R&D spend up, capital down makes for shorter runways for midmarket biotech companies

Spending on R&D by midmarket biotech companies increased 18 percent from 2015 to 2016, from an average of $65.9 million to an average of $80.6 million, according to the 2017 BDO Biotech Briefing, a report from BDO USA LLP analyzing the 10-K SEC filings from companies in the Nasdaq Biotechnology Index (NBI) with revenue of less than $300 million.

Breaking down the companies by size, smaller biotechs with revenue of less than $50 million boosted R&D spending by 24 percent year over year, from $65.4 million in 2015 to $81.2 million in 2016. Larger biotechs with revenue greater than $50 million increased R&D spending by 20 percent in 2016, from $66.4 million in 2015 to $80 million in 2016.

“It’s a good positive sign that midmarket companies are continuing to invest in the science they’re trying to develop,” Ryan Starkes, assurance partner and leader of BDO’s life sciences practice, told BioWorld Insight.

It wasn’t all good news for the sector in 2016, with the NBI trading well below the all-time high set in the middle of 2015, making it difficult for companies to raise capital on the public market.

In fact, the average size of an equity raise fell almost 35 percent across all midmarket biotech companies, from $117.2 million in 2015 to $75.7 million in 2016. Large biotechs had the biggest decline, cut in half from an average of $103.7 million to $52.1 million. Among small biotechs, the average equity raise declined from $130.6 million to $99.4 million.

“Deals will continue to get completed, but biotech companies may have to raise capital with terms or at levels that are not as favorable as in the past,” the report concludes.

In addition to a decline in the size of equity raises, which included IPOs as well as secondary offerings, the volume also decreased, with 18 large biotechs securing equity financing in 2016, compared to 29 and 23 equity raises in 2014 and 2015, respectively. Small biotechs also saw a decline from 61equity raises in 2014 and 57 in 2015 to just 48 in 2016.

While the average size of an equity raise decreased, debt financing increased slightly with small biotechs producing most of the increase from an average raise of $34.8 million in 2015 to $96.5 million in 2016. The average size of large biotech debt financing was basically flat year over year.

Not surprisingly with more spending and less capital raised, companies’ cash runways decreased. In 2014, companies had 2.81 years’ worth of R&D spending in liquid assets, which increased slightly to 2.88 years in 2015. In 2016, that figure dropped to just 2.49 years.

“You’re going to see companies dipping into those reserves. But having 2.5 years of cash on hand is pretty solid,” Starkes said.

Big moves in big biotech

Biogen Inc., Amgen Inc., Gilead Sciences Inc. and Celgene Corp. all reported second-quarter earnings last week, providing an opportunity to check in on R&D spending at the larger biotechs.

Biogen and Gilead were the outliers, with large increases and decreases, respectively, but the year-over-year changes were due to large deals in the second quarter of 2017 and 2016, respectively.

Backing out Biogen’s $300 million payment to Bristol-Myers Squibb Co., of Princeton, N.J., and the associated $60 million milestone payment to the former stockholders of Ipierian Inc. for anti-tau antibody BIIB-092 (formerly known as BMS-986168), Biogen’s R&D spending was down 5.4 percent in the first half of the year compared to the same period of 2016.

Gilead’s R&D spending on a non-GAAP basis, which backs out acquisition-related expenses, up-front collaboration expenses and some other items, fell just 6 percent year over year in the first half of 2017.

Looking forward, in conjunction with its earnings release, Biogen, of Cambridge, Mass., announced a plan to streamline the company with the hope of freeing up $400 million in spending that can be redirected toward R&D to help build its neurosciences pipeline.

“In the [profit and loss statement], you can expect to see neutral impact on the contribution in bottom-line – but a potential shift from [selling, general and administrative] to R&D,” Michel Vounatsos, Biogen’s CEO, told analysts and investors on the call.

Jefferies analyst Michael Yee characterized the plan as “the right thing to do for the long term” in a note to clients, but pointed out that investors are “unsure whether higher-risk, higher-reward pipeline is [the] best approach” given Biogen’s focus on Alzheimer’s disease, a tough disease to combat.

Cowen analyst Eric Schmidt isn’t convinced that a large deal by Biogen is likely. “We can’t help being a bit skeptical on the timing of a significant transaction as Biogen has communicated its intention to acquire late-stage neurological assets for much of the past two years,” he wrote.

Celgene, of Summit, N.J., is looking to boost R&D activity in the second half of the year and beyond. “The timing and pace of clinical activity is expected to increase in the second half of 2017 as we initiate pivotal programs for key pipeline assets and make go/no-go decisions for proof-of-concept trials on early stage assets,” Peter Kellogg, Celgene’s chief financial officer, told analysts and investors on the call, noting later that Celgene “would seek to have research and development as a percentage of revenue be roughly maintained as we roll forward.”

Celgene has a well-stocked pipeline that could result in quite a bit of spending if a large proportion of the early and midstage programs advance, but Kellogg pointed out that Celgene also has 18 late-stage trials that are wrapping up soon, “In a sense, we have some of our existing R&D budget probably opening up.”

Foster City, Calif.-based Gilead raised the low end of its 2017 guidance for adjusted R&D spending, which again backs out one-time items, from a range of $3.1 billion to $3.4 billion to a range of $3.2 billion to $3.4 billion. The company ended the second quarter with $36.6 billion in cash, cash equivalents and marketable securities, giving it plenty of ammunition to buy or license pipeline assets.

Thousand Oaks, Calif.-based Amgen has “stockpiled $39 billion in cash (approximately $4 billion net), mainly offshore, and appears to be freeing up its income statement to absorb significant new programs into its R&D infrastructure as well,” Leerink analyst Geoffrey Porges pointed out in a note to clients. “Perhaps instead of Gilead leading significant M&A, the ball might be in Amgen’s court?” he pondered.

 

A new report from The Centre for Innovation in Regulatory Science (CIRS), “New drug approvals in ICH countries 2007-2016” explores the impact of improvements in the regulatory environment in the International Council for Harmonisation of Technical Requirements for Registration of Pharmaceuticals for Human Use (ICH) countries over the last decade. Findings include a decrease in the time to approval as well as an increase in the number of medicines that have become available.

 

Download the free report, “New drug approvals in ICH countries 2007-2016.”

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