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Life sciences industry outlook

INSIGHT ARTICLE

Volume 9, Winter 2022

As the life sciences industry continues to experience high-volume growth and new scientific and operational opportunities, it also faces several challenges. Looking ahead, life sciences companies will encounter increased competition as the economy recovers. This includes competition for experienced and highly skilled talent, as well as for funding and investor interest across the broader economy. Likewise, readiness considerations for shifting models related to clinical trials and new treatments remain top of mind for multiple sectors, from pharmaceutical and biotech companies to medical device and contract service organizations.

We explore what’s happening and what’s to come for this dynamic industry.

Key takeaways from the winter 2022 life sciences industry outlook

  • This year will set the high-water mark for the most private capital invested in life sciences; however, the velocity of activity is decreasing, and the total number of deals will likely settle back into pre-pandemic levels.
  • Life sciences companies are going public at earlier stages of development, and with greater amounts of pre-IPO private investment.
  • A tight labor market will continue to present a significant challenge for life sciences as companies struggle to attract and retain talent in the midst of the “great resignation.”
  • Therapeutic development is shifting from conventional drugs to biologics, and investors are mindful of this change.
  • Patient-centricity is one of the hopeful outcomes of clinical trial decentralization and virtualization; time will tell if it’s achieved.

PRIVATE CAPITAL

Private equity and venture capital remain robust but face headwinds

As shared in our August blog post, a strong first half has set the stage for another record year of investment from the private equity sector. Private equity and venture capital investment in the life sciences sector exceeded $50 billion for the nine months ending September, surpassing 2020’s previous record of $40 billion for the same period. Over the last decade, 26% of private equity and venture capital was raised in the fourth quarter, making up 22% of deals. Given the level of activity this year, there is little doubt that 2021 will set the record for the most private capital invested in life sciences. But the velocity of activity has decreased in the third quarter, and the total number of deals will likely settle back into pre-pandemic levels.

Over the last decade, strong demand for private equity and venture capital investments as an asset class has driven record levels of investment across all industries. In 2020, investment in the life sciences sector grew even faster as efforts to combat the global pandemic ramped up. Investment remained strong into the first half of 2021 as demand for vaccines, diagnostics and other support services grew. Additional investment poured into mRNA research as initial studies leveraging this new platform to address other genetic diseases appeared promising. Investors are hoping they can replicate the rapid development and commercialization of the novel COVID-19 vaccines for these other applications.

MIDDLE MARKET INSIGHT

Investment remained strong into the first half of 2021 as demand for vaccines, diagnostics and other support services grew.

Month-over-month activity indicates life sciences investment has slowed since the peak of the pandemic, a trend driven by several factors. First, capital flows are rebalancing due to record high valuations. Prior to the outbreak, valuations across the life sciences sector neared record highs. Strong investment flow since has continued to drive valuations higher. However, as market volatility increase and merger and acquisition activity in the sector cools, capital will continue to flow toward industries with relatively better valuation metrics.

MIDDLE MARKET INSIGHT

As market volatility increases and merger and acquisition activity in the sector cools, capital will continue to flow toward industries with relatively better valuation metrics.

Second, as the global economy reopens and recovers, investment in the sectors hit hardest will return in lockstep to capitalize on this opportunity. Lastly, despite the successful commercialization of mRNA COVID-19 vaccines, promises and timelines around the development and commercialization of other drugs leveraging this platform remain uncertain. Although early data from clinical research appears promising, approval and commercialization of these drugs for other applications will inevitably take longer than the rapid rollout we saw as an urgent response to combat the global pandemic.

PUBLIC MARKETS

Life sciences companies are raising more and going public sooner

Over the last 12 months, the life sciences industry has represented 40% of initial public offerings—excluding transactions by special purpose acquisition companies—and 20% of capital raised. As was seen in the private sector, year-to-date deal activity suggests 2021 will set a record for life sciences IPOs, led by biotech. We expect the surge in deals and valuations to ;moderate through 2022, with the possibility of a short-term overcorrection as markets rebalance investments across a gradually recovering economy.

MIDDLE MARKET INSIGHT

We expect the surge in deals and valuations to moderate through 2022, with the possibility of a short-term overcorrection as markets rebalance investments across a gradually recovering economy.

The last three years represent the most active period of public market activity that the life sciences industry has ever experienced. Not only have IPOs been increasing in volume and value, but they are launching at earlier stages of development. Between 2019 to 2021, 50% of IPOs were pre-commercial, compared to only 42% in the previous seven years. On average these companies raised $180 million prior to IPO from 2019 to& 2021, compared to an average of $125 million in the earlier part of the decade. In addition, over the last three years, 37% of all life sciences companies that went public did so before raising a fourth round of capital.

