Life sciences services industry outlook: Winter 2023

Coming out of a period of staggering growth during the pandemic, life sciences services companies, particularly in the clinical research space, have maintained strong growth despite the economic headwinds of 2022. Looking toward 2023 and 2024, we see a potential easing of these headwinds as the federal funds rate hikes potentially peak in the first half of 2023. Key considerations include the following:

Small to midsize biotech RFP headwinds may ease with public funding rebound in summer 2023

From 2017 to 2021, according to data from Bloomberg and RSM US LLP, biotechs averaged approximately $45 billion annually in private equity and venture capital investment. Through 2022, we did not see a significant PE and VC investment shortfall; however, the public funding environment has faced significant challenges. From 2017 to 2021, biotechs averaged approximately $15 billion annually in funding from initial public offerings. Through 2022, we saw around $2 billion in funding from IPOs, a decline of approximately 85%.

Amid rising rates from the Federal Reserve, biotechs are experiencing depressed valuations. It costs around $350 million to bring a new drug to market, excluding the cost of the many failures along the way.  Many biotechs raise around $100 million in private markets before turning to public markets to secure remaining funding. Therefore, public markets serve as a major funding source in a biotech’s life cycle. Recent inflation challenges and the corresponding federal funds rate hikes have effectively lowered available public funding of US biotechs through depressed valuations.

That said, history has shown some correlation between the final federal funds rate hike, market performance, and funding through IPOs and additional offerings. We currently anticipate the final hike in the federal funds rate in the first half of 2023. Barring any unforeseen shocks to the U.S. economy, this could mean a rebound of public funding as early as summer 2023.

Biotechs are increasingly focusing on cost as extending their cash runways takes on growing importance. This means that clinical research organizations with a high concentration of small to midsize biotech sponsors are under increasing pressure to meet sponsor cost demands while maintaining profitability in a period of rising labor costs. An easing of the public funding markets should mean an easing of this trend for CROs, increasing the volume of requests for proposals and granting CROs more bargaining power to bake in much-needed fee increases to offset rising labor costs.

Average return pre- and post-final Fed rate hike*

IPO and additional offering funding; pre- and post-final Fed rate hike*

Look for labor demand to ease as U.S. economic growth slows through 2024

U.S. labor demand, including life sciences services, remains unhampered coming out of the pandemic. Through 2022, based on analysis on the clinicaltrials.gov database, we expect approximately 5,200 new clinical trials to start. While this is less than the approximately 5,650 starts in 2021, strong starts and increasing clinical trial duration mean labor demand remains strong. The industry’s demand for labor, which includes a highly skilled and specialized workforce, has historically outpaced supply. The federal funds rate hikes, expected to peak in the first half of 2023, will lead to a tempering of demand, which we see as moving more in line with supply levels versus falling short of supply. Therefore, companies should not expect an immediate decline in wage pressure. It could take until well into 2024 for this demand realignment to work its way through the system.

As a side note, we found that approximately 30% of phase 2/3 trials scheduled to start in the first half of 2022 delayed their start date. The delays averaged approximately 130 days or 4.3 months. We believe these delays, influenced by small to midsize biotech funding challenges and by availability of labor, are the primary reason we did not see record levels of clinical trial starts in 2022.

Clinical trial study starts and active forecast*