Life sciences industry outlook
INSIGHT ARTICLE |
The life sciences industry has been in the spotlight for much of 2020 as government officials and the public pin their hopes for economic recovery on the discovery of an effective vaccine for COVID-19. While some of the initial rush of excitement around the industry has moderated as the pandemic has worn on, life sciences continues to be a very active market for both private investments and initial public offerings.
The clinical trials pipeline also seems to be recalibrating after a flood of COVID-19-related clinical trials sidelined research on other diseases earlier this year. Overall, we expect the resilience the life sciences industry has shown to continue into 2021 as researchers make progress on vital work related to the coronavirus and a wide range of other diseases.
Key takeaways from the fall 2020 life sciences industry outlook
- The Q2 surge behind life sciences is beginning to ease as some stability returns to the broader market, but we expect this industry to remain a primary focus for investors.
- Companies should at least consider mounting pressure to repatriate aspects of production when designing and forecasting long-term supply chains.
- A rapid recovery in employment for life sciences companies will reignite the race for talent that characterizes hiring in this industry.
Topics in this issue
In a troubled economy, life sciences remains a bright spot
Much of the world has spent the last two quarters under some form of lockdown, hoping for a therapy or vaccine that will put an end to the pandemic and the fallout that has crippled economies, sent national deficits skyrocketing, and kept the population out of work and school. Much rests on that hope, because, as RSM chief economist Joe Brusuelas frankly put it: “No vaccine, no recovery.”
Now, as the initial shock of the pandemic has lessened, we can look ahead to where the economy and the life sciences ecosystem are headed. While many industries have been focused on the year that could have been, life sciences has fared better than the rest of the U.S. economy, except for some big tech stocks and a handful of now essential work-from-home players like Zoom.
Acknowledging that the market is not the economy, we do see current year performance as a positive sign for life sciences, especially when compared to the high-performing S&P 500. Each of the life sciences sectors has been on par or far in advance of the broader market, with biotech and life sciences tools and services leading the pack. Given pharma’s more established portfolio and the fact that all the primary vaccine candidates are biologics, we are not surprised that pharma’s performance has matched the market. The excitement around biotech and a potential vaccine has started to wane as development of a critical few vaccine candidates has reached warp speed and retail investors start to place bets elsewhere in a rebounding market.
Life sciences tools and services are benefiting from a strong tail wind in demand for testing services and supplies, reagents and other components to support ongoing trials, COVID-19 tests and the manufacture of vaccines. We believe this demand will persist well into 2021 as a vaccine is hopefully made available and testing continues within an increasingly open economy.
The focus on COVID-19 therapies, critical medical devices and testing capabilities has provided a halo effect for the life sciences industry. But looking past the market hype and politics of bringing a vaccine to market, we believe life sciences will remain a primary focus for investment and innovation. Life sciences capital markets are as strong as ever, supply chains have proven resilient, and clinical trials have rebounded to support the overall ecosystem for the long term.
MIDDLE MARKET INSIGHT
Life sciences capital markets are as strong as ever, supply chains have proven resilient, and clinical trials have rebounded to support the overall ecosystem for the long term.
A primary player in public markets
As many industries suffer depressionary shocks from the economic shutdown, and the Federal Reserve keeps interest rates near zero to support spending, life sciences companies have been attractive targets in the public and private markets for investors who see the long-term potential of the industry.
Looking only at initial public offerings for life sciences companies, it would be hard to tell we have been in a global recession. Other than special purpose acquisition companies (commonly known as SPACs), which have seen a resurgence during the pandemic as a faster and less cumbersome alternative to public listing, there are no other sectors that have approached the performance of life sciences. Biotech, which made up the vast majority of IPOs during 2020, was likely able to benefit from an increased level of understanding and excitement from both retail and institutional investors driven by the sector’s efforts to find therapies and a vaccine for COVID-19.
The Q2 surge is beginning to ease as stability returns to the broader market, but we expect life sciences to remain a primary focus for public investment, as the industry has represented 40% of all non-SPAC IPOs in the United States since 2018. Looking ahead, we expect biotech to remain the most active sector in life sciences as these companies bring innovative new therapies and technologies to market and serve as growth catalysts and targets for large biopharmaceutical companies. As a point of reference, about 60% of all life sciences IPOs over the last three years have been in biotech.
Private investment reaches new peak
Even with the disruption of clinical trials and a defensive position by many private investors during the pandemic, life sciences has remained a very active market for private equity and venture capital.
