2023 Global Life Sciences Outlook

By Vicky Levy, Global Life Sciences sector leader, Deloitte Consulting, LLP

Now that the dust has settled from the first quarter of 2023, the outlook for the rest of the year is beginning to come into focus for life sciences companies. While the first three months might have been a bit erratic—due to rising interest rates¹, an economic slowdown², continued geopolitical uncertainty³, new rules outlined in the Inflation Reduction Act⁴, and on-going supply chain issues⁵—pharmaceutical, biotech, and medical device manufacturers seem to be finding their footing. Almost half of life sciences executives surveyed by Deloitte Global said they remain optimistic about the sector for 2023 (See Deloitte Global’s new 2023 Global Life Sciences Outlook). I suspect this is due to their continued confidence in the underlying demand for medicines, their belief in the value of big and small mergers and acquisitions (M&A), and their confidence in their ability to continue to transform themselves and create impact and value.

In Deloitte Global’s 2022 Outlook, I noted that the COVID-19 pandemic had pushed many companies to adapt to a world that was quickly becoming more digital and virtual. I asked if the effects of the pandemic would continue to push the sector forward. (See COVID changed life sciences companies…will they change back?). A year later, it is clear that there is no going back. The pandemic was somewhat of an industry-wide bomb cyclone. While it had a profound impact on the sector, and helped to accelerate change, it is not the only factor.

Big pharma could see some big deals

Some biotech and pharmaceutical companies benefited from and grew during COVID. A few companies that were involved in the development of vaccines and/or therapeutics to prevent and treat the disease gained a global customer base of unprecedented reach and scale. Some of their products touched billions of people. It is unlikely those companies want to return to their smaller, pre-pandemic customer base after getting a taste of what they can do at scale. These companies are likely looking to acquire organizations with complementary portfolios to help sustain their scale and growth. Conversely, companies who were negatively impacted by the pandemic might need to jettison less profitable lines of business and seek to deploy capital differently to accelerate growth.

The pandemic had a completely different effect on the medical technology sector. As patients put off non-emergency procedures, some device manufactures saw sales fall.⁶ In addition, supply chain disruptions led to worldwide shortages of some medical devices.⁷ In his 2023 Outlook for U.S. Life Sciences companies, my colleague Pete Lyons said that despite the challenges that emerged from COVID-19, he was bullish on the sector for 2023. About 80% of surveyed medtech executives said the development of innovative products would be a top priority in 2023, according to our U.S. life sciences industry outlook; and 75% intend to focus more on their research and development (R&D) investments. Respondents also indicated they intend to invest more in digital innovations in the year ahead and will try to build more resiliency into the supply chain. (Click here to see our complete survey results.)

Factors that could help shape life sciences this year

Pressure on margins and sales, declining access to capital for biotechnology companies, the Inflation Reduction Act, and continued focus on health equity could help drive behavior during the rest of 2023 and beyond. In response, I expect we will see increased attention on M&A, more aggressive focus on R&D, commercial, and supply chain, and a broader and rigorous approach to health equity. I also expect companies will continue to try to differentiate themselves by looking beyond the medicines and products they manufacture. I expect there will be an increased emphasis on patient experiences and health outcomes.

Here are five issues that could influence the global life sciences sector during the rest of 2023:

• Pressure on margins, sales: Average peak sales for drugs indicate that average peak sales for new drugs are declining (see our Life Sciences R&D insights report). It is costing some companies more money to develop, produce, and market drugs, but they might not be seeing the same returns as they did a few years ago, according to our research. Pharmaceutical companies spent an average of $2.2 billion to develop a new therapy in 2022—up nearly $300 million from the prior year (see Measuring the return from pharmaceutical innovation 2022). At the same time, the average forecast peak sales per pipeline asset fell from $500 million in 2021 to $389 million in 2022. Some companies are searching for new sources of growth and value and/or rethinking how they bring new products to market, according to our research.
• Access to capital: Rising interest rates has made investment capital more expensive, which could make it challenging for smaller companies to grow and remain independent.⁸ Larger companies that have more cash on hand might eye smaller organizations as an opportunity to grow (see M&A trends in Life Sciences.) They might also divest their low-growth and low-margin assets. While M&A activity has cooled a bit over the past few years, a handful of sizable deals have closed recently, suggesting a potential uptick in M&A value in 2023. Last month, for example, Pfizer Inc. announced plans to acquire cancer-drug maker Seagen Inc. for $43 billion.⁹
• The Inflation Reduction Act of 2022: The new law includes several provisions intended to reduce the price of prescription drugs for Medicare beneficiaries, as well as for the federal government.¹⁰ This law could become the scaffolding that leads to some potentially negative consequences for pharmaceutical companies in terms of their ability to grow. In the US, some life sciences leaders are developing strategies to address the potentially profound impact. These market and regulatory developments have the potential to reshape strategies and tactics in the life science sector as companies begin to understand the impact on their current drug portfolios and longer-term strategies.
• Supply chain: Shortages and supply chain issues could continue to pose challenges for life sciences companies, at least for the first half of the year. According to the 2023 Outlook, a majority of surveyed life science and health care chief executives said supply chain disruptions have raised the cost of doing business and cut into margins, citing production or logistics issues and reduced logistics capacity as key challenges. These CEOs further predicted continuing challenges will disrupt business strategy during the next year
• Health equity: Accrediting bodies, federal regulatory agencies, states, trade associations, and the White House are pushing health equity to the forefront (see Health equity is becoming a new regulatory reality). Medical device manufacturers and pharmaceutical companies are positioned to play a leadership role in improving health equity and improving transparency. At this year’s World Economic Forum meeting in Davos, Switzerland, Deloitte Global joined 38 other multinational organizations, including life sciences companies, in signing the Global Health Equity Network Zero Health Gaps Pledge. Since then, nearly 60 companies have signed the pledge. The Pledge is a commitment to help advance health equity and support better health outcomes.

COVID-19 was an accelerator for the life sciences sector, and it changed the way some business is done. The pandemic helped to illustrate what this sector is capable of accomplishing, in terms of reach, scale, innovation, collaboration, and the ability to make decisions quickly.

This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor.

Deloitte shall not be responsible for any loss sustained by any person who relies on this publication.

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Endnotes:

¹ The Fed raises rates a quarter point and signals more ahead, The New York Times, February 1, 2023

² Global economy to slow further amid signs of resilience, International Monetary Fund Blog, January 30, 2023

³ Asia and the world face growing risks from economic fragmentation, International Monetary Fund Blog, October 27, 2022

⁴ Explaining the prescription drug provisions in the Inflation Reduction Act, Kaiser Family Foundation, January 24, 2023

⁵ Reimagining the pharma supply chain, The Hill, November 15, 2022

⁶ Medical devices market mostly stabilized after two years of COVID-19, Medical Device Network, December 14, 2021

⁷ Medical devices market-growth, trends, COVID-19 impact, and forecast, Yahoo! Finance, November 3, 2022

⁸ Investing in an era of higher interest rates and scarcer capital, The Economist, December 8, 2022

⁹ Pfizer agrees to buy Seagen for $43 billion, Wall Street Journal, March 13, 2023

¹⁰ Explaining the prescription drug provisions in the Inflation Reduction Act, Kaiser Family Foundation, January 24, 2023

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