The life sciences ecosystem enters the second half of 2020 poised for growth, with strong capital markets and signs of improved public perception. This is due in no small part to the fundamentals that have made it one of the most lucrative segments in the global economy for the last two decades: a highly skilled workforce, technological innovation, and an underlying mission to improve public health and quality of life.

A shot of life to the economy

The COVID-19 pandemic has devastated lives and economies across the globe, and life sciences companies are squarely in the spotlight as the need has exploded for personal protective equipment, the development and distribution of test kits, therapies, and hopefully a vaccine for the new coronavirus. The industry is leveraging technology and collaboration to respond to these needs at a rapid pace.

The process of developing a COVID-19 vaccine remains difficult, but the fact that academia, industry and the government are working together to speed up development and manufacturing capabilities is encouraging for the long-term health of the ecosystem.

The time between sequencing the COVID-19 genome to the first clinical trials of therapies and vaccines was months, not years, and some experts believe that a vaccine could be approved and distributed (on a limited basis) by the end of the year. According to National Geographic, the mumps vaccine, considered the fastest ever approved, took four years to go from collecting viral samples to licensing. The process of developing a COVID-19 vaccine remains difficult, but the fact that academia, industry and the government are working together to speed up development and manufacturing capabilities is encouraging for the long-term health of the ecosystem.

Infection rates, deaths, high unemployment and lost wages because of the pandemic are all factors driving the enormous momentum to find a vaccine quickly. Second- and third-degree ripple effects to public health will also have major long-term effects on the U.S. economy and health care system; specifically, the deferral of routine medical care and nonemergency surgeries, undiagnosed or ignored illnesses, and mental health issues. Additionally, the disruption to clinical trials and stalled progress on experimental medicines for non-COVID-19 diseases may take years to recover from. The good news is that social and political awareness of these risks is increasing, and the importance of a robust life sciences ecosystem is reflected in public conversation and capital markets.

Resilient capital markets

Coming out of the Great Recession, the public’s investment focus has shifted to high-tech and scientific sectors and away from the traditional economy. While the overall number of publicly traded companies has continued to decline, the life sciences ecosystem has made up a disproportionate percentage of the initial public offering market in recent years, accounting for approximately 30% of IPOs in the United States since January 2019.

As market volatility and uncertainty have grown during the pandemic, we anticipated a breakdown in investment into what are highly capital intensive and often risky endeavors in the life sciences space. However, that investment window never really closed and appears to be wide-open for the second half of the year.

Between March and May, while the United States experienced a peak in the COVID-19 crisis, nine companies went public on U.S. exchanges; eight of them were life sciences companies. Over that same period, only 21 U.S. companies announced plans for an IPO, 14 of which were in the life sciences sector (none focused on vaccines or treatments specifically related to COVID-19). We believe this illustrates two positive points for the life sciences public market: market valuations and enterprise fundamentals for companies in the industry remain strong, and the IPO market and public investment will quickly accelerate in Q3 and Q4 (likely focused on biotechnology).

Public markets are not the only portion of the capital markets that remain robust for life sciences. Private investment (e.g., venture capital and private equity) into U.S. life sciences companies exceeded $50 billion in each of the last three years, according to an RSM analysis of PitchBook data. This represents approximately 12% of all private investment capital and 18% of all deal flow during that time. In 2020, even as the private capital valves were turned off for much of the market, life sciences investment continued to flow. From January to May 2020, the industry saw a year-over-year increase in invested capital of 34%. In comparison, the rest of the market saw a 26% decline. In general, private investment activity so far in 2020 falls into two categories:

• Large investments or buyouts of later stage companies (5% of deals and 58% of capital went to companies with an average of six investment rounds)
• Additional rounds to support early stage companies (50% of investments were $3 million or less)

The large proportion of early stage support is driven by a need for additional liquidity during the economic downturn. These investments are often a direct response to disruptions in clinical trials and the achievement of milestone payments. 

Corporate investment and mergers and acquisitions activity are two areas where investors have remained on the sidelines. Since January 2019, corporate investors have funneled $320 billion into life sciences targets, accounting for about 20% of the $1.6 trillion that such investors have made into all U.S. targets. While the proportionate number of corporate investments into life sciences has remained consistent in 2020 (approximately 10% of all deals), the amount of funding from corporate investors has declined from 20% of all investments to just 12%. This is partially due to a lack of megadeals (greater than $10 billion) taking place in 2020, but also points to the fact that enterprises are protecting their balance sheets and waiting to see what shape the recovery takes. If we ultimately see a steep V-shaped recovery, it will likely mean dry powder is quickly put to work in the second half of the year, but a protracted recovery will result in corporations going bargain hunting for viable but capital-hungry targets.

