United States

Life sciences industry outlook

INSIGHT ARTICLE

Volume 6, Winter 2021

After a strong year of rapid scientific innovation in the face of a global crisis, the life sciences industry must now determine how best to position itself in a rebounding economy amid heightened expectations and a new presidential administration. There will continue to be pandemic-related struggles ahead, and we anticipate some moderation in deal valuations and the number of transactions this year in life sciences as other industries recover and compete for capital.

Nevertheless, we expect 2021 to be another strong year for life sciences. In this report, we examine recent investment trends and how the industry can continue building on its impressive 2020 progress in clinical trials and drug development.

Key takeaways from the winter 2021 life sciences industry outlook

  • We believe that life sciences as a whole—and biotechnology in particular—will continue to outperform average levels throughout 2021.
  • There are a number of policy decisions we expect will heavily affect the industry under a Biden administration, including drug pricing policy, health care reform and the anticipated normalization of trade relations.
  • Over the previous three years, 60% of life science initial public offerings have been among biotech companies, with that proportion increasing to 75% in 2020.
  • The clinical trial industry should continue its focus on being more patient-centric to improve patient retention and expand the population of patients able to participate in trials.

Major catalysts in the first half of 2021

The life science ecosystem has favorable tail winds coming out of 2020 and, given the continued importance of the industry in addressing the COVID-19 pandemic, we anticipate that 2021 will remain an above-average year in terms of deal flow, innovation and public sentiment. We do anticipate some moderation in valuations and the number of transactions this year as other industries recover, but we believe that life sciences as a whole—and biotechnology in particular—will continue to outperform average levels throughout 2021.

We expect medical device companies will have significant upside once the pandemic subsides and health systems return to normal operations. Pharmaceutical companies will be bolstered by the likely delay of major drug pricing policies as the Biden administration faces a narrowed House majority, a split Senate, and many pressing economic and COVID-19-related matters to address in its first 100 days. In the clinical trials space, we are encouraged by the broad resumption of non-COVID-19 trials, and optimistic about advances in remote/virtual trials that have taken a massive step forward during the global pandemic lockdowns.

As devastating as 2020 was, it gave the life sciences ecosystem an opportunity to showcase what can be accomplished when it functions at its best and receives full support from regulators and the community. Collaboration, adaptation and innovation were at the core of the industry’s development of diagnostics, therapies and vaccines to address COVID-19; the securing of supply chains to prevent drug shortages and maintain the flow of lifesaving medical supplies; and the ongoing support of clinical trials and drug development focused on the future health of our communities.

Life sciences companies will also need to determine how to position themselves in a rebounding economy with heighted expectations for rapid innovation, a new Biden administration and greater competition for investment from recovering industries.

“Given the continued importance of the life sciences industry in addressing the pandemic, we anticipate that 2021 will remain an above-average year in terms of deal flow, innovation and public sentiment.”

Biden policy impacts

According to the Center for Responsive Politics, Joe Biden received 3.5 times more political contributions from life science interests during his candidacy as incumbent President Donald Trump. What’s more is that 1.8 times as much money from life sciences interests flowed to Democratic candidates in congressional races as compared to Republican candidates, per the CRP. While the political nuance of such contributions is beyond the scope of this outlook, we believe it is a strong indication that the industry favors the policy and economic implications of the new Biden administration. Government decisions that will heavily affect the industry in the near future include:

  • Changes in key leadership positions including at the Food and Drug Administration, Centers for Disease Control, Health and Human Services, and the Federal Trade Commission. These individuals will help shape the rate of play for life sciences companies, affect the public perception of pandemic-related efforts, and set the tone for drug approval and deal flow.  
  • The anticipated normalization of trade and international relations with our allies, which would reduce volatility and stabilize supply chain concerns.
  • Accommodative fiscal and monetary policy that will likely include additional fiscal stimulus and sustained near-zero interest rates. This will encourage investment in private and public markets, which life science has been a major beneficiary of during this recession. With the broader economy expected to recover somewhat in mid-2021, there will be increased competition between industries for investor dollars, but we believe that life sciences—particularly biotechnology, diagnostics and medical supplies—will receive an outsized piece of the pie. 
  • Health care reform and drug pricing will be major policy targets as Biden seeks to shore up the Affordable Care Act, and governments and insurance systems are faced with decreased budgets and the mounting economic cost of the pandemic. Governments will be looking to health care providers and drug companies to reduce the cost of care to a wider swath of the population that has lost employer coverage. 