As discussed in our previous outlook, a growing number of companies are developing their first commercial drug without backing from an established developer. Through June 2021, 45% of new Federal Drug Administration approvals were for drugs developed by first-time launchers, up from 22% in 2020. While these companies can operate leaner than their larger peers, the average total raised by the 25 companies that successfully launched their first drug between January 2020 and June 20201 was $330 million.

MIDDLE MARKET INSIGHT

Though private markets are happy to finance early-stage development, the large influx of capital provided by an IPO makes it the most sought-after funding source by life sciences companies.

Investment prior to IPO: clinical vs. commercial business status

Public markets remain strong, but divergence continues

Public markets remain hot as the S&P 500 and life sciences sectors continue to rebound from pandemic lows. The life sciences tools and services sector has outpaced its peers as investors favor companies that support the broader life sciences ecosystem and can generate near-term returns, as compared to pharma and biotech with their lengthy product development cycles.

MIDDLE MARKET INSIGHT

Biotech remains positioned for the greatest sustained performance due to the& large number of startups entering the market

The tools and services sector also includes diagnostic companies, which have been expanding rapidly throughout the pandemic, a trend we expect to continue as the global economy shifts towards the endemic phase and additional efforts are directed toward rapid screening and the prevention of future outbreaks. Biotech remains positioned for the greatest sustained performance due to the large number of startups entering the market—businesses that are developing the next& generation of therapeutics focused on cell and gene therapies and the personalization of medicine.

HUMAN CAPITAL

Competition for talent during the “great resignation” 

Plentiful capital provides a strong tailwind for the ecosystem, but labor will continue to present a significant challenge as companies struggle to attract and retain talent in the midst of the “great resignation,” with employees quitting in record numbers to seek new or different opportunities. Life sciences will have to contend with other sectors vying for the same highly educated individuals that have formed the backbone of the ecosystem.

MIDDLE MARKET INSIGHT

Life sciences will have to contend with other sectors vying for the same highly educated individuals that have formed the backbone of the ecosystem. 

From a hiring perspective, the life sciences industry has returned to its pre-pandemic hire rate, and is well ahead of the health care industry and the broader economy. The area with the largest increase in employment is biotech research, followed by medical equipment and supplies. This tracks with the continued focus on and investment in biotech startups, which have raised record amounts of public and private capital over the past 18 months. 

MIDDLE MARKET INSIGHT

In a recent RSM survey of life sciences finance and accounting professionals, respondents reported the labor shortage as the greatest challenge they expect their organizations to face over the next six to 12 months.

In a recent RSM survey of life sciences finance and accounting professionals, respondents reported the labor shortage as the greatest challenge they expect their organizations to face over the next six to 12 months. As the economy reopens and employers continue to adapt to a more remote, digitized and data-driven business environment, there will be a battle for highly skilled employees with science, technology, engineering and math skills. While demand for high-tech labor is currently outstripping supply, there may be a slight reprieve due to a loosening of restrictions around H-1B visa applications. Under the current administration, approval rates have increased from 84% to 98%, and U.S. Citizenship and Immigration Services announced it will conduct a second lottery for visas next fiscal year, as this past year the number of visas has not met the cap set by Congress. 

The shortage of labor and growing number of life sciences companies in the United States and globally could lead to extended development timelines and clinical trials as well as higher cash-burn rates. To combat these negative effects, we anticipate that companies will look for new, innovative business models to get more done with less. These models may include greater capital investment in digital infrastructure, leveraging of advanced computing techniques such as artificial intelligence and machine learning, and increased outsourcing of research, manufacturing and other processes to contract service organizations and other highly specialized third parties.

BIOLOGIC FOCUS

Continued shift from conventional to biologic treatments

One enduring trend in life sciences is the continued focus on biologically derived therapies. This is reflected in both historic and projected worldwide sales of conventional drugs and biologics. In 2020, 70% of sales were conventional drugs while 30% were biologics. Based on forecasts from Evaluate Pharma, the proportion of sales attributable to biologics is expected to grow to 37.5% by 2026. Although capturing an additional 7.5% of market share may not sound groundbreaking, it represents $267 billion in additional revenue.

