The biotechnology industry is facing “one of its most challenging periods for many years” in an economic climate where a greater emphasis is being placed on the price paid for the sector’s drugs and what value they add to patients, a major new report claims.

The report by Ernst & Young, which is co-authored with think-tank Oxford Analytica, notes that innovations in the USA and international drugs markets “may not have happened had pricing controls been applied” and any new products on the market today have only been made possible “through the reinvestment of healthy financial returns on drugs sold”.

Ian Oliver, of E&Y’s biotechnology team in the UK, claims that because the USA is the most significant market in the world for the biotech and pharma industries, the introduction of price controls there “would change the face of the sector on a global scale”. He adds that such a measure would have driven capital away and slowed down R&D, “so ultimately this could result in the industry’s pipeline drying up.”

Mr Oliver also notes that in the face of increasing healthcare costs, government bodies are putting increasing pressure on companies to determine whether the use of their products will add sufficient value when treating a patient to justify its cost. “This poses a serious operational challenge for the industry as companies will have to present robust data”, he said, adding that “innovative therapies treating unmet medical needs will stand the best chance of commanding higher prices”. As a result, biotech companies will be more incentivised to develop first-in-class medicines rather than ‘me too’ drugs and “this could drive focus to niche areas, from those with ‘blockbuster’ potential”, he argues.

The report also highlighted raising capital as a major threat to the industry. Mr Oliver says that venture capitalists are favouring investments where they can predict how much capital they need to invest, “what value they will extract at the end of the investment and have a clear understanding of the exit route”. Furthermore, private equity funds are favouring public companies with higher market liquidity than the typical biotech company, “which is causing PE houses to move away from the industry”.

He added by saying that “uncertain access to funding and capital markets will lead to a funding gap for early-stage technologies and impact the pace of drug development long term.” In conclusion, Mr Oliver argues that “it is important for biotech companies to identify and manage risks as soon as possible – put them on management’s ‘radar screen’ – and develop procedures to mitigate their potential impact”.