As of this writing in January, nearly 600 drugs (almost all branded) have already experienced an average price increase of 4.2% in 2021, according to GoodRx. While this is in line with previous years, the industry will come under increased scrutiny given sustained unemployment and financial difficulties throughout the United States. We anticipate that early policy decisions will be focused on the economy, COVID-19 and the ACA, and major drug pricing provisions such as the "most favored nation" clause proposed by Trump will likely be dropped in favor of more moderate policies with a better chance to pass a divided Congress.

Drug development technology and vaccination efforts

As much as the world wants to move past 2020, the reality is that many pandemic-related challenges will persist through 2021. As of this writing, Pfizer/BioNTech and Moderna have received emergency use authorization (EUA) for their COVID-19 vaccines, and tens of millions of doses are being distributed across the country. Through December 2020, 4.5 million American’s had received their first dose, as tracked by the CDC COVID-19 data tracker, which is far fewer than initial projections.

This slow roll out has been affected by production capacity, disparate distribution protocols for each state, logistical complications, and varying levels of willingness to get the vaccine by different demographics and regions. These challenges are not unexpected, and as the United States and other developed countries expand their vaccination efforts we expect to see a persistent decrease in infection rates, the relaxation of lockdowns, and a boost in employment and economic activity. As we noted in November following the news of positive efficacy results for the Pfizer/BioNTech vaccine, such innovations will bring us closer to unlocking nearly $4 trillion in impaired economic activity in the United States.

Through the rapid development of COVID-19 diagnostics, therapies and vaccines, the world has seen it is possible to bring safe and effective drugs to market in months not years—a feat only achieved because of capital injections and political and regulatory support that would have been unimaginable a year ago. This shows what can be accomplished when government, community and industry interests align. We hope that the pandemic signals a structural shift in how investments and regulations are made in life sciences and health care.

While this shift will likely take years, there is an immediate need for the industry to collaborate with the Biden administration and international partners regarding the increased use of technology and analytics in the identification, development and delivery of next-generation therapies. This will mark a continued shift from pure physical sciences to a digital hybrid based upon an unprecedented amount of data collected clinically and by patients. Key technologies will include artificial intelligence, machine learning, the gene editing tool CRISPR and other gene editing techniques, telehealth, digital clinical trials, and the expansion of the Internet of Medical Things, which is expected to grow at a compound annual growth rate of 27% through 2027 globally, according to Acumen Research and Consulting.

A record year in capital markets

While the full value provided by the life sciences industry is immeasurable, it is clear that the halo effect of the industry’s COVID-19-related efforts, as well as the future potential they bring to the economy, have encouraged a surge of funding to the industry in 2020. The question now is whether this financing momentum will carry through 2021 and serve as a further catalyst of the industry’s growth.

Across all investment types, biotechnology companies received the majority of investor attention in terms of the number of transactions and the amount of capital raised. From our analysis of investment data collected by PitchBook and Bloomberg, 44% of all corporate life science investments were in biotech targets in 2020, up from the previous three-year average of 34%. Pharmaceutical companies accounted for 60% of corporate life science investment in 2020. Over the previous three years, 60% of life science initial public offerings have been among biotech companies, with that proportion increasing to 75% in 2020.

This focus on biotech has been several years in the making as the technologies become more affordable and accessible to both developers and patients, and are seen as crucial components of drug portfolios that are looking to diversify, specifically with regard to oncology and immunotherapies. The attention in 2020 was primarily driven by biotech’s role in addressing the pandemic, but given historic trends and the fact that the sector has gained significant mainstream attention, we believe that biotechnology will continue to drive innovation and investment in the life science ecosystem for the foreseeable future.

