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The recent flurry of Q1 earnings reports offer a unique opportunity to assess the real-time impacts of COVID-19 on the sector. EY analyzed top biopharma quarterly earnings1 to understand what trends are shaping business performance and how they might influence corporate strategy. Arda Ural reports on what has been observed, and what it means for the C-suite in Q2.
1. Earnings results reflect significant variability, and executives must challenge the current playbook
While organic revenue growth was largely positive, performance varied markedly. Some companies have seen record-breaking growth tied to COVID-19 vaccines and therapeutics, while sales of products that require in-office administration continue to lag. At the same time, losses of exclusivity — especially tied to biosimilar penetration — emphasize that companies must replenish their pipelines through internal R&D productivity and external assets. Companies with the best financial performance and strong balance sheets will have an enhanced competitive advantage.
From our view, industry performance could become more stratified over time. Laggards may struggle, and increased activist pressure will require a close watch. Executives must challenge their current playbook. From investing CapEx in digital capabilities to piloting hybrid commercial models, enterprises should focus on maximizing efficiency to ensure sustainable performance. A dearth of senior talent, and the challenge to attract and retain the best, will tie to financial performance. For companies that experience a slowdown in earnings or miss consensus expectations, aggressive actions are necessary, not optional.
2. Concerns about drug pricing, reimbursement and tax reforms are weighing on share prices
At the heart of current drug pricing proposals is Medicare price negotiation, including excise penalties for affected companies that fail to reach an agreement with the government. Previous legislative proposals that could be considered include limiting drug price increases relative to inflation and ordering pharmaceutical companies to pay an increased portion of costs to limit out-of-pocket spending in Medicare Part D.
Biopharma executives should proactively advocate for the high costs of and risks to innovation. The rapid development of effective vaccines clearly demonstrates the profound benefits to the global economy. Legislation to regulate drug pricing could stifle R&D, and this message should be at the forefront of company communications. The public debate, however, has already shifted towards foregoing patents to distribute vaccines worldwide. Further, we should expect to see increased price pressure outside of the US, given austerity measures due to COVID-19. Maximizing operational efficiency, commercial infrastructure and tax structures will help blunt these effects.
3. A renaissance of scientific innovation continues to drive a favorable growth outlook
As of late April, 18 NMEs have been approved, with a record number of products under review at the FDA. This momentum is a bullish leading indicator for future industry performance. The successful development of novel therapeutics offers the opportunity for higher returns on investment and is driving pipeline priorities. Gene therapy, mRNA vaccines, cell therapy and gene editing once seemed like science fiction but are now reality. Industry leaders must critically assess their R&D programs to ensure that their new products which will be competitive, as the bar on value-adds is clearly rising.
Additionally, pharmaceutical manufacturers must rethink their approach to ensuring manufacturing capacity and production quality. The economic, regulatory and societal impacts of missteps in drug manufacturing are far-reaching. Manufacturers should find efficiencies, maintain rigorous compliance protocols and anticipate potential quality issues.
4. The health of the capital markets will significantly impact growth strategies
M&A remains fundamental to the industry’s growth strategy, as do the equity capital markets. With more than $170B in dry powder, industry leaders seek opportunities to diversify and expand existing therapeutic franchises. Multiple factors suggest an active M&A year in 2021, driven by lots of free cash, rising losses of exclusivity and high innovation. Because many biotechs are flush with $52B raised last year, they are funding through multiple milestones and deal premiums are likely to remain high.
Portfolio optimization is no longer a choice — it’s an imperative. Given valuations in the market, consider spinning off non-core assets. Further, while returning excess cash through share repurchases is core to shareholder returns, it cannot be at the expense of M&A or deploying capex, which could transform enterprise values. Doing a successful and smart strategic deal will make doing the next one much easier.
Leaders should track these major trends and proactively respond to drive optimal business performance. And while the pandemic is beginning to ebb in the U.S., the far-reaching business implications of COVID-19 will continue to influence corporate performance and shape the biopharma industry’s strategic direction for years to come.
Arda Ural, PhD., is EY Americas Industry Markets Leader, Health Sciences and Wellness.