Healthcare and Life Science Sector Trends

Cautiously optimistic. That is the tone for the Healthcare and Life Sciences Sector as we head into 2019. Many of us who attended JPMorgan’s Healthcare conference earlier this year in San Francisco, CA, walked away feeling this tone. Despite the ongoing stock market volatility, continuing Affordable Care Act (ACA) challenges, ongoing evolution of regulations, reimbursement policies and delivery models, and risk of a rise in drug price rhetoric in the United States, many are maintaining an optimistic stance for increased growth and efficiency opportunities.
Macroeconomic issues and trends impacting healthcare and life sciences need to be monitored. Investors appear to take little comfort from the fact the turmoil has largely been triggered by fears from beyond the sector. And yet, despite uncertainty about what the industry will look like in 10 years, the healthcare and life sciences industries are expected to be more resilient than many other industries. This is mostly due to reliable demand for patient care by an aging population with a significant and growing disease burden. Comprehensive analyses for the new year, written by notable firms, provide greater detail on the outlook for 2019(1-5).

The below article from Objective Capital Partners explores the trends in the healthcare and life sciences markets.

Situation Analysis

Global pharmaceutical spending is predicted to outpace overall healthcare spending. Worldwide prescription drug sales are expected to rise from US$900B in 2019 to US$1.2T by 2024. From 2018 to 2024, Compounded Annual Growth Rate (CAGR) of sales for pharmaceutical drugs is expected to be 6.4%. Drivers of growth are predicted to be novel therapies that address key, unmet medical needs and increased access to medicines, as a result of new pricing policies around the world. Challenges to growth include payer scrutiny, sales losses due to genericization, and competition from biosimilars. In 2019, it is estimated that US$19B in prescription sales may be at risk due to patent expiries, with approximately half resulting in lost sales.

Worldwide pharmaceutical R&D spend is expected to decrease from 4.1% CAGR in 2018 to 3.1% in 2019. Companies may improve R&D efficiencies by using big data and predictive analytics, or by directing less revenue toward replenishing pipelines. Overall, R&D spend from pharma and biotech companies is expected to reach US$177B in 2019. According to Deloitte, projected R&D returns for 12 large cap biopharma companies, have fallen to their lowest level in nine years, at 1.9% in 2018, down from 10.1% in 2010. The cost to bring an asset to market has increased to record levels in 2018, while the forecast peak sales per asset have more than halved since 2010. In contrast to large cap companies, specialized biopharma companies are outperforming them with projected returns of 9.3% in 2018.

The disruptive forces that may have the biggest impact on investing activity this year in the sector are the results of the midterm elections, increased attention to cost and access, challenges to the ACA, bipartisan action on drug pricing and incremental moves toward value-based care and digitization. Further, members of Congress from both parties will invariably view healthcare issues through the lens of the 2020 elections, which will heighten the political rhetoric on polarizing issues and likely impede progress on substantive legislation. Public perception of the industry and drug pricing has been shaped by highly publicized incidents of price gouging, otherwise known as the “Shkreli Effect”. With drug pricing a hot political issue, there will be lots of efforts built around capping prices.

There is also considerable uncertainty for Western Europe, where Brexit has raised risks for some economies and healthcare systems across the region. In early January 2019, the UK’s Medicines and Healthcare products Regulatory Agency (MHRA) issued a “Further guidance note on the regulation of medicines, medical devices, and clinical trials if there’s no Brexit deal,” whereby UK Marketing Authorizations, which are currently Centrally Authorized Products in the EU, will be grandfathered in on exit day.

The pressure on payers and providers to reduce prices, to be more transparent with treatment costs, and to provide evidence of value and outcomes, continues to drive change throughout the commercial healthcare sector. The industry seems committed to value-based care, which will continue to evolve as payers and providers shift away from fee-for-service payment and delivery models. Additionally, patients are paying more for their health care out-of-pocket, which is fueling the drive toward lower-cost, more convenient, and higher-value sites of care.

Taking the above information into consideration, here are 10 important trends to watch within Life Science and Healthcare in the coming year.

