The biotechnology industry remained strong in 2016 despite some declines and uncertainties. While industry financing dipped 27% from 2015, research and development spending hit a new record. Merger and acquisition activity was also robust despite a decline in upfront deal commitments. Looking ahead, biotechnology companies will need to navigate increasing complexity around issues like product reimbursement, research and development efficiency, digital strategies, dealmaking, and financing volatility. The ability to adapt to these shifting environments will be key to future success.

1. Biotechnology Industry Report 2017
Staying the course
Beyond borders

2. Page 1 Biotechnology Industry Report 2017 | Beyond borders
Beyond borders 2017
Key trends and implications

3. Page 2 Biotechnology Industry Report 2017 | Beyond borders
Despite multiple uncertainties, the biotech industry
stays the course in 2016
Industry financing dips 27%, but …
… is third highest total in 31 years
Decline in IPOs and follow-ons, but …
… robust early stage VC investment
Deal milestones more common, but …
… M&A total second highest in history
Market cap falls below US$1t, but …
… rebounded in 2017
Net income drops 52%, but …
… R&D spending hits new record
FDA approvals drop sharply, but …
… FDA remains science and access focused
Ongoing drug pricing pressure, but …
… industry adapting to value-based payments

4. Page 3 Biotechnology Industry Report 2017 | Beyond borders
In the dynamic biotech landscape, the only certainty is
uncertainty
“I can’t think of a period that has been
characterized by so much uncertainty as the past
six to nine months. … The uncertainty is a factor
that comes up in every board meeting I attend.”
– Alan Mendelson, Partner
Latham and Watkins
Successful companies have “learned to filter that
[uncertainty] out and focus on the things that are
right for the company. There may be tax reform.
There may be repatriation. But you can’t count on
it – and you can’t wait for it either.”
– John Milligan, CEO
Gilead Sciences

5. Page 4 Biotechnology Industry Report 2017 | Beyond borders
Key performance metrics for US and EU biotechs (US$b)
Numbers may appear inconsistent because of rounding.
Commercial leaders are companies with revenues in excess of US$500m.
Sources: EY; S&P Capital IQ and company financial statement data.

6. Page 5 Biotechnology Industry Report 2017 | Beyond borders
Financial performance of US biotechnology commercial
leaders and other companies (US$b)
US biotechnology: commercial leaders and other companies (US$b)
2016 2015 US$ change % change
Commercial leaders
Revenues 98.8 93.7 5.1 5%
R&D expense 21.9 18.8 3.1 16%
Net income (loss) 29.1 32.0 (2.9) (9)%
Market capitalization 522.0 660.3 (138.3) (21)%
Number of employees 87,930 77,823 10,107 13%
Other companies
Revenues 13.4 13.7 (0.3) (2)%
R&D expense 16.9 15.2 1.8 12%
Net income (loss) (19.9) (16.6) (3.2) 19%
Market capitalization 176.7 231.0 (54.3) (24)%
Number of employees 47,846 52,316 (4,470) (9)%
Numbers may appear inconsistent because of rounding.
Commercial leaders are companies with revenues in excess of US$500m.
Sources: EY; S&P Capital IQ and company financial statement data.

7. Page 6 Biotechnology Industry Report 2017 | Beyond borders
Financial performance of European biotechnology
companies (US$b)
European biotechnology: commercial leaders and other companies (US$b)
2016 2015 US$ change % change
Commercial leaders
Revenues 23.6 19 4 23%
R&D expense 3.5 3.8 (0) (8)%
Net income (loss) 2.0 3.0 (1) (32)%
Market capitalization 120.9 43.3 78 179%
Number of employees 48,233 31,893 16,340 51%
Other companies
Revenues 3.7 3.6 0 3%
R&D expense 3.4 2.9 0 16%
Net income (loss) (3.3) (2.0) (1) 66%
Market capitalization 43.2 132.3 (89) (67)%
Number of employees 19,405 16,721 2,684 16%
Source: EY, S&P Capital IQ and company financial statement data.

8. Page 7 Biotechnology Industry Report 2017 | Beyond borders
Financing
Investors downshift in 2016

9. Page 8 Biotechnology Industry Report 2017 | Beyond borders
2016 was another strong year for “innovation capital” in
the US and Europe
Sources: EY; S&P Capital IQ and VentureSource.

10. Page 9 Biotechnology Industry Report 2017 | Beyond borders
VC investment in early stage US- and EU-based biotechs
is a reason for optimism
Sources: EY; S&P Capital IQ and VentureSource.

