Foreword
Key assumptions underpinning the pharmaceutical sector are being tested.
In 2023, key assumptions underpinning the pharmaceutical sector, such as the US market’s supreme profitability and reliance on big M&A to fuel growth, are being tested. The far-reaching Inflation Reduction Act (IRA) curbs profits on high-spend drugs, limits price rises and dampens incentives to develop small molecules and some orphan products in the world’s largest market. The anti-trust FTC is apparently willing to try and block M&A deals that may encourage dubious pricing practices, while regulators are less predictable in the face of new modalities.
In short, working out what kind of assets to develop or buy has become much more complicated. Multiple legislative, regulatory and commercial unknowns make this pharma’s Age of Uncertainty.
For now, the sector’s near-term growth trajectory nevertheless looks healthy. Pharma revenues are forecast to grow at a compounded annual rate of 5.9% from 2022 to 2028, reaching almost $1.6 trillion. The top ten biggest drugs in 2028 will still pull in over $160 billion, similar to 2022’s top ten tally (excluding Covid-19 products).
Innovation continues: in 2022, FDA for the first time approved more biologics (including new modalities such as conjugates, cellular therapies) than small molecules. This year has already brought a second, potentially more effective Alzheimer’s therapy to market, and may deliver another game-changing anti-obesity drug in Eli Lilly’s tirzepatide.
Working out what kind of assets to develop or buy has become much more complicated.
Dealmaking has picked up in 2023, with over $80 billion worth of M&A deals announced in the first half of the year. Pfizer’s $43bn Seagen deal is the biggest so far, with Merck’s $10.8bn acquisition of Prometheus and Astellas’ $5.9bn Iveric deal also on the podium.
The Federal Trade Commission’s lawsuit against Amgen’s $27.8 billion Horizon deal, announced in late 2022, raised concerns. But the dealmaking engine must continue turning: pharma faces a minimum of $118 billion in lost sales due to patent expiries over the next five years. (This number is based only on lost sales during the first year post expiry, cumulative losses could be much higher). Pharma needs external programs to fill those gaps and drive projected growth: home-grown new molecular entities account for less than half of annual sales at six of the top ten big pharma in 2023.
And biotech needs deals: public markets remain subdued, IPOs are still nigh on impossible and private investors are, as a result, holding back cash. Despite large funds raised in the last 2-3 years, the hurdles for accessing VC capital have risen. Biotechs need more compelling, later-stage data and highly differentiated assets. Pharma financing – through acquisitions or partnerships – has become more important for biotech, especially now that over half of biotechs have less than two year’s cash, according to EY.
Biotech’s struggles don’t translate directly into an easier life for pharma, though. The IRA and related pricing pressures, plus tighter VC funding, have made “good” assets even rarer, driving up competition. Meanwhile, uncertainty over how (and when) the new US pricing rules will play out – the first lawsuits have been filed – makes it harder to identify the most promising programmes. Should industry revert to niche biologics at the expense of further progress treating more widespread conditions best addressed with oral molecules?
More efficient R&D would help address many of these challenges. Bringing more products to market, faster, and easing patient access would dampen IRA’s downstream impact on profitability – if lawsuits don’t neutralise it first. Perhaps fittingly, pharma’s R&D spending growth is projected to fall slightly over the next five years. (See figure 7: Worldwide Total Pharmaceutical R&D Spend). Whether that’s down to anticipated AI-powered efficiencies or a more cautious outlook remains to be seen.
Legislative (e.g. IRA)
Regulatory (e.g. FDA)
Dealmaking (e.g. FTC/IRA)
Commercial (e.g. payers/access)
R&D (e.g. pipeline strategy/IRA)