Life Sciences and Healthcare Industry Investment Outlook

Even with market and geopolitical uncertainties as growing headwinds, expect to see significant healthcare and life sciences investment activities continue in 2019. In 2018, the sector celebrated a flood of capital – overall VC funding is back to its dot-com era scale. Few are predicting that 2019 will see a substantial retrenchment in venture funding, though firms are expected to start investing more wisely. Financing options are not expected to dry up. In terms of public markets, the IPO window heading into 2019 is far from closed, albeit government shutdowns have caused delays with SEC reviews. Nonetheless, substantial sums of dry powder and cash are still being invested into healthcare and life science companies by venture firms and private equity.

Innovator, Biosimilar and Generic Drugs

Biotechnology products are expected to contribute steadily to sales, rising to 52% of the top 100 product sales by 2024. In 2019, biotech is forecast to represent 27% of the global market, and by 2024, 31%. By 2024, the orphan drugs sector is expected to almost double and account for 20% of prescription sales. In particular, gene and cell therapies are accelerating growth. The Chimeric Antigen Receptor T-cell (CAR-T) immunotherapy market is projected to increase at an annualized rate of over 51% during the time period, 2018–2030. Cellular and gene therapy-related R&D is advancing rapidly in the United States and China, where hundreds of trials are underway. For all innovator drugs, payers’ decisions to reimburse a drug that may carry a significant price tag will heavily depend on the drug’s value, with many ways for value to be determined.

Anticipate seeing a continued push of biosimilars to the market in the United States to help save costs. Europe already has approved 65 biosimilars and India currently has over 50 approved biosimilars on the market. The FDA is accelerating the approval process through its Biosimilars Action Plan launched in July 2018. Governments worldwide are looking to boost patient access to affordable medicines and may increase demand for generic drugs. While this may create growing pipeline opportunities for generics, the number of companies manufacturing generics is consolidating, and the number of complaints about rising prices for some generics is increasing.

Innovation, R&D and Outsourcing

Excitement about new technologies that are delivering real breakthroughs remains palpable, and several are in launch phase or approaching commercialization. Science is accelerating and moving at a pace like never before. Startup firms are the key drivers in the disruption of next-generation therapies. As these startups mature, pharma companies who may be looking to buy these companies can expect challenges in acquiring this innovation at reasonable valuations. Startups bring a whole new mind-set and technology culture that appears to be dramatically opposite to pharma’s traditional, slow-growth legacy culture. Among the challenges is pharma’s value chain, which is built around traditional products, while next-generation therapies are being built around the patient and their engagement.

The extent to which companies with unproven technologies can maintain their billion-dollar-plus valuations in 2019 will signal the depths of any possible downturn. The fact that many of these cash-strapped life science firms are valued more highly than those with products on the market suggests that the sector is still some way from the bottom.

Pharmaceutical companies are expected to shift from transactional outsourcing relationships to more strategic, relationship-based models for biologics, data-driven clinical innovation, and manufacturing capacity. Also, more companies will likely be outsourcing expertise in advanced technologies, such as AI, robotic and cognitive automation, and cloud computing. Outsourcing technology providers could increase efficiencies, lower costs, and decrease clinical timelines. Companies are increasingly partnering with academia and contract research organizations (CROs) for R&D capabilities. Biopharmaceutical delivery devices, such as prefilled syringes, could be another outsourcing opportunity as drug companies look to make products that are easier for physicians and patients to use. Contract manufacturing organizations (CMOs), and contract development and manufacturing organizations (CMDOs) will continue to be a strategic and integral part of the global supply process.

Therapeutic Areas of Focus

Oncology and rare disorders are still center stage for partnerships, investment and R&D focus.  Cancer is a big market, and getting bigger as we have longer lifespans and more seniors. Oncology is expected to remain the dominant therapy segment, growing US$129B in projected worldwide sales over 2017–2024, and reaching US$233B by 2024. Immunosuppressants are expected to have the highest CAGR gain in the period, 2017–2024, at 15.7%, followed by skin care/dermatologicals (13%), Oncology (12.2%), and Antianemics (11%).

