2. Inorganic growth
As the chemically-synthesised pharmaceutical pipeline dries up, large and mid-tier pharmaceutical companies have been turning to biopharmaceuticals to replace that value. However, internal biopharmaceutical pipeline value creation has been difficult. Internal R&D returns for original large biopharmaceutical companies continue to decline, from 7.3% in 2012 to 3.7% in 2016, and from 17.4% in 2013 to 9.9% in 2016 for their mid-tier counterparts. As a result, a majority of players in the pharmaceutical and biopharmaceutical industry will need to continue to implement external innovation strategies through M&A, looking outward to acquire value in a race for inorganic growth through bolt-on acquisitions.
Pharmaceutical and biopharmaceutical companies may be further encouraged by political movements to undertake M&A. Overseas, cash stockpiles may be boosted by a favourable cash repatriation plan and tax easing policy proposed by the US government and UK’s period of monetary easing. This complements the industry’s increasing appetite to invest in companies with lead assets at early stages of development. Traditionally, big players look to acquire concept-proven late-stage pipeline offerings. In the last two years, however, there has been significant increases in M&A exits in some emerging categories despite weaker overall M&A activity. For example, oncology focussed start-ups accounted for 20% of all pharmaceutical private market deals last year, which represents an increasing focus on improving cancer treatment. This included the second-largest venture capital-backed deal in history with AbbVie acquiring cancer therapeutics start-up Stemcentrx for US$10.2 billion. The industry is seeing some significant developments in the treatment of certain illnesses, and another category to watch for will be gene-based therapy, which includes genomics, gene-editing and genetic engineering applications.
Where does Australia sit in this broader trend?
Australia is a leader in R&D in biotech. The 2016 Scientific American Scorecard placed Australia at no. 5 globally in an assessment of innovation potential in biotech. Australia is also in the top 10 most competitive locations for R&D development.
Today, we have one of the largest biotech industries in the world, home to over 480 biotech companies with an annualised industry revenue growth rate of 4% in the past five years and forecasted annualised growth rate of 4.3% to 2022.
There were over A$2 billion of biotech deal flows in 2016 and Australian biotech companies have raised over A$1 billion in 2015 and 2016 in capital raisings including IPOs and backdoor listings. Deal value looks set to continue for the coming year.
Austrade estimates investment in Australian clinical trials by pharmaceutical, biotech and medical devices in company to be continue at A$1 billion annually for the next few years, 20% of which coming from the top 10 pharmaceutical companies alone.
Australia’s strong reputation can enable companies to attract greater investment from large pharmaceuticals companies. With a globally competitive R&D tax incentive scheme and clinical trial cost containments through initiatives like cost standardisations, Australia can strengthen its position as an attractive and world-class destination for life sciences and biotech companies to conduct research, clinical trials and develop products that enable medical developments which are changing the quality of life for people all over the world.
The biotech industry has never been more exciting and is making significant developments in healthcare. Traditional pharmaceuticals are investing heavily in biotech and biopharmaceuticals, driving the rise of biopharmaceutical companies, and the maturation of biotech advancements in R&D.
Non-communicable diseases, called ‘one of the greatest public health challenges of the 21st century’ by the World Health Organisation, will face many worthy biotech opponents in the coming years. The growing market need for treatments for non-communicable diseases due to a substantial rise of occurrences in emerging economies and an ageing population is complemented by the increased interest in early-stage biotech companies (mentioned above). We expect to see a gradual increase in M&A activity in areas like cancer therapy treatments and therapeutic treatment for age-related neurodegenerative diseases.
In Australia, the establishment by the Australian Government of its A$500 million Biomedical Translation Fund (aimed at converting biomedical discoveries to high growth potential companies) will encourage more venture capital-backed biotech companies to emerge. This will also increase the momentum for progress in prominent techniques and treatments being explored involving genomics, gene-editing and genetic engineering, which is a space to watch this year. On the medical tech front, the CRISPR/Cas9 technique was used in a human trial for the first time late last year in China, bringing gene-editing closer to development and commercialisation. Gene-editing and genomics are also being used in agricultural biotech to develop techniques that improve plants, animals and microorganisms. (See more in our Australian Food and Agribusiness 2017: Key Themes report.)
Industrial biotech looks to reduce reliance on fossil fuels in electricity generation and plastic production, developing biomasses and biofuels as viable commercial replacements. Various regulatory and policy initiatives have also lent their support to these emerging industries, like the Queensland biofuel mandate which commenced this year, supporting growth of the biotech industry.