Leading Through a Historical Singularity

May 28, 2020

Considerations for biopharma to transform itself beyond the COVID-19 crisis, by Arda Ural.

The biopharma industry is experiencing a unique predicament in the wake of COVID-19. While pharmaceutical companies focus on employee health and navigate the pandemic’s immediate economic impact, they are also doubling down on innovations to develop a vaccine.    This is not the first-time biopharma companies have weathered major crises. Evidence from previous recessions suggests that the life sciences industry has historically survived economic downturns relatively unscathed.   Using M&A volume as a proxy to investor confidence, research1 shows that the life sciences industry bested all other sectors in three prior recessions.    However, as we live through arguably the biggest public health crisis in a century and the ensuing economic downturn, the COVID-19 pandemic may challenge this streak. Biopharma companies, in addition to organizations everywhere, must reimagine how they operate: not merely to remain resilient, but to leverage this historical opportunity for transformation.    Here is a snapshot of key considerations regarding portfolio management, clinical trials, supply chain, commercialization and M&A, and thoughts on how biopharma companies can navigate the months ahead.   COVID-19 put pressure on the reliability of current portfolios. Forecasting assumptions were materially changed by the pace at which the assets could be brought to market, and the attainment of peak revenue was potentially disrupted. Our post-COVID-19 analysis estimates that the pandemic’s impact on the biopharma pipeline will be $3B over the next five years. Consider, for example, recent significant reductions in the rate of patient enrollment in clinical trials. We advise analyzing the full portfolio in a scenario-based approach and refreshing it on a monthly basis throughout the pandemic to ensure efficient use of capital.   Schedules for clinical research study sites have been disrupted by COVID-19. A silver lining of this pandemic may be the long overdue acceleration of the digitalization and simplification of clinical trials. COVID-19 may fast-track the widescale adoption of digital platforms and methodologies, from telehealth to remote patient monitoring. Digitally enabling trial operations could lower expenses, accelerate enrollment and improve retention through electronic or video consent platforms. R&D executives should consider this unique period as a live experiment to fundamentally reimagine the traditional end-to-end clinical trial process and product development.   Over the last few months, supply chains saw sharp spikes in demand alongside challenges to securing raw materials, leading to worldwide shortages. We expect governments may provide strong guidelines to re-patriate or onshore manufacturing of some essential medications in the next 12 months, thus disrupting supply chains. These regulations will likely require pharmaceutical companies to nimbly adapt their supply chain footprint, think differently about their API and excipient sourcing and develop compliance mechanisms. These adjustments may partially reverse the trend of globalization and supply chain outsourcing to lower cost geographies. Amidst this uncertainty, executives should conduct scenario-driven and dynamic forecasting exercises and enhance their current sales and operations planning processes. This will help both manufacturing and commercial functions develop real-time adjustments, as supply chains remain fragile for the foreseeable future.   The impact of the pandemic also manifested itself in near-term spikes or deferred demand. Several therapeutic areas, especially those used to manage COVID-19 infections, have seen sharp demand increases. These include antibiotics, antivirals, respiratory nebulizers and inhalers, analgesics and anaesthetics used in acute care and intensive care settings.   Specialty therapeutics, including those for oncology, hematology and auto-immune diseases (e.g., multiple sclerosis, rheumatoid arthritis, psoriasis and diabetes, etc.) have mostly maintained their utilization. However, patients’ hesitation to visit any medical facility to adhere to their prescribed treatment regiments, or doctors’ inability to newly diagnose patients to grow new demand in these therapeutic areas, may lead to a slowdown. The location of care of services is also a critical variable. Treatments that can be administered at home or at ambulatory surgical centers are less affected.   Finally, therapies for chronic conditions, life-style treatments, products for asymptomatic cardiovascular conditions and vaccines that are not related to COVID-19 may experience an adverse impact. The patients in these therapeutic areas may not actively seek care or renew prescriptions, and demand may drop.    The uncertainty COVID-19 ushered in will impact M&A across the industry. Companies are primarily using their balance sheets to preserve cash, and the ability to forecast and value the acquisition or divestiture of assets in this environment may be challenging. Yet, when we polled life sciences executives, nearly half said they would consider M&A activity in the next 12 months.    We believe this is driven by a few tailwinds, starting with the systemic need to replenish the pipeline with late stage assets. Biopharma has been challenged by an intrinsic inefficiency in its R&D productivity and needs to maintain its growth by acquiring assets mostly developed by nascent biotechnology companies. Additionally, the industry is experiencing $160B worth of exclusivity loss through 2023, and the lost revenue needs to be supplemented by acquiring highly de-risked or in-market assets. Good news is that the industry can afford it, thanks to its balance sheet valued at $1 trillion as of March 2020.   At the same time, the industry is faced with a unique challenge of inventing the next cure as a treatment or a vaccine in record time. So far, the sentiment is one of total and selfless collaboration. The drive to help the rest of the world get back to the new normal is palpable, from the c-suite to the researcher in the lab.    When this historical challenge is accomplished, the industry’s perceived value will shift from the manufacturer of costly prescription drugs to an innovation leader essential for advancing humanity. In the final analysis, this pandemic facilitated an unprecedented market environment, which will compel the industry to reimagine and reinvent itself.   Arda Ural, Ph.D., is the Americas Industry Markets Leader for Health Sciences and Wellness at Ernst & Young LLP (EY). Arda oversees the life sciences team that covers industry mergers and acquisitions.  

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https://www.ey.com/en_us/transactions/how-life-sciences-companies-can-rethink-strategies-and-m-a-for-post-covid-19-world