11. Page 10 Biotechnology Industry Report 2017 | Beyond borders
US and European venture investment by round
Sources: EY; S&P Capital IQ; VentureSource.

12. Page 11 Biotechnology Industry Report 2017 | Beyond borders
New sources of capital are emerging, especially in Asia
Size of bubbles shows number of financings per region
Innovation capital is the amount of equity capital raised by companies with revenues of less than US$500 million.
Sources: EY; S&P Captial IQ and VentureSource.

13. Page 12 Biotechnology Industry Report 2017 | Beyond borders
Dealmaking
Dealmaking remains active, though not as lucrative, for biotechs

14. Page 13 Biotechnology Industry Report 2017 | Beyond borders
2016 was another strong year for biotech M&A
Chart excludes transactions where deal terms were not publicly disclosed.
Sources: EY; S&P Capital IQ; MedTRACK and company news.

15. Page 14 Biotechnology Industry Report 2017 | Beyond borders
US M&As (2007–16)
Chart excludes transactions where deal terms were not publicly disclosed.
Sources: EY; S&P Capital IQ; MedTRACK and company news.

16. Page 15 Biotechnology Industry Report 2017 | Beyond borders
European M&As (2007–16)
Chart excludes transactions where deal terms were not publicly disclosed.
Sources: EY; S&P Capital IQ; MedTRACK and company news.

17. Page 16 Biotechnology Industry Report 2017 | Beyond borders
Top biotechnology IPOs by region (2016)
Sources: EY; BioCentury; S&P Capital IQ and VentureSource.

18. Page 17 Biotechnology Industry Report 2017 | Beyond borders
Navigating complexity: key issues for biotechs

19. Page 18 Biotechnology Industry Report 2017 | Beyond borders
Continued success requires the ability to navigate
complexity on multiple fronts
1
Product
reimbursement
2
R&D
efficiency
3
Digital
strategy
4
Deal-
making
How can
biotechs
accelerate
value-based
payment
models?
How can biotechs
improve the ROI for
their R&D spend?
What deal structures
and partners give
companies the most
optionality?
What technologies
should companies
invest in today?
5
Financing
volatility
What sources of
financing are most
relevant?

20. Page 19 Biotechnology Industry Report 2017 | Beyond borders
Complexity: product reimbursement
As conversations shift from price to value, what steps do biotechs need to take?
► As emphasis on demonstrating value grows, biotechs should consider:
► Investing in real-world evidence to capture patient-centric data during
development
► Using biomarkers to segment populations to demonstrate improved efficacy
► Incorporating stakeholders’ definition of value into pricing decisions
► Around-the-product services that will enable better outcomes
► Proactive pay-for-performance deals with payers (depending on therapeutic area)
Future strategiesTraditional strategies Emerging strategies
Rebates
and
discounts
Patient
assistance
Indication-
specific pricing
Financial-
based risk
sharing
Performance-
based risk
sharing
Annuity
models
Capitation
1

21. Page 20 Biotechnology Industry Report 2017 | Beyond borders
Complexity: R&D efficiency
How can companies improve efficiency via new technologies and capabilities?
► Right drug to right
patient at right time
► Highest use in
oncology
► Shortened
development time
► Increased probability
of success
► Increase probability
of success
► Reduce capital
invested
► Shortened
development time
► Increased sales
► Using technology to
monitor trials
remotely
► Increased regulatory
compliance
► Shortened
development time
► Use social, mobile
and big data
► Develop disease
models and
advanced
therapy solutions
► Targeted clinical
recruitment
► Real world efficacy
and safety
Precision medicine
Biopharmas must overcome challenges to transform the R&D process.
Emerging
understanding of
disease
Data security and
governance issue
Partnering with new
players
Lack of FDA
guidance-
regulatory fears
Lack of resources
(talent and funds)
2
New trial designs
Risk-based
monitoring
Data analytics

22. Page 21 Biotechnology Industry Report 2017 | Beyond borders
Complexity: digital strategy
Technological advances will change biotech value chain
Smart and connected
Sensors
Device miniaturization
Artificial intelligence
Cheaper sequencing technology
Block chain
3-D printing
Cloud computing
Robotics
Memory processing
More data has been created in the past
two years than in the entire previous
history of the human race.
Empowered by data
Data-focused companies are disrupting
the retail, entertainment and
transportation industries.
Data generation + new technology will
disrupt traditional biotech R&D and
commercial activities.
3

