Although the biotech industry performed strongly during the COVID-19 pandemic, it now faces challenges to valuations and access to capital.\n\n\n\nThis is according to the 32nd edition of the Beyond Borders report produced by Ernst & Young LLP (EY US). \n\n\n\nThe report, which EY said is a ‘moment-in-time’ snapshot of the industry, says despite the recent market volatility and correction in biotech, the industry remains in a position of strength as evidenced by a promising outlook for revenues, the unprecedented investments already made in the innovation renaissance in R&D, and a massive tide of dollars waiting in the wings for future attractive investments. \n\n\n\nArda Ural, PhD, EY Americas industry markets leader, health sciences and wellness, said: "Since the onset of the pandemic, biotech has experienced significant growth with the advent of the mRNA vaccines, antivirals, virtualization of clinical trials and more. In parallel, the large cap biopharma industry is facing a foundational growth gap due to upcoming patent expirations for its leading blockbusters biologics and pipelines, which are not sufficient to sustain their top-line growth aspirations. \n\n\n\n“With the pandemic boom in the rear-view mirror, flush balance sheets and a huge correction in deal target development stage biotechs, now is an opportune time for big pharma to deploy its firepower to acquire biotech innovation."\n\n\n\nReport overview\n\n\n\nBeyond Borders looks at the state of the industry with reference to US and European public company revenues, FDA/European Medicines Agency product approvals, biotech capital activity and other factors. \n\n\n\nThe report also provides an overview of where the industry stands today, where it is heading next and what challenges need to be addressed to secure growth as the business environment evolves.\n\n\n\nAshwin Singhania, principal, Ernst & Young LLP, in the EY-Parthenon Life Sciences Strategy practice said: "Biotech executives must have a clear vision of what they seek to accomplish to succeed post-pandemic. The unprecedented public health crisis coupled with the market downturn demonstrated biotech's resiliency, but now companies must address pain points to optimize their potential."\n\n\n\nThe report also states biotech initial public offerings (IPOs) reached record levels in 2021 – 143 offerings totaling $19.3 billion – but the IPO and follow-on windows have shut, and biotech access to capital markets via IPOs or SPACs looks increasingly difficult. \n\n\n\nIt also notes venture capital money follows science: Venture financing reached a record $26.2 billion in 2021, and activity remains strong in 2022 as investors continue to bet on biotech's long-term viability. \n\n\n\nM&As on the way?\n\n\n\nEY US said the dealmaking value decreased by 46% when compared to last year and remains slow thus far by mid-2022. With historic drops in target valuations, big pharma players may seize the opportunity for large-scale M&A later this year, the company notes. \n\n\n\nIn the interim, big pharma continues to favor strategic alliances, committing to a potential infusion of $314 billion in 2020 and 2021 alone. Even if the U.S. was to experience a macro-economic slowdown, EY US said its research shows biopharma M&A has been driven by industry's fundamental needs to drive growth. \n\n\n\nIn the wake of COVID-19, the report says, biotechs face significant operational challenges, including addressing the shortfall of talent across the sector and anticipating policymaker-driven shifts in supply chain expectations, pricing and scaling commercial infrastructure.\n\n\n\nCause for optimism – with challenges\n\n\n\nThe report says the strength of biotech's R&D engine is cause for optimism, as is the normalization of health care delivery. After more than two years of pandemic disruption, there has been a rebound in product demand. However, EY US adds there are signs the aftermath of the pandemic will also leave biotech with significant challenges.\n\n\n\nIt says a shift in investor sentiment began in the first quarter of 2021 and has continued into 2022. Over the past decade, and particularly during the pandemic, biotech enjoyed soaring valuations. But since early 2021, these valuations have plunged, and the momentum of the decline accelerated in 2022. \n\n\n\nSmaller, and earlier stage, companies now face an existential path to the capital markets and access to capital in general. For some biotechs, reduced access to capital has forced restructuring and may increase the desirability of exiting via acquisition and galvanize consolidation and M&A activity in the sector.\n\n\n\nThe report continues, saying as valuations sink and financing becomes more challenging, a buyer's market may emerge, with big pharma CEOs reconsidering targets that proved too expensive to justify the acquisition price in the past. De-risked, late-stage biotech assets that fit naturally into a company's strategic pipeline will be an M&A priority, and strategic alliances may remain the preferred route to access higher-risk early-stage innovation over outright bolt-on acquisitions. While an M&A rebound seems probable, there is little evidence of it so far in 2022.\n\n\n\nFurther uncertainty\n\n\n\nThe report says the industry faces more uncertainty in the immediate future. It says the unforeseeable geopolitical environment and the post-pandemic landscape create unknown market conditions and new challenges, including supply chain disruption; intensifying competition for talent; challenges to established commercial models; the ability to achieve scalability for the newly minted commercial companies; rising pressure to demonstrate commitment to addressing environmental, social and governance (ESG) issues, from patient access and drug affordability to clinical trial diversity.\n\n\n\n"While the biotech industry has experienced a substantial correction, the industry's fundamentals remain strong, and there is still a lot of firepower to invest in innovation and underpin growth strategies," said Ural. \n\n\n\n"While some biotechs may struggle with reduced access to the public markets, the sector as a whole will continue to flourish as long as companies work to innovate to help address unmet medical needs of the future."