Private and venture investment peaks in 2020

Serving as the growth engine for the ecosystem, capital raised through private equity and venture capital investment reached record highs throughout the pandemic with a specific focus on biotechnology, diagnostics and drug discovery companies. Overall, private equity and VC investment increased 20% last year over 2019. The nature of private investments mirrors the broader K-shaped recovery taking place in the United States, whereby the lower arm of deals under $20 million represented 76% of the deals, but only 13% of capital raised. Investments at this level are typically seed and early VC rounds, but during the pandemic we have seen an increase in the number of companies that needed quick add-on rounds to support operations as trials and development milestones were temporally delayed.

The upper arm of late-stage companies and those with significant prior financing rounds benefited from increased valuations and attention from investors looking to put dry powder to work.

MIDDLE MARKET INSIGHT

When focusing on investments in the core middle market of life sciences, we see that the number of deals, valuations and median size of deals between $20 million and $500 million continues to increase rapidly, and peaked again in 2020.

U.S. corporate M&A remains highly active

The United States remains the global leader in life sciences in terms of research, development and market share, but other developed countries across Europe and Asia play a critical role in supporting the U.S. ecosystem. China and India have established themselves as key centers for manufacturing generics and active pharmaceutical ingredients (API), and are quickly developing their own domestic R&D capabilities. Our allies across the Atlantic also continue to generate many breakthrough technologies and have proven to be a valuable source of partnerships and acquisition targets for U.S. companies.

As we wrote about in Pharmaceutical Outsourcing, a rise in nationalism across the globe, strained trade relations and economic disruption from the pandemic have put significant pressure on distributed supply chains and increased calls to reduce reliance on our international partners. With a Biden administration, we anticipate normalization in international relations and a de-escalation of trade tensions, but the calls for more robust domestic life science capabilities, from research through production and distribution, will persist through the near term.

MIDDLE MARKET INSIGHT

Middle market companies are leaders in the industry’s digital transformation, as they are the ones developing and testing new techniques and technologies, which then makes them prime targets for acquisition. Our analysis of Bloomberg data on corporate M&A deals between 2016 and 2020 shows that 90% of acquisitions of biotech and pharma companies in the United States involved deals less than $200 million.

Given the capital available to large U.S. drug and medical device companies, we believe that corporate investment in domestic and foreign entities will continue at increasing rates as established companies seek to diversify aging product portfolios and drive innovation through the acquisition of small and middle market companies pursuing breakthrough technologies. Foreign investment has tapered off in recent years, and we expect this to persist until Europe emerges from the pandemic-driven recession and finds clarity in the wake of Brexit.

Public capital surges in 2020

The life science industry has generated over 40% of all non-special purpose acquisition company (SPAC) IPOs in the United States since 2018, and 2020 shattered previous records in terms of offerings and capital raised. Typically thought of as a defensive industry, institutional and retail investors took note of the spotlight placed on life sciences by the pandemic, and gave increased recognition to growth potential that rivals the tech market.

In 2020, existing public life sciences companies raised three times as much capital through secondary offerings as was raised through new IPOs. We expect that the rate of IPOs will moderate in 2021, and will continue to be focused on biotechnology and drug discovery. 

Out of the crucible of 2020, better clinical trials emerge

The global pandemic caused substantial disruption to clinical trials in 2020. In April of 2020, despite the beginning of hundreds of new clinical trials related to COVID-19, total new patient enrollments were down 59% compared to the same period in 2019, according to Medidata. As vaccine distribution gets underway and provides some sense of hope for the future, the life sciences industry will need to decide what its future will look like. Will the industry return to the pre-pandemic model in which trials are extremely hands-on, require endless trips to study sites and are disruptive to patients’ lives? Will study patients be willing to give up the convenience of telehealth and remote patient monitoring? Or will we build on the changes of 2020 so that trials remain more patient-centric, accessible and inclusive?

In a July article in British medical journal BMJ, Simon Erridge of the Imperial College London described this environment as "the greatest global disruption to clinical research since the Second World War." This left many study sponsors facing the prospect of a lost year of research unless they and the clinical research organizations (CROs) conducting the trials quickly adapted. A survey from CRO ERT in the spring showed that 79% of clinical study professionals were most concerned about the ability to screen new patients, and 25% said the primary issue over the next six to 12 months would be patient recruitment and enrollment. In that same survey, 75% of participants identified telehealth and remote patient monitoring to be most important tools needed to move to virtual trials.