Considering the trajectory and makeup of worldwide sales, the pandemic spurred an increase in overall drug sales, with an emphasis on biologics. In the bioengineered vaccine category, we see revenue jumping from $23.5 billion in 2019 to $80 billion by the end of 2021 as countries rush to vaccinate their populations against COVID-19 The hopeful portion comes as we see the revenue in this segment then fall over the next several years back to $56.4 billion in 2024 as the pandemic subsides.  

At first glance, the prediction of continued dominance of conventional drug sales seems incongruous with the fact that 54% of all research and development spending in 2020 was devoted to biologics. This discrepancy is best explained by two possible factors. The first is that biologic revenue growth beyond the 2026 forecast window may be more promising than the growth projected for the next few years. The second is that the compound average growth rate for conventional drugs from 2016 to 2026 is forecast to be 4% per year, while for biologic drugs, it is forecast at 11% per year. As this trend continues, the higher biologic growth rate promises better returns on investments in this space.

Finally, it is worth noting that, although the amount spent on research and development for biologics continues to grow, the approval rate for new biologic drugs remains generally stable. From 2011 through September 2021, biologics accounted for one-third of all new-drug approvals. That ratio held true in 2020 and is in line with expected approvals in 2021—so far this year, biologics have accounted for 31% of new drug approvals.

MIDDLE MARKET INSIGHT

Although the amount spent on research and development for biologics continues to grow, the approval rate for new biologic drugs remains generally stable.

CLINICAL TRIALS

The changing clinical trial landscape

A structural change in clinical trials is underway as the industry shifts toward virtualization and decentralization. Three primary trends are driving this shift:

  • A new group of companies has entered the contract service provider market. These newcomers are virtual trial platform companies that typically provide a software as a service (SaaS) clinical trial management system (CTMS) to contract research organizations (CROs). Over $700 million has been invested in this market in the past seven quarters, and we expect this number to grow significantly in the coming years.
  • Clinical trial starts have rebounded from the pandemic-induced lull, and currently exceed historical levels as investors continue to pump capital into the ecosystem during this life sciences renaissance. At the same time, there is a major shortage of labor and trial duration continues to increase. Many companies are looking to virtualize and digitize their trials to minimize cost, maximize efficiency and reduce the likelihood of delay. 
  • Contrary to the current narrative, virtualization often does not lead to cost reductions in telehealth, including when telehealth serves as a proxy for a clinical trial. Clinical research executives note that patient-centricity, not necessarily clinical trial cost, remains the key objective in execution of virtualized clinical trials.

New entrants: Virtual trial platform companies

“Decentralized” and “virtual” are ubiquitous buzzwords in current descriptions of clinical trials; however, the meaning of these terms within the industry can be confusing. Clinical trials are designed to fall within a spectrum of virtualization. On one end of the spectrum, all trial procedures are performed virtually; on the other, all trial procedures are conducted physically at a research site. Trials typically do not fall at the extreme ends of this spectrum but instead comprise a mix of virtual and on-site procedures—a design commonly referred to as hybrid.

The number of clinical trials utilizing virtualization is on the rise. In a recent ERT survey, 33% of clinical professional respondents indicated they were incorporating virtual components into their trials prior to the COVID-19 pandemic, while 82% indicated they are currently doing so. 

With this changing landscape, several new players have entered the arena. These companies are primarily service providers to large CROs and assist with clinical trial virtualization through some sort of SaaS CTMS. In its Decentralized Clinical Trial Products PEAK Matrix® Assessment 2021, the Everest Group ranked several companies based on their vision and capability related to decentralization. The leaders—Medable, Science 37 and THREAD—fall into this bucket of SaaS CTMS providers. A few companies fall outside this bucket, such as ObvioHealth, which markets itself as a virtual research organization and aims to provide fully virtualized clinical trial administration to trial sponsors. 

Partnerships between decentralized trial companies and CROs are increasing, and so is investment in virtual trial companies. According to PitchBook, there have been 14 disclosed investments into these organizations over the past seven quarters, totaling $719 million. We expect that capital will continue to flow into these organizations as partnerships expand. We also expect established CROs to look into acquiring these organizations as they grow their in-house virtual trial offerings.

On Oct. 7, Science 37 completed a reverse merger with LifeSci Acquisition II Corporation to go public under the ticker symbol SNCE. Further highlighting the growing demand for related services in the clinical trial industry, the deal valued Science 37 at $1.05 billion, a significant increase from its $250 million valuation 12 months prior, according to PitchBook data. This transaction is not reflected in the accompanying chart.