Med-Tech / Medical Devices

Medtech is projected to grow at a 5.6% CAGR over the forecast period 2017–2024. In 2019, worldwide medtech sales are predicted to be US$475B, growing to US$595B by 2024. The fastest-growing device areas by CAGR are predicted to be Neurology (9.1 %), Diabetic Care (7.8 %), and General and Plastic Surgery/Dental (6.5%). By 2024, In Vitro Diagnostics is expected to be the largest medtech segment with annual sales of US$79.6B, followed by Cardiology and Diagnostic Imaging. Medtech R&D spend is estimated at US$39B by 2024. Software-as-a-Medical Device (SaMD) is a rapidly growing area of innovation that regulators across the globe are working to de-risk and have greater agility.

Intersection of Technology and Healthcare

2019 will continue to see a focus on digital transformation in life sciences. This transformation is about using technology symbiotically and strategically, not just adopting a particular technology or device. Data is fast becoming the currency of life sciences, and digital enterprises are building a new business model for the future. Digital technologies and massive connectivity are creating rich networks of connection, collaboration, and interdependence. As companies can more easily deploy and activate assets they neither own, nor control, opportunities and risks are expected to grow exponentially. Rich networked ecosystems could create new value, provide a competitive advantage, and accelerate learning. It appears the need for companies to translate learning into innovation has never been greater.

The large technology giants are diversifying into health care and life sciences. They have a cumulative value estimated at almost US$4T and they are investing in startups. Alphabet’s venture arm, Google Ventures, has allocated a third of its funding to 60 healthcare and life sciences companies from genetics to telemedicine. About a third of the world’s data is generated from healthcare, and technology companies specialize in data. The tech giants are using Big Data and artificial intelligence (AI) for prediction and prevention. Tech giants are developing medical-grade consumer technology focused on both diagnostics (e.g., Amazon Echo) and therapeutics (e.g., Alphabet’s Calico and Verily), and using their deep understanding of the consumer to enhance and simplify the patient experience.

For life science companies, tech giants can represent numerous opportunities, including potential partnerships, competitors, or disruptors in a specific area and creating chaos. In the future, a tech giant, or one of the larger data companies, may begin to push into R&D and have an impact on spend in the sector. In 2019, we may see more “coopetition,” collaboration between business competitors, in the hope of mutually beneficial results.

Effect of Regulatory and FDA in Life Sciences and Healthcare Markets

The US FDA looks like it will remain one of life sciences best friends. There is an evolving regulatory framework and collaboration between industry and regulators. The influential regulator’s willingness to speed novel therapies to market has emboldened companies and investors to take ever-greater risks.  Additionally, regulators are providing more and more clarity and guidance on new therapeutic approaches to treatment, including cell and gene therapy and regenerative medicine, to name a few.

Healthcare Providers, Services and Plans

Investor enthusiasm for these categories correlates with an observed trend of health care services shifting to lower-cost sites of care. In response to pressure from new delivery models and the need to adapt business models to new demands, organizations are focused on rolling up and creating scale by consolidating portions of the fragmented provider market to create larger entities. Home health care services are becoming increasingly sophisticated as patients receive more and more aspects of traditional hospital-level care in the home, e.g., dialysis, infusion therapies, oxygen therapy, and intravenous administration of complex drugs for certain conditions. Growth in this sub-sector will continue to be driven by the dramatic cost differences between home and inpatient settings, although increasing scrutiny of favorable federal reimbursement for home health care could become a headwind.

Consolidation is occurring in the retail-centric medical groups (e.g., dental, dermatology, vision, physical therapy), yet the market remains fragmented and highly competitive due to previous roll-ups. Specialty physicians that serve patients with chronic diseases or those requiring more specialized treatment are also consolidating. This sub-sector will be especially impacted by newer specialist-focused, risk-based alternative payment models (APMs), as well as the Merit-based Incentive Payment System (MIPS), which ties a provider’s or practice’s compensation to performance relative to peers, as well as to cost and quality improvements over time.