23. Page 22 Biotechnology Industry Report 2017 | Beyond borders
Complexity: dealmaking
What deal structure give biotechs the greatest optionality?
► A significant portion of biotechs will be acquired at some point:
► From 2012-16, 10 of 37 commercial leaders (US and EU) were acquired
► How can companies be more strategic to realize full value from portfolio?
M&A
optionality
Option to buy
LLC model
Single asset co Sell minority stake
Divest business
Spin out assets
Biogen/Bioverativ
JNJ buys Actelion; spins out
Idorsia
Lonza sells peptide biz
to PolyPeptide
Roche/Genentech
Gilead/Nimbus Apollo
program in NASH
Takeda/Maverick
Therapeutics
Medicxi funds Kymo
Therapeutics through POC
4

24. Page 23 Biotechnology Industry Report 2017 | Beyond borders
Complexity: financing volatility
Sharp decline in US and EU IPOs underscores financial volatility
5
Sources: EY; S&P Capital IQ and VentureSource.

25. Page 24 Biotechnology Industry Report 2017 | Beyond borders
Complexity: financing volatility
How can biotechs build access to multiple pools of capital?
► Ongoing market volatility driving financial volatility:
► IPO window didn’t slam shut in 2016-17, but for many, it’s not open
► Tougher climate for follow-ons
► Private companies tapping a more diverse set of investors (by type
and geography):
► Traditional venture vs. corporate venture/biopharma business
development
► Foundations/family endowments vs. growth investors
► Life sciences vs. technology
► US vs. Europe vs. China/Asia-Pacific
► Long time cycles and cash required to bring products to market still
bias to public listings
5

26. Page 25 Biotechnology Industry Report 2017 | Beyond borders
EY survival index for US and EU biotechs (2015–16)
Chart shows percentage of biotech companies with each level of cash. Numbers may appear inconsistent because of rounding.
Sources: EY; S&P Capital IQ and company financial statement data.

27. Page 26 Biotechnology Industry Report 2017 | Beyond borders
Beyond borders 2017: key findings
Payers’ cost containment efforts result in slowing top-line
growth for biotechs.
Product reimbursement1
R&D investment increased but FDA approvals dropped;
improving R&D efficiency is an ongoing area of focus.
R&D efficiency2
Partnering with new technology entrants to access new
digital capabilities is a key topic.
Technological change3
Capital markets pull back significantly in 2016; biotechs
must take advantage of a broader investment pool.
Financing4
M&A activity remains strong, but up-front commitments for
alliances decline as biotech valuations fall.
Dealmaking5

28. Page 27 Biotechnology Industry Report 2017 | Beyond borders
When the only
certainty is
uncertainty, is
staying the course
your best bet?

29. Page 28 Biotechnology Industry Report 2017 | Beyond borders
Additional resources
Contact an EY advisor:
► Glen Giovannetti
EY Global Biotechnology Leader
glen.giovannetti@ey.com
► Jürg Zürcher
EY Biotechnology Leader,
Germany/Switzerland/Austria
juerg.zuercher@ch.ey.com
► Ellen Licking
EY Global Life Sciences Senior Analyst
ellen.licking@ey.com
Also:
► Download the report:
ey.com/beyondborders
► Explore/subscribe for new content:
ey.com/VitalSigns
► Follow us on Twitter:
@EY_LifeSciences

30. EY | Assurance | Tax | Transactions | Advisory
About EY
EY is a global leader in assurance, tax, transaction and advisory
services. The insights and quality services we deliver help build trust
and confidence in the capital markets and in economies the world
over. We develop outstanding leaders who team to deliver on our
promises to all of our stakeholders. In so doing, we play a critical role
in building a better working world for our people, for our clients and
for our communities.
EY refers to the global organization, and may refer to one
or more, of the member firms of Ernst & Young Global Limited, each
of which is a separate legal entity. Ernst & Young
Global Limited, a UK company limited by guarantee, does not
provide services to clients. For more information about our
organization, please visit ey.com.
Ernst & Young LLP is a client-serving member firm of
Ernst & Young Global Limited operating in the US.
© 2017 Ernst & Young LLP.
All Rights Reserved.
EYG no. 04481-174Gbl
CSG no. 1706-2348176
ED None
This material has been prepared for general informational purposes
only and is not intended to be relied upon as accounting, tax or other
professional advice. Please refer to your advisors for specific advice.
The views of third parties set out in this publication are not necessarily the views of the
global EY organization or its member firms. Moreover, they should be seen in the context of
the time they were made.
ey.com/lifesciences
ey.com/vitalsigns