Strong consumer spending, historically low unemployment and an easing of trade tensions with China initially fueled optimism early in the year for a 2020 bull market. But as the coronavirus pandemic has upended the global economy, uncertainty and disruption have replaced that once sunny outlook, and the life sciences ecosystem is not immune to the fallout.
The life sciences sector has experienced tremendous growth in recent years, but that momentum has significantly slowed amid the pandemic. The outbreak has disrupted much of the anticipated deal flow in the first quarter of the year. However, because of the long development process for innovations in life science, which involves approval by the Food and Drug Administration, we anticipate that investment is experiencing a delay rather than a stall. Several large mergers and initial public offerings have already taken place. With hundreds of billions of dollars of dry powder specifically tagged for life sciences waiting to be deployed, we expect deal flow eventually to return to 2019 levels once markets stabilize, though it’s difficult to predict when that will happen.
Rapidly growing market
At the end of 2019, there were 1,170 publicly traded life sciences companies in the United States, with a combined market capitalization of more than $3 trillion. In 2019, 64 life sciences companies went public and raised a combined $12 billion of capital. As of the end of February 2020 those companies had an average offer-to-date return of 40%. This level of return is matched only by portions of the technology sector, which is part of the reason that investors are increasingly entering the life sciences ecosystem.
This growth in the life sciences sector is driven by several interconnected factors:
- An aging population with greater access to health care presents a larger and more affluent customer base.
- A shift from the “traditional economy” to the “new economy,” which is based upon highly innovative and technologically advanced processes (sectors including life sciences, technology and financial services).
- A growing familiarity with the complex and seemingly futuristic advances in medicine such as cloud-connected medical devices, artificial intelligence, machine learning, and gene sequencing and editing.
These changes all contribute to the overall trend of personalized medicine, which will fundamentally change the way patients, providers and developers interact with the life sciences and health care ecosystems. The markets’ acknowledgement of this opportunity is evidenced by the steady shift of public, corporate and private dollars into the life sciences.
Stretched supply chain
As the disease caused by the new coronavirus continues to spread and the supply shock to the global economy persists, there is increasing concern about how the pandemic will affect the availability and quality of drugs and medical equipment.
The disruption could be particularly significant for the supply of active pharmaceutical ingredients, or API, that produce therapeutic effects in drugs, as RSM noted in early March. While the majority of drugs prescribed in the United States are finished and packaged domestically, the past two decades have seen an almost universal outsourcing of API manufacturing to Asia and India, which have a lower cost of production and less restrictive labor and environmental regulations.
As a result, the United States is able to produce only a quarter of global capacity for APIs. On Feb. 27, FDA Commissioner Stephen Hahn said in a statement that the first shortage of a drug as a result of the outbreak had occurred. While the FDA is closely monitoring more than 180 “at-risk” drugs that are vulnerable to supply chain shocks, the potential exposure is raising concerns by the public and policymakers about the structure of U.S. drug supply chains.
Exposure by the numbers (approximate):
- 80% of all API manufacturers are outside of the United States.
- 55% of biologics and 30% of medical devices, by dollar value, are imported.
- 80% of APIs used by commercial sources to produce finished medicines come from China.
- 90% of the drugs prescribed in America are generics, and of the generics used in the U.S., 40% are imported from India, which in turn acquires approximately 80% of its APIs from China.
- 97% of all antibiotics in the United States come from China.
Sources for the numbers above: FDA Regulated Products report; testimony from Christopher Priest, deputy assistant director at the U.S. Defense Health Agency; 2019 testimony from Rosemary Gibson, senior adviser at the Hastings Center; 2018 comments from India’s commerce minister Suresh Prabhakar Prabhu; Department of Commerce study on drug supply chain.