Private investment in life sciences companies was at its highest level ever between January and August 2020, according to our analysis of PitchBook data, and that is even after excluding Vilex and Squadron Capital’s $62 billion acquisition of medical device maker DT MedTech in July (which we removed from the below analysis as it was a major outlier). The amount of life sciences capital raised is even more impressive given that the deal count through August is 24% lower than the three-year average. The slowdown in deals is to be expected in a recessionary environment as funds monitor and protect existing portfolios and wait to see if there are opportunistic deals to be had. Investments to date have skewed toward the ends of the spectrum between large investments and buyouts of later stage companies with high probability assets, and smaller add-on rounds to support early stage companies that have been disrupted by the pandemic.
Over the last decade, an average of 69% of private deals and 64% of private capital investments in life sciences take place between January and August each year, an RSM analysis of PitchBook data shows. Those levels of activity remained relatively unchanged even during the Great Recession. Given the resilience of life sciences through the pandemic, we have no reason to expect that private investment activity through the remainder of 2020 will slow in any significant fashion. Especially as the life sciences public markets continue to provide above-average returns, interest rates are expected to be held near zero for the foreseeable future, and the broader economy continues to experience increased political and pandemic driven volatility.
“Given the resilience of life sciences through the pandemic, we have no reason to expect that private investment activity through the remainder of 2020 will slow in any significant fashion.”
Rapid rebound in clinical trials
The pandemic forced researchers and clinical trial managers to contend with a new set of obstacles, including travel restrictions, remote work, economic instability and concerns from patients about visiting medical facilities. Many sponsors diverted attention away from their core pipeline and toward efforts to develop and test COVID-19 treatments and therapies. Globally, the number of patients who entered clinical trials in April this year plummeted 79% compared to April 2019, according to a survey conducted by Medidata early in the pandemic. At the same time, there was an explosion in the number of new trial starts related to COVID-19; globally, nearly a quarter of all new trials in April 2020 focused on the disease, and in the United States that figure was 30%.
The fear was that these challenges and the focus on COVID-19 would significantly disrupt the clinical trial pipeline and have long lasting repercussions for the life sciences ecosystem. Fortunately, those fears did not materialize. Even during the peak of the pandemic in the United States, the weekly number of new trial starts registered with clinicaltrials.gov remained above the 2019 average. According to an August clinical trials survey by Medidata, 41% of clinical trial professionals stated that the pandemic was now having little to no impact on their ongoing trials, and 58% were optimistic about the future of clinical trials. This is a very welcome change of sentiment, and it speaks to how robust and resourceful the U.S. clinical trial ecosystem is.
However, much like the economic recovery which has come swiftly for some and will remain slow and frustrating for many others, the rebound in clinical trials has favored the therapeutic areas that have seen the most investment and promise over the last several years.
Medidata reported that oncology has been leading the pack in terms of trial enrollment, and as of July was ahead of 2019 metrics. Based on our analysis of clinical trial data from Trial Insights, studies associated with neoplasms (related to oncology) had one of the lowest rates of terminated or suspended trials between May and August across all major indications. Only dermatological, joint and congenital studies saw a slower occurrence of trial suspension or termination.
The September announcement of Gilead’s $21 billion acquisition of Immunomedics is a market reflection of the importance of oncology within life sciences. The deal aims to expand Gilead’s oncology portfolio with what is anticipated to be a successful breast cancer therapy. The antibody-drug conjugate technology this therapy uses also has the potential to work across tumor types. This is a further push by Gilead, like many other large drug companies, to expand into immuno-oncology, which according to EvaluatePharma’s 2020 annual industry report is expected to “grow at a CAGR (compound annual growth rate) of 20.2% between 2019 and 2026.”
"The focus on COVID-19 therapies, critical medical devices and testing capabilities has provided a halo effect for the life sciences industry.”
From a recruitment perspective, trials related to the central nervous system are likely the only other therapeutic area to fully recover by the end of Q3; but we do see the overall increase in recruitment numbers as a positive sign that patients are comfortable and engaged in trials again.
Domestic life sciences manufacturing is unlikely to recover without structural change
The number of discussions about repatriating production of life sciences products in the United States has been increasing as economic and nationalist pressures rise in response to the pandemic. The crisis has also heightened awareness of just how global the life sciences supply chain has become. While the rhetoric around reshoring may seem omnipresent in the media and from politicians, the reality is that any major change is highly unlikely in the near term. Still, the life sciences ecosystem should at least consider this mounting pressure when designing and forecasting the long-term supply chain for products in the development pipeline.
In 2019, branded drugs accounted for 80% of drug spending ($511.4 billion) in the United States but only 9.8% of prescriptions dispensed, according to data from health care analytics company IQVIA. Net margins for specialty manufacturers who make generic drugs average 18.2% compared to 28.1% for branded drug manufacturers, according to a 2017 study from the University of Southern California. Given the lower margins, generic drug manufacturing will continue to be less profitable in the United States and companies in this space are less likely than branded drug manufacturers to have a domestic supply chain.
