IPO funding slowdown has placed significant pressure on life sciences companies that are not yet generating revenue.
Key takeaways
Robust labor demand, coupled with inflation, has led to significant wage pressure on life sciences employers.
Challenges can be mitigated through cash flow management, alternative funding sources and technology upgrades.
The life sciences industry maintains robust employment and job growth compared to the overall U.S. economy; however, the effect of rising inflation on wages and a near standstill in life sciences initial public offerings serve as significant headwinds.
The overall U.S. economy has experienced barely break-even performance on employment compared to pre-pandemic levels; meanwhile, employment in life sciences has increased by approximately 2% since the beginning of 2022, and 11% from pre-pandemic levels. While wages rose through the first quarter of 2022, those gains were offset by reductions through the second quarter. The bigger story is the significant fall-off in IPO funding through the first half of the year.
By the numbers ...
IPO funding has dropped from an average of about $25 billion per year over the past two years to roughly $1.5 billion and has come to a near standstill halfway through 2022. A slowdown in IPO funding places significant pressure on life sciences companies that are not yet generating revenue.
The top challenge for the life sciences industry in a slowing economy is decreased funding.
IPO funding, venture capital and private equity investment remain the primary funding sources for pre-revenue life sciences companies. VC/PE investment averaged approximately $90 million per year over the last two years and has dropped to about $36 million halfway through 2022. Even mergers and acquisitions, which may seem like a last resort for the Wild West environment characterized by early-stage biotechs, have dropped significantly. There were 134 M&A deals worth approximately $137 billion in each of the last two years which has dropped to 24 deals totaling some $13 billion in value halfway through 2022.
Other challenges include employment and inflationary pressure on wages, sales and prices.
Robust labor demand, coupled with inflation, has led to significant wage pressure on employers; however, there are some signs it may be easing. Life sciences wages rose through Q1 but saw signs of relief in Q2 as those gains were offset by reductions. More data is needed to know whether this is the start of recessionary fears shifting the power dynamic back into the employer’s court.
Sales and pricing could also potentially be affected by recessionary fears; however, there are currently no signs of a slowdown in spending, according to Evaluate Pharma, with worldwide sales for 2022 forecasted to grow 7% year over year to $1.14 trillion. Additionally, prices for prescription drugs have not seen the same level of inflation as the broader U.S. economy in the first half of 2022, and have remained flat year to date.
As we consider the recently passed Inflation Reduction Act’s provisions directing the U.S. Department of Health and Human Services to negotiate the prices of the highest-spend prescription drugs, we expect little impact on middle market life sciences companies that are not the manufacturers and distributors of such drugs.
Challenges can be mitigated through cash flow management and alternative funding sources.
While there is clearly a funding slowdown exacerbated by wage pressures, there is a silver lining for life sciences companies. Coming off two years of historic fundraising, many have working capital on hand to support operations for the next 24 to 36 months. Companies not lucky enough to secure such funding are looking for alternative measures to support their operations, such as licensing deals. And large pharma companies have also stated that they are remaining acquisitive for the right companies to join their portfolio.
Other top considerations to offset the impact of headwinds facing life sciences:
Technological overhauls: Small to midsize biotechs often have small teams and are overly dependent on inefficient spreadsheets. Working with the right consultant may seem counterintuitive in a recessionary environment; however, identifying and remediating process inefficiencies now can save thousands, if not millions, of dollars over the next couple of years and position companies with strong back-office technology platforms to be ready for eventual commercialization or an IPO when the opportunity presents itself.
RSM contributors
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Industry inflation snapshots
Hampered by rising inflation, geopolitical uncertainty and supply chain disruptions tied to the COVID-19 pandemic, the U.S. economy contracted in each of the first two quarters of 2022.
RSM economists peg the chance of a full-blown recession over the next 12 months at about 65% (as of October 2022); an economic slowdown of any measure creates significant challenges for middle market companies. We took a look at the potential impact on several industries.
