Biotech Outlook 2024: Enhanced Financing Environment and Strategic Adaptations Drive Industry Forward

Ernst & Young’s (EY’s) 34th edition of the Beyond Borders report reveals a promising outlook for the biotech industry in 2024. Beyond Borders focuses on the biotech industry and provides a summary of US and European public company’s metrics such as revenues, financing, merger and acquisition (M&A) activity, alliances and product approvals.

Owing to the potential reduction in interest rates and fiscal policy changes, a positive shift is expected in the biotech industry in the second half of 2024. In the past two years, the industry has faced considerable challenges due to a constrained financing environment, forcing many emerging and early-stage biotech companies to restructure their operations, merge with other companies or narrow their research and development (R&D) efforts by shelving certain assets.

Therefore, there is a pressing need for big pharma companies to improve revenue generation to offset the more than US$300 billion loss caused by product exclusivity expirations. Continued investments in scientific innovation are essential to drive the sector forward and meet unmet medical needs.

Biotech Outlook 2024

Biotech sector revenue has declined for the second consecutive year, despite an upward trend of around four percent annually over the last decade. From 2015 to 2021, revenues grew by over nine percent per year, largely driven by the demand for COVID-19 vaccines and therapeutics introduced in 2021. However, a decrease in pandemic-related medication sales contributed to the revenue drop in 2023.

Notably, in 2023 (and likewise in 2018), the US Food and Drug Administration (FDA), including the Center for Drug Evaluation and Research (CDER) and the Center for Biologics Evaluation and Research (CBER), achieved one of the highest totals in biopharma product approvals, with 80 novel products approved. Approvals have shifted from vaccines, mRNA-based technologies and autologous cell therapies (ACTs) to cardio-metabolic products like GLP-1 receptor agonists, radiopharmaceuticals and antibody-drug conjugates (ADCs). Oncology and immunology continue to attract the most investment, while neuroscience is rapidly gaining attention due to significant unmet needs in the field.

M&A Activity in the Biotech Industry

In 2024, the biotech sector has seen robust M&A activity driven by pent-up demand. As macroeconomic conditions stabilize and the Federal Reserve tapers interest rates, further M&A activity is anticipated. This change in interest rates, coupled with big pharma’s need to technologically de-risk assets and boost topline growth, is expected to drive more deals in the latter half of 2024. Notably, deal premiums, the difference between share prices the day before an announcement and the offer price, have reached an all-time high of 83 percent, indicating strong investor interest in late-stage, high-quality assets.

Funding Challenges

Initial public offerings (IPOs) in the biotech sector remain highly selective and are still below the historical annual average. Venture funding continues to be low, although follow-on financings have shown some improvement compared to the 2022 to 2023 period. According to E&Y’s analysis, nearly 33 percent of biotech companies lack sufficient cash to sustain their operations for more than a year.

Important Findings of the Beyond Borders Report

After a sharp decline of 93 percent in biotech IPOs from 2021 to 2022, investment in biotech companies saw a significant rebound, doubling to $2.9 billion in 2023. Despite the five-year pre-pandemic average for venture capital funding being $47.5 billion, it remained substantially lower at $18.9 billion in 2023. To compensate for reduced M&A spending between 2020 and 2022, big pharma companies have increasingly turned to alliances, which offer a low-cost, low-risk strategy for accessing innovative products. In 2023, the total potential value of these alliances reached $125.3 billion, surpassing pre-pandemic levels but still falling short of the figures seen in 2020, 2021 and 2022.

Oncology is projected to drive 33 percent of biopharma’s overall growth over the next five years. This is evident in the number of new products reaching the market, the volume of clinical trials targeting cancer and the overall investment in oncology products, which surpasses that of any other biopharma assets. However, revenues for European and US public companies fell by 10.7 percent from 2022. In contrast, debt and follow-on financings in 2023 surged to $29.4 billion, up from $9 billion in 2022. Nonetheless, the number of publicly traded biotech companies in the US and EU decreased by 5.3 percent in 2023, with some companies filing for bankruptcy.

In response to the economic downturn, biotech companies have optimized their business models, resulting in an 86 percent increase in M&A activity compared to 2022. This represents a 38 percent rise over the previous five-year average, demonstrating the sector’s adaptability and resilience.

“We’re seeing about one-third of product launches coming from companies that are commercializing their first-ever product, so it’s becoming even more critical to be effective,” says Ashwin Singhania, Principal, EY-Parthenon, Ernst & Young LLP, in the company’s news release.

“Especially due to the lack of M&A and dealmaking issues, companies must remain strategic and adaptable in their efforts, and let’s remember that 31 percent of biotech companies have less than two years of cash on hand. This turbulence has caused many companies to fail fast and pivot their strategies quickly, which in turn proves the durability of the sector heading further into 2024.”

Takeaways from the Biotech Outlook 2024 Report

EY’s Beyond Borders 2024 report documents essential factors and trends that can impact the biotech industry. It also reports a possible uptick in the industry’s revenue generation with the improving funding climate. The key highlights of the report include:

Financial Climate: The financing environment in the biotech sector is expected to improve due to adjustments in fiscal policy and potential reductions in interest rates.
Revenue Requirements: Within the industry, due to the expiry of patents, there is a need for big pharma companies to offset revenue losses. Therefore, more funding is being committed to innovative solutions that can address unmet medical requirements.
Regulatory Approvals and Innovation: In 2023, the FDA approved a large number of new biopharma products, particularly cardiometabolic ones, although oncology- and immunology-related requirements remain robust.
Funding Challenges: Although the outlook for financing has improved, it continues to be a challenge for early-stage ventures in particular. Moreover, the biotech IPO market continues to be flat, which is affecting investments in biotech IPOs and early-stage funding.

In summary, EY’s 34th edition of the Beyond Borders report reveals a promising outlook for the biotech industry in 2024. The report highlights a resurgence in financing and deal-making, driven by potential reductions in interest rates and fiscal policy changes. After facing significant challenges in recent years, the biotech sector is poised for a rebound, with big pharma companies focusing on innovative solutions to offset substantial revenue losses from expired patents. This transformative period is marked by increased M&A activity, improved funding conditions and a strong emphasis on scientific innovation to meet unmet medical needs.