The high cost of U.S. manufacturing becomes especially critical in the manufacturing of active pharmaceutical ingredients (API). In Teva Pharmaceuticals’ Q2 earnings call, President Kåre Schultz said, “It's also true that there [have] been discussions about getting API manufacturing … back into the U.S. It's a fact that it has basically all left the U.S. within the last 30 years. So there is nothing left, which means that getting it back for real would take probably 10, 20 years and would have to depend on major structural changes” in pricing and other factors.
The economics of drug manufacturing ultimately determine the logistical sites and supply chains that pharmaceutical companies select. While U.S. companies continue to be powerhouses in developing innovative, safe, and effective drugs and medical devices, much of the raw materials and active pharmaceutical ingredients for this work still come from overseas because of the lower costs and looser regulations. API and finished drug form (FDF) manufacturing globally is very opaque. In 2019 testimony to Congress, Janet Woodcock, director of the Food and Drug Administration Center for Drug Evaluation and Research, said that “although CDER can describe the locations of API manufacturing facilities, we cannot determine with any precision the volume of API that China is actually producing, or the volume of APIs manufactured in China that is entering the U.S. market, either directly or indirectly by incorporation into finished dosages manufactured in China or other parts of the world.”
Based on the limited data provided by the FDA, we are left using manufacturing sites as the best proxy for the amount of manufacturing taking place in the United States and other countries. Manufacturing sites may produce API, FDF or both, according to Woodcock’s 2019 testimony. Pharmaceutical companies often identify multiple manufacturing sites as able to produce a given API or FDF, and manufacturers “are not required to report to the FDA whether they are actually producing an API at a facility, and if they are, the volume they are producing,” per her testimony.
Within the life sciences ecosystem, there is a growing concern that potential reshoring efforts would increase costs, put upward pressure on drug prices as margins shrink and create a concentration risk for life-saving medications should a domestic crisis take place. If there is an appetite in the United States to make structural changes to the pharmaceutical industry, it is more likely to be focused on reducing drug costs than reshoring supply chains.
MIDDLE MARKET INSIGHT
If there is an appetite in the United States to make structural changes to the pharmaceutical industry, it is more likely to be focused on reducing drug costs than reshoring supply chains.
As life sciences hiring rebounds, so do skilled labor shortages
Amongst the turmoil of the current labor market and mass unemployment, life sciences employment has nearly recovered to pre-pandemic levels. Like nearly all industries, life sciences saw significant decreases in payrolls in Q2, but was able to quickly recover to levels last seen in October 2019. By comparison, the health care sector is currently at September 2017 employment levels. Other industries have fared still worse.
To assess employment trends in the life sciences ecosystem, we monitor monthly data from the Bureau of Labor Statistics Establishment Payroll Survey and compare life sciences to heath care, which represents the delivery of life sciences products; and the information sector, which represents the competition for skilled technical talent.
This rapid recovery in employment for life sciences companies will restart the race for talent that characterizes hiring in this industry. In the biotech hub of Boston, competition for talent between firms is the primary challenge to hiring, according to industry nonprofit group MassBioEd. The immigration landscape is also a significant factor for hiring within the life sciences industry; in 2014, 52% of biomedical researchers in the United States were foreign-born, according to a 2017 article in Nature (that number includes naturalized citizens and noncitizens). And U.S. demand for foreign-born skilled workers has grown in recent years. The number of new approvals for H-1B visas—which allow foreigners to work in the United States in specialty occupations—climbed steadily from 193,000 in 2010 to 389,000 in 2019, according to data from U.S. Citizenship and Immigration Services. While this represents a significant increase in the total number of applications approved, the percentage of applications approved has dropped from 94% in 2010 to 85% in 2019.
Life sciences companies have always competed with the technology and information sectors for highly skilled workers such as data scientists, programmers and engineers. Now, both life sciences and tech companies are also competing with financial institutions, business and professional services firms, and nearly every other industry as they work to redefine their businesses using data sciences, machine learning and artificial intelligence. Without increased access to skilled talent through either increasing science, technology, engineering and mathematics education domestically or allowing skilled immigration, life sciences companies should expect an increasingly competitive landscape for talent in the coming years.
MIDDLE MARKET INSIGHT
The rapid recovery for life sciences companies will restart the race for talent that characterizes hiring in this industry.
While the search for talent will remain tough, the industry finds itself well capitalized and in a strong position as the end of 2020 approaches. Demand for some life sciences products and services has helped make the industry more resilient than expected during the pandemic. The urgent need for COVID-19 vaccines, therapies, and related products such as personal protective equipment, ventilators and testing supplies, when combined with closer attention from the public and investors, has given the ecosystem a significant boost in 2020. We expect the life sciences industry to remain at above-average performance even as the broader economy makes steady progress toward recovery.
see the full industry outlook report
Get data-driven economic insights and outlooks on a variety of middle market industries provided by RSM US LLP senior analysts.