Health plans and hospitals continue to be major players in the healthcare industry. However, the changing landscape – such as the evolution from volume to value, the shift to lower cost sites of care, and increasing consumerism – means these players must evolve and innovate along with their less traditional counterparts. Payers are increasingly willing to pay for new modes of service and sites of care, if there is support from data that substantiates cost reduction, improved quality, or better outcomes. However, the willingness of payers to enter into these types of arrangements is currently being constrained by the extent of providers’ readiness to take on risk.

Patients Represent the Core

As an increasing number of processes and tools become digitized and more patient-centric, patient expectations grow. In order to gain a better understanding of the customer experience, life sciences companies are expected to keep patients at the core, and start thinking “outside in” when designing value chains. Coherent and meaningful experiences should be created through the entire chain of patient interactions—from R&D to product launch and commercialization phases. When patient-centricity is ingrained into a company’s culture, a lot of new creative ideas may be uncovered to create value.

Today, patients are becoming partners in the design of their healthcare experience, and companies should explore a greater focus on customer experience. The future of customer experience could become more personalized and patient-centric using interoperable data and AI. Patient-centricity means moving beyond engagement and developing a true partnership with patients—leveraging patient data and understanding the burden of disease, the caregiver’s role, access decisions, and the healthcare systems involved. In addition, a patient-centric approach can help life sciences improve R&D productivity and may also decrease the number of patients who drop out of studies.

Deal-making and Inorganic Growth

Life sciences mergers and acquisitions (M&A) activity totaled US$198B in 2018, as life sciences companies focused on building therapeutic scale and optimizing their portfolios. This is according to the 2019 EY M&A Firepower Report. In 2019, there will be a continued search for innovative technologies that will drive life science companies to bolster pipelines through external deals, either through licensing or mergers and acquisitions (M&A). This activity is likely to continue to be a strategic focus for many companies that may face patent expiries, competitive headwinds, weak pipelines, and growing technology needs. Over the last ten years, the top 10 pharma companies with the highest return on investment (ROI) spent an average of 35% on M&A from their total R&D and M&A investment.

A new era of deal-making is accelerating among biopharmaceutical and genomics companies looking for a leadership position in next generation therapies. Large, transformative acquisitions in the US$60–70B range defined 2018 and the beginning of 2019 (e.g., BMS- Celgene). Companies may be rearranging portfolios based on the anticipated pricing controls, and acquisitions are expected to be very strategic, with a focus on core therapies or specialties.

As life sciences companies look to develop innovations that satisfy increasingly empowered health customers, they must accelerate their deal-making agendas on two fronts: the creation of focused business models and the acquisition of disruptive, data-centric capabilities. The acquisition of these digital capabilities will become increasingly important as new digitally savvy entrants disrupt the larger health ecosystem and life sciences companies’ business models.

What To Expect

Investors should expect that the healthcare and life sciences industry will likely remain an attractive investment target for some time, due to the sector’s critical role in the economy. Projected healthcare spending is expected to grow to nearly 20% by 2026. Smart investors will make decisions between novel technologies, clinical differentiated products, inflated expectations and appropriate values, by monitoring policy, regulatory, and market developments, and evaluating opportunities in the context of disruption and new models. Healthcare and life sciences companies will need to become more efficient, nimble, customer-focused and they will need to demonstrate value.

About the Author:

David H. Crean, Ph.D, MBA

Managing Director, Life Sciences and Healthcare

25+ Years of Experience

david.crean@objectivecp.com

References:

1. Deloitte, 2019 Global Life Sciences Outlook, https://www2.deloitte.com/global/en/pages/life-sciences-and-healthcare/articles/global-life-sciences-sector-outlook.html
2. EY M&A Firepower Report, 2019, https://www.ey.com/en_gl/life-sciences/how-can-you-use-dealmaking-today-to-capture-value-from-data-tomorrow
3. IQVIA, The Global Use of Medicine in 2019 and Outlook to 2023, https://www.iqvia.com/institute/reports/the-global-use-of-medicine-in-2019-and-outlook-to-2023
4. PWC, Top health industry issues of 2019: The New Health Economy comes of age, December 2018, https://www.pwc.com/us/en/industries/health-industries/top-health-industry-issues.html
5. Vantage 2019 Preview, http://www.evaluate.com/thought-leadership/vantage/vantage-2019-preview