Introduction to United States Life Sciences
Cautious optimism following a tumultuous period
In January 2024, thousands of executives, investors, entrepreneurs, scientists, and bankers had the chance to take the temperature of the life sciences industry at the JPM Health Care Conference in San Francisco. A shadow of uncertainty was cast over the event before it began, given the tumultuous previous months for the sector. 2023 saw many biotech stocks hitting rock bottom, high interest rates, and sustained geopolitical uncertainties. Amidst depressed valuations and a recovering sector, R&D also appeared in peril due to a challenging regulatory environment.
Nevertheless, conversations took an optimistic tone in San Francisco that week. Indeed, the earlier months of 2024 have shown that the pendulum is now swinging towards what many industry leaders have referred to as “cautious optimism”. The industry certainly is not back to pre-pandemic levels of venture capital flowing into early-stage, highly ambitious technologies (some of which, perhaps, having been dispersed before necessary due diligence was made), however, strong innovation and a bolstered M&A and IPO environment have the potential to lay the ground for a virtuous cycle that will reward companies and patients.
What is certain is that the US will remain the driving force of the industry globally. Statista estimates the projected revenue in the pharmaceutical industry to reach US$1.156 trillion in 2024. The US alone is forecast to account for over half of that revenue, with a figure as high as US$636 billion. Indeed, it is the stronger investment outlook in the country that is positioning the global industry on a positive growth trajectory in 2024. According to EY figures, life sciences M&A spending rose to US$191 billion in 2023, a 34% YoY increase, with patent cliffs and a vast amount of capital to be deployed adding urgency to big pharma’s dealmaking capabilities. In December, Pfizer finalized the US$43 billion acquisition of Seagen, bringing its total to nine cancer drugs that are either blockbusters or have that potential, and serving as a keen reminder that antibody-drug conjugates (ADCs) and oncology remain leading value-creating therapeutic areas. In January 2024, following one of the worst IPO periods in the industry’s history, four firms held IPOs on the NASDAQ, worth a combined US$800 million. This was closely followed by two other biotechs, suggesting that the IPO window had, finally, cracked open (2023 only recorded 19 public offerings, a considerable drop following the over 100 in 2020).
“Overall, 2023 was one of the most challenging years the biotech industry has faced.”
Joe Panetta, President and CEO, Biocom California
Headwinds and tailwinds: Innovation as a lifeline
Amongst the factors that set the US life sciences industry apart is its capacity to innovate. Having mobilized at an unprecedented level and pace during the COVID-19 pandemic, which was enabled by decades of research and innovation, the industry showed it was able to achieve results that could only be conceived as science fiction in the recent past. Indeed, the idea of an mRNA vaccine “on demand” was debated in a research piece published in the National Library of Medicine in 2015. Less than a decade later, Katalin Karikó and Drew Weissman received a Nobel Prize for their discoveries concerning nucleoside base modifications that enabled the development of effective mRNA vaccines used by Pfizer-BioNTech and Moderna against COVID-19. Both Nobel laureates received education from the US’ top universities, where they today direct innovation institutes and teach neurology and RNA biology.
Post-pandemic, as mRNA pipelines slowly dry up amidst sluggish demand (Moderna reported a quarterly loss in Q3 2023 amid plummeting demand for its Covid shots), 2023 saw notable advancements made in vaccine development, cancer treatments, GLP-1 drugs transforming obesity management, gene therapy, and gene editing technologies targeting rare diseases, alongside novel treatments for complex ailments such as Alzheimer’s. Despite these breakthroughs, the challenge of realizing their value remains, leaving investors dissatisfied. The sector continues to lag in capital markets compared to the broader market index. After a challenging year in public and private markets, the sector’s ability to capitalize on these innovations will most likely make the difference between success and failure.