The nature of these investments and the broader capital market activity illustrates two primary themes: first, that the pandemic has caused disruption to the cadence of product pipelines and commercialization plans, resulting in a need for additional capital inflows to support operations; and second, that there is a significant amount of optimism about the longer-term viability of these companies and their developments, even if there is uncertainty about the velocity of economic recovery.

Disruption of the clinical trial pipeline

Supply and demand shocks are reverberating throughout the economy, and the clinical trial pipeline is no exception. The pandemic pushed researchers to reallocate limited resources to COVID-19-specific therapies, while at the same time social distancing and lockdown orders have made it increasingly difficult for organizations to recruit patients and conduct trials. According to the results of a clinical trials site survey conducted by Medidata in April, 69% of respondents stated that COVID-19 has affected their ability to conduct ongoing trials, while 78% believe COVID-19 has affected their ability to initiate new trials.

Further, according to data publicly reported by biotech companies and aggregated by industry news site BioPharmaDive, 240 active clinical trials being conducted by 100 different companies experienced disruption due to COVID-19. Based upon our analysis of global clinical trial data collected by Scientist.com through its Trial Insights database, there has been a 15% yearover- year decrease in global clinical trial starts during the period from January through May. That decrease is deceptively low given that more than 3,000 COVID-19-related clinical trials were registered in 2020. If COVID-19-specific trials are excluded from total new trial starts, then we see a 25% decrease in global trials year over year.

The life sciences ecosystem has never experienced a shock of this magnitude, and the effects appear to be more pronounced in the global markets than for U.S. companies. While not perfectly analogous, when comparing unique new trial starts registered on the U.S. National Library of Medicine’s ClinicalTrials.gov database to the World Health Organization’s registry, we see significantly more stability in the U.S.-specific data set.

Given that the majority of research into COVID-19 is being conducted by U.S. companies and the number of non-COVID-19 trials has remained robust, we believe these results are indicative of a temporary disruption to the U.S. clinical trial pipeline but that the industry will be able to recover by Q4 2020.

Globally, however, access to capital and the repair of broken supply chains present more systemic challenges that are likely to persist into 2021. China is likely the exception, as it was the first economy to come out of lockdown and its life sciences industry continues to benefit from significant state support in a long-term effort to become a biopharma superpower. Continuing tensions between the United States and China regarding trade, supply chain dependence and the origins of the coronavirus are likely to accelerate a shift in the way U.S. life sciences companies approach their supply chains. This could manifest through repatriation to the United States or as a greater supply chain shift to India and Southeast Asia.

Drug pricing

Though China’s life expectancy and infant mortality rates have improved and caught up with those in the United States, China still spends significantly less on health care than the United States does. China’s health care spending as a share of the nation’s gross domestic product is three times less than the equivalent figure in the United States, according to data from the U.S. Centers for Medicare and Medicaid Services. The average annual out-of-pocket health care spend per capita in China is a fraction of the $12,000 per capita spent in the United States. These stats are also reflective of prescription drug spending, partially because China has a massive patient pool and its government wants to avoid stressing the country’s medical insurance fund.

The United States is not likely to experience the same aggressive pricing controls and government negotiating tactics as seen in China, but there had already been a rising chorus calling for health care and drug pricing reform here before the pandemic. The coronavirus has shifted much of the conversation away from drug pricing and toward the innovation and production efforts of drug developers in the race for a COVID-19 vaccine or therapy.

While public sentiment toward pharma and biotech has been improving, it pales in comparison to the pressure that will be put on Medicaid and Medicare budgets as tens of millions of unemployed Americans transition off employer-funded insurance programs. Combined with a loss of state and federal income tax revenues, this is likely to restart the drug pricing debate on Capitol Hill.

As the 2020 presidential election draws near, lawmakers will not want to be seen as impediments to a COVID-19 vaccine or therapy, but also need some policy position to take with them on the campaign trail. As such, we expect more posturing than substantive changes, and Medicare Part D reform is low-hanging fruit considering both the House and Senate have proposed Part D reform legislation. Any measures as aggressive as an international pricing index for Medicare Part B or granting the government authority to negotiate drug prices are unlikely, especially since bipartisan drug-pricing legislation currently excludes such language.

While more aggressive drug pricing reform measures seem unlikely this year, we would not be surprised to see proposals that would encourage competition among generics or provide an easier path to market for biosimilar products. The optics of supporting free market competition as opposed to stifling innovation is a safer path in what will be a very contentious election cycle. The economy, civil rights and COVID-19 have taken center stage in 2020, and health care and drug pricing reform will just have to wait for their turn in the spotlight.