The unprecedented disruption to clinical trials necessitated rapid change in a field that previously experienced mostly incremental changes spanning many years. According to surveys conducted by Medidata and published in September 2020, 15.3% of sites reported switching to remote lab collections, 15.3% adopted at-home visits by study staff, and a remarkable 40% began using virtual patient visits to bring clinicians into trial subjects’ homes.

This rapid adoption stands in stark contrast to the pace of change prior to 2020: In a 2019 statement by then-commissioner of the U.S. Food and Drug Administration Scott Gottlieb, for instance, he urged study sponsors and research organizations to embrace new technology and approaches to reduce cost and risks. In 2018, Center for Drug Evaluation and Research (CDER) director Janet Woodcock described innovation in new therapies "converging on the clinical research enterprise, which is at best a sickly link in this chain." As recently as November 2019, Life Sciences Leader referred to virtual trials as a “recent” innovation that biopharma companies should consider adopting.

Trials at the intersection of medicine and consumer technology

Critical upheavals in clinical trials would not have been possible without a corresponding adoption of supporting technologies. Some of these have been building over time and others saw rapid adoption because of the pandemic. The most basic requirement in order to conduct trials virtually is that patients must have access to smartphones or broadband internet. Approximately 88% of Americans currently have a smartphone and that is expected to near 90% by 2023 according to data from Ovum.

"With the rapid adoption of remote monitoring, telehealth and virtual trials catalyzed by the pandemic, the biopharma and CRO industries should leverage what they learned in 2020 and never look back.”

In addition to smartphones, smart watches and fitness trackers (collectively referred to as wearables) have also enabled new approaches to clinical trials and are the most familiar to consumers when it comes to remote patient monitoring tools. Apple has led the charge in the adoption of wearables for clinical research. From 2017 to 2019, Apple conducted a trial with Stanford to research the feasibility of using the Apple Watch to support heart research. According to Stanford professor Mintu Turakhia, "the study’s findings have the potential to help patients and clinicians understand how devices like the Apple Watch can play a role in detecting conditions such as atrial fibrillation, a deadly and often undiagnosed disease. The virtual design of this study also provides a strong foundation upon which future research can be conducted to explore the health implications of wearable technology."

Building on this research, Apple has joined forces with Johnson and Johnson to conduct an additional three-year, 150,000-patient study using more advanced electrocardiogram features in newer Apple Watches. The goal of the study is to research atrial fibrillation in adults over 65 and identify causes of adverse outcomes. According to J&J, this will be the largest randomized cardiovascular study in history.

These consumer trends laid the groundwork for the two biggest technical components required for hybrid and virtual trials—telehealth and improved clinical trial technology. Telehealth saw remarkable adoption in 2020 as patients and providers alike worked to allow people continued access to care while minimizing exposure risks to COVID-19. Insurance providers saw a nearly 3000% increase in claims for telehealth visits in 2020. This change was driven by temporary waivers of HIPAA penalties that allowed doctors to leverage technologies at hand, like FaceTime and Zoom, but given the success and rapid adoption by patients it is hard to see people giving up the convenience of telehealth anytime soon.

These changes require biopharma companies and CROs to rethink the tools and systems they use to manage trials and ensure that they support collecting data directly from patients, performing routine trial activities like gathering consent electronically, and supporting telehealth visits.

With the rapid adoption of remote monitoring, telehealth and virtual trials catalyzed by the pandemic, the biopharma and CRO industries should leverage what they learned in 2020 and never look back. The benefits of virtual trials offer concrete benefits for both the sponsors of trials and the patients involved in them. Using the lessons of the past year, the clinical trial industry should continue its focus on being more patient-centric to improve patient retention, expand the population of patients able to participate in trials and bring therapies to market faster.

2020 was a year of remarkable successes in the life sciences industry. It was one of the few beacons of light in an otherwise dark year. Decades of ground work allowed biopharma companies to develop COVID-19 vaccine candidates with unimaginable speed. Regulators, drug developers and CROs came together to perform—in just a few months—trials that normally take years. Capital markets recognized this with record investments. As we start 2021 with new vaccines to tame the pandemic being administered around the globe, the industry should build on the successes of 2020 to continue to drive investment, make trials more diverse and patient-centric, and develop new therapies at a pace we once thought was impossible.


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