Clinical trial activity and duration

We analyze clinical trial starts and average years to study completion as indicators of opportunities in the clinical trial space. These metrics can signal opportunities for efficiencies that virtual trial models could address.

Clinical trial starts

Phase 3 clinical trial starts have rebounded to their pre-pandemic levels. Quarterly phase 3 clinical trial starts totaled 152 and 193 during Q1 and Q2 2020, respectively, but then averaged 245 through Q3 2021, surpassing the historical average of 220 pre-pandemic. As the volume of trials increases without a corresponding reduction in study duration, the industry will continue to feel productivity pressures, exacerbated by the highly competitive labor market.

Average years to industry-funded study completion

The average phase 3 trial duration was approximately two years in 2009, compared to 3.25 years so far in 2021, with the COVID-19 pandemic serving as a delaying factor. We expect to see a reversal of this trend beginning in late 2022 or early 2023 as early adopters of increased virtualization complete their trials. For the time being, this upward trend highlights the opportunity to increase efficiencies in the clinical trial process.

The cost of virtualization

The industry has provided limited information on the cost savings of a fully decentralized trial versus a fully on-site trial. In last quarter’s outlook, we described several large CROs and their progress toward decentralized trials. We noted PPD’s commentary that fully virtual trials have a completely different cost structure than legacy models. While the number of sites and travel to those sites are reduced in a fully virtual trial, there is an increase in point-to-point solutions to serve patients in their homes, as well as a much more decentralized supply chain. To quantify potential savings we looked at telehealth’s impact on costs in the health care industry overall.

In parallel: Telehealth in health care and life sciences

In an article published in the Journal of Medical Internet Research, Determining if telehealth can reduce health system costs: Scoping review, researchers found that while telehealth does benefit patients and increase productivity for many services, it does not routinely reduce the cost of care delivery for the health system. Telehealth cost savings were identified in 53%, 50% and 32% of cost-minimization, cost-effectiveness and cost-utility studies reviewed, respectively. Savings were predominant in studies where historical health system-funded patient and clinician travel was replaced by telehealth. In the remaining studies, telehealth improved patient care while simultaneously increasing cost.

Important to note is that subsidizing of patient or clinician travel is most prevalent in the public health system versus the private health system—which helps explain why researchers found that the public system realized higher cost savings with telehealth than the private system did. The public health system model is similar to most clinical trial models, which may reimburse patients or clinicians for their travel to a physical site. If we assume the two models are analogous, we can also assume that clinical trials may realize cost savings with telehealth.

One of the most critical points made in the research is related to cost minimization versus cost-effectiveness and cost utility. While telehealth may not be the best tool to minimize costs in the clinical trial process, it has proven to be very effective in improving overall health and reducing morbidity and hospitalization. In 32% of studies reviewed for cost utility, cost savings were demonstrated while simultaneously increasing quality-adjusted life years of patients. In the remaining 68% of studies reviewed, telehealth increased health care costs while simultaneously increasing quality-adjusted life years. As we speak with biopharma and CRO executives, who measure cost while also focusing on data quality and patient-centricity, we believe these metrics strike a chord with them. 

Discrepancies in the data and industry anecdotes  

As we’ve mentioned, “decentralization” and “virtualization” are industry buzzwords. The industry sentiment is that these trial models will improve patient-centricity and reduce clinical trial costs; however, we haven’t seen extensive data to support that conclusion. Various articles and discussions with executives point to an estimated 30% in cost savings as the industry continues to implement virtual components; however, this figure is anecdotal for the time being.  

While the overall savings remain to be quantified, specific tasks clearly will benefit from virtualization and result in reduced costs. The Association of Clinical Research Organizations highlighted a case studywith Covance—now known as Labcorp Drug Development—which cited $10,000 to $25,000 as the cost to recruit a new patient, without consideration of the cost of trial delays. Telehealth undoubtedly makes patient retention and recruitment easier; less clear is the net impact from cost savings on patient recruitment and retention and the cost to implement a telehealth solution.

In short, we remain torn on this topic. We look forward to the improvements in patient-centricity that decentralization and virtualization will bring to the table. Hopefully these improvements will result in meaningful reductions in clinical trial costs that will be passed on to patients through reduced drug pricing. We look forward to seeing that hope turn into reality, while remaining keenly aware that it may not.

MIDDLE MARKET INSIGHT

While the overall savings remain to be quantified, specific tasks clearly will benefit from virtualization and result in reduced costs.


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John Lanza
National Life Sciences Practice Leader
John.Lanza@rsmus.com
800.274.3978