year.
 
The 2015 BDO Biotech Briefing, which examined the most recent 10-K SEC filings of publicly traded companies included in the NASDAQ Biotechnology Index, found that average R&D expenditures reached $55.6 million in 2014, up from $47.1 million in 2013 and $40.7 million in 2012.
 
The uptick in R&D spending was underpinned by a surge in revenue growth across the industry and optimism stemming from the high number of FDA drug approvals. Revenue among all biotechs jumped 44 percent to $67.1 million in 2014, up from $46.6 million the year before. Large biotechs (between $50 million and $300 million in revenue) saw the greatest increase, growing average revenue by 52 percent to $129.3 million. Small biotechs reported a 7 percent increase in average revenue, up from a decrease of 21 percent in 2013. Meanwhile, novel new drug approvals hit an 18-year high in 2014, with a total of 41 New Molecular Entities (NMEs) receiving FDA approval. 2015 has continued the high pace of drug approvals, with 29 NMEs approved as of October 2015.
 
Average R&D expenditures as a percentage of revenue is down from 101 percent in 2013 to 83 percent at the end of the most recent fiscal year; however, this is less reflective of industry caution than it is the leap in revenue among large biotechs. Smaller biotechs actually increased their R&D spending as a percentage of revenue from 261 percent to 313 percent in 2014.
 
“Optimism surrounding the opportunities for further drug development in light of a continued increase in the approval of new drugs by the FDA supports investment in R&D," said Ryan Starkes, partner and leader of the Life Sciences Practice at BDO. "However, political controversy and widespread criticism around rising drug prices has made investors skittish, and we have seen that recently reflected in valuations."
 
Additional findings from the 2015 BDO Biotech Briefing include:
 
Debt Financing Doubles. While the bulk of biotechs secured financing through the equity markets, those who sought debt financing raised much larger amounts. Seventy-one percent of biotechs secured equity financing, whereas only 34 percent of companies secured financing through the credit markets. Companies seeking debt financing raised an average of $128.6 million, nearly double (97 percent more) the average size of 2013 financings, with large biotechs demonstrating an ability to secure more than twice the average amount of debt financing than smaller biotechs. Companies seeking equity financing secured an average of $104.5 million, up 32 percent from 2013 with little distinction between large and small biotechs of the average amount raised.
 
Biotech Hiring Spree. Biotechs continue to demonstrate a high level of hiring activity, reporting an average of 216 employees, 20.7 percent higher than 2013 levels. With industry-wide growth and increased demand for top R&D talent, competition for candidates is intensifying. BDO’s third annual Life Sciences RiskFactor Report found that 91 percent of life sciences companies cite their ability to attract and retain talent as a critical risk to their business.
 
More Cash Reserves, More Time to Invest. With a focus on growth and R&D-led innovation, biotech companies are growing their cash reserves. In 2014, biotechs reported an average of $180.3 million in liquid assets, up 43 percent from 2013 and almost 100 percent from 2012 levels. Biotechs' effective cash management grants them an equivalent of 3.2 years worth of R&D expenditures, marking the highest reserve/R&D spend ratio in the study’s history.
 
Shareholder Returns Boost 2014 IPO Valuations. While investors may be concerned about the recent market volatility, biotech stocks have consistently improved returns to shareholders. In 2014, biotechs reported an average total shareholder return of 113 percent, up from 97 percent the previous year. In addition, the average market cap of companies in the study, as of the end of their most recent fiscal year, surpassed the billion dollar mark, reaching $1.14 billion, compared to $881 million in 2013. Fueled by strong returns and investor appetite, biotech IPO activity was strong in 2014 and the first part of 2015. In 2014, one-in-four of all U.S. IPOs were biotechs, according to Renaissance Capital. 2015 kicked off with a bang, with $2.9 billion raised from 29 IPOs in the first half of the year, compared to $2 billion raised during the first half of 2014. However, a recent slump in the sector has temporarily stymied the IPO pipeline and caused valuations to drop. Notably, through mid-October, the NASDAQ Biotech Index has declined 23 percent from its all-time high in July 2015.
                             
Banner Year for M&A. In addition to a robust IPO market, 2014 saw a surge in M&A activity in the broader biopharma industry, reaching a record $202 billion. 2015 has sustained this level of activity, with nearly a fourth (23.6 percent) of companies on the NASDAQ Biotechnology Index engaging in M&A in 2015. According to Dealogic data, the first three quarters of the year saw the beginning of the year through September 4, 2015 has seen 302 biopharma deals, totaling $235 billion.
 
"Despite the current slump in biotech stock prices and IPOs, appetite for M&A remains strong, and we can expect deal activity to continue at a moderate pace," said Aftab Jamil, partner and leader of the Technology & Life Sciences Practice at BDO. “The electoral focus on healthcare reform and public frustration around rising drug prices will create some investor hesitation, but increased excitement about drug development presents an opportunity for future industry growth." 

About the 2015 BDO Biotech Briefing
The BDO Biotech Briefing examines the most recent 10-K SEC filings of companies listed on the NASDAQ Biotechnology Index. 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 Biotechnology Index. Remaining companies were divided into two groups—those with more than $50 million in revenue and those with less than $50 million in revenue—to identify trends and key metrics relevant to each group. The average market cap of companies in the study as of the end of their most recent fiscal year is $1.14 billion.
 
About the Technology & Life Sciences Practice at BDO USA, LLP
BDO has been a valued business advisor to technology and life sciences companies for over 100 years. The firm works with a wide variety of technology clients, ranging from multinational Fortune 500 corporations to more entrepreneurial businesses, on myriad accounting, tax and other financial issues.
 
About BDO
BDO is the brand name for BDO USA, LLP, a U.S. professional services firm providing assurance, tax, financial advisory and consulting services to a wide range of publicly traded and privately held companies. For more than 100 years, BDO has provided quality service through the active involvement of experienced and committed professionals. The firm serves clients through 63 offices and more than 400 independent alliance firm locations nationwide. As an independent Member Firm of BDO International Limited, BDO serves multi-national clients through a global network of more than 1,300 offices in over 150 countries.    BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms. For more information please visit: www.bdo.com.