Four years after the COVID-19 pandemic lockdown, the 2024 economy is an entirely new beast, and life sciences CFOs are dealing with major headwinds.
As inflation, high interest rates and a tight investment environment continue to create headaches, 72% of CFOs said economic volatility poses the same or greater risk to their business this year compared to 2023 in a recent survey from BDO — and there are more changes afoot.
“Creativity has to be in abundance because the normal pathways [of money] — whether it's private equity, venture capital or IPO — have not been readily available for the last 18 months or so,” said Patti Seymour, managing director at BDO's bioprocess technology group.
While signs of an economic and biotech market rebound are spurring pharma CFOs to reup R&D spending, some pharma companies are making new types of deals due to cash flow pressures.
Creative deal-making
Many of the elements that defined the COVID-era economy have faded, and rising interest rates and inflation have put life sciences deals and investments from private equity and VCs on ice.
For many cash-strapped companies, keeping drug development churning has been a challenge. Advancing drug candidates to the next phase of development is risky for long-term revenue potential, forcing some companies to take what they might consider below-market offers, according to the survey, which queried 100 life sciences CFOs in October 2023.
“We have been seeing some lower valuations to keep the molecules going in the clinic, and primarily that’s to stave off patent expiries,” Seymour said. “[They’re] getting at least some valuation to keep [drug development] moving so if it does reach commercialization, you still have that patent life runway ahead of you. Once you file your patents, the clock is ticking. That's why it's so important to get through clinical development as quickly as possible.”
“Inflation has taken a big bite out of the R&D dollars that are available."
Patti Seymour
Managing director, bioprocess technology group, BDO
Economic uncertainty also stalled M&A activity over the past few years, and according to the survey, far fewer CFOs are planning transactions in 2024 compared to 2023, which closed the year with a rebound in M&A deals. Just 27% said they planned to buy a company, compared to 42% in 2023, and only 26% planned to buy an asset, down from 44% in 2023. CFOs are looking at the back end of 2024 to resume M&A activity in the hopes of more stable market conditions.
The uncertainty has given way to other types of deals in pharma, including collaborations and licensing agreements, which offer opportunities to expand into new drug modalities at later stages without the early development risks. For companies in need of cash, these deals can also be beneficial, but 36% and 33% of CFOs said aligning on expectations and deliverables, and finding the right partner, respectively, are top challenges to planning a collaboration agreement.
“This is a way to continue to get investment to move their drugs forward and without taking a lower valuation or dilution in the company,” Seymour said. “It's a win-win for both the small innovators who have an asset but not a lot of capital to develop it and the large pharma that has a lot of capital, but maybe not as robust a pipeline.”
Pharma multinationals were a big reason M&A deals rebounded in late 2023, with 69% of M&A investment coming from Big Pharma, compared with 38% in 2022, according to recent research from EY. The research also predicted M&A deals will pick up in 2024, but pharma will be more focused on value due to macroeconomic factors and incoming regulatory pressures from the Inflation Reduction Act.
And so far, one of the most creative deals of the year was driven by quickly growing sales of GLP-1 agonists for weight loss. Earlier this month, Novo Nordisk announced it was acquiring contract manufacturer Catalent to help boost and secure its supply of its blockbusters Wegovy and Ozempic. But even as new players look to enter the obesity space and analysts see growth potential in the GLP-1 market to the tune of $300 billion by 2030, industry watchdogs don’t predict the Novo-Catalent deal will spark a trend of similar drug company-manufacturer acquisitions.
R&D spending returns
Despite the remaining chill from the recent economic headwinds, CFOs are banking on a market “thaw” — and more R&D activity could return in 2024, according to Seymour.
Drug development is getting a lift in 2024 compared to the previous year, with 77% of CFOs planning to increase R&D spending — the highest since 2020. However, most said they planned to increase R&D spending in 2024 in the 1%-5% range, “which barely outpaces inflation,” the survey noted.
The 2024 R&D spending figures are more on par with pre-pandemic plans, Seymour explained.
“Inflation has taken a big bite out of the R&D dollars that are available,” she said. “But with inflation easing, we're seeing the spending plans that mirror what we saw before the pandemic. While we wait for inflation to get more under control, we're anticipating the CFOs to re-engage and make greater investments into R&D.”
Just 4% said they planned to decrease spending in 2024 — a big drop from the 19% of CFOs who said they decreased R&D in 2023.
Since COVID hit, R&D dollars have been more focused on pandemic preparedness, and 37% percent of CFOs said they plan to keep investments flowing into other epidemic-related vaccines and therapeutics.
“COVID is no longer the darling of the epidemic preparedness,” Seymour said.
CFOs in the survey also said they plan to continue investing in immunotherapies (36%), personalized medicine (29%), gene therapy (28%) and mRNA or other oligonucleotide technology (27%).