Among the challenges that persist in 2024 are the sustained high interest rates, ongoing geopolitical tensions, and the implications of the Inflation Reduction Act (IRA). Concerning the latter, numerous industry leaders express apprehension regarding its adverse effects on innovation. One notable catalyst will be the finalization of drug prices in September 2024, with several pharmaceutical firms having already initiated legal challenges questioning the constitutionality of this policy, with speculation mounting that the matter may eventually reach the US Supreme Court. Beyond the regulatory landscape, the political one might also impact the industry, as the US braces for an undoubtedly tumultuous presidential election in November. Expanding on the importance of innovation, William Lewis, CEO of Insmed, a biopharma developing its pipeline in the rare disease space, shared: “Global financial markets, geopolitical events, regulatory and legislative changes, and evolving technologies will continue to influence our sector in the year ahead. I believe that companies with the ability to innovate have enormous opportunities to succeed.”
Building on a strong innovation pipeline, the US has maintained its ability to remain the innovation powerhouse of the world, and this ability will more than ever constitute its lifeline, with several therapeutic areas poised to benefit from the commercialization of novel drugs. The FDA approved 55 novel drugs in 2023, a slight increase from the five-year average of 53. With an exceptional 17 approvals for the treatment of tumors, significant scientific improvements in the field of cancer have materialized into commercially available new drugs on the market. As such, oncology remains the biggest target for dealmaking, with 2023 investment hitting US$65 billion.
The notorious GLP-1s (such as Wegovy, Zepbound, and Ozempic, the blockbuster weight-loss drugs) will most likely see huge runaway demand, and with more innovation from pharma giants like Novo Nordisk and Eli Lilly, as well as 230 biotechs in the space, the life sciences industry seem to have entered a race to develop the next generation of these drugs. As obesity affects over 40% of US adults and 1 billion people worldwide, that market is expected to be worth US$150 billion by 2030, according to the Financial Times. Separately, investment in advanced modalities like cell, gene, and RNA therapies will continue to shape the innovation landscape.
Beyond the labs, innovating in the business model
In early 2024, a PwC report highlighted pharma companies’ growing challenges in driving value growth, despite the historic achievements of the past years. Indeed, since the pandemic, Big Pharma returns lagged the S&P 500, and biotech did even worse. The evidence is clear: Great science is not enough to generate value growth. As market headwinds affect all industries, perhaps the sting is more acute for pharma, and the coming years might see C-level executives reshaping their strategic model. Indeed, in that same PwC report, 45% of the CEOs interviewed were concerned that their business model would run out of steam within a decade.
Another model does not necessarily mean inventing something new, and a return to fundamentals is the solution for many pharma CEOs. The first-mover advantage theory was coined in the 1980s, and for Greg Rotz, transformation consulting leader for pharmaceuticals & life sciences at PwC, it might be the way forward for executives. Pharma expenditure rose between 2018-2023 to a record US$161 billion, but effects on returns have been limited as many firms have competed for asserts in the same therapeutic areas. “We have more assets chasing the same areas, creating more head-to-head competition” explained Rotz. Simply put, more products in the same space means more competition and, therefore, less returns.
One way to regain investor trust in leadership models could be to reincorporate risk, despite the higher chance of failure. Pharma is innovative by nature, but Rotz and other experts suggest infusing a culture deeply rooted in innovation, reinforcing differentiation, and going outside of traditional comfort zones for the sector to thrive again. This approach, however will have to be managed with caution, as the investment community almost unequivocally expressed to us their preference for de-risked assets.
Following one of its toughest periods in 2023, the industry has many reasons to be cautiously optimistic for the remainder of 2024. The world’s top brains and best-educated pool of investors are found in the US, and they have room to keep funding innovation in areas such as oncology, CNS, or auto-immune diseases. The focus on R&D will be supported by ever-so-important development and manufacturing partners, for whom the US offers unparalleled areas for growth. Importantly, long-term exogenous events such as climate change, an aging population, and growing demographics mean the industry will have to adapt to a proactive stance in the creation of vaccines and drugs fit for a changing environment.
The following pages will analyze the different segments – from public to private markets, law firms, and consultancies, pharma and biotechs, CDMOs, CROs, and service providers, wrapping up with technology and AI-focused companies – that, through collaboration and unstopped innovation, ensure that the US remains the leading life sciences hub in the world.
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