The life sciences industry within the United States makes significant contributions to both America’s health and economy and is a leader in R&D and innovation based on numerous proxies including patents received, government and venture funding, R&D investments, new product approvals, and deal making, to highlight a few. However, that leadership position must be continually curated and stewarded, or face risk of decline, especially as other nations around the globe implement more aggressive tactics to improve their nations’ life sciences competitiveness. Moreover, effective policies, pricing systems, incentives and robust protections can help ensure that America’s life sciences innovation and production engine continues to flourish into the future.
Importance of Innovation
Many leaders talk about the importance of innovation as a catalyst for company growth but then fail to act in support of the best ideas. This issue of failing to act has only been compounded by the viral pandemic as executives expect the fallout from COVID-19 to fundamentally change the way they do business over the next five years. As one might expect, companies are largely focusing on maintaining business continuity and executives must weigh cutting costs, driving productivity, and implementing safety measures against supporting innovation led growth.
Investments in innovation are suffering across every industry. Fortunately, the sole exception is biopharmaceutical and medical products sectors, where McKinsey learned through surveys with company executives where they have seen an approximate 30% increase in the immediate focus on innovation.1 Leaders face an important choice around supporting innovation led growth in the short term, one that may have lasting consequences for their companies’ ability to grow in the years to come.
Proxies for Innovation in the Life Sciences Industry
Investment in R&D
The life sciences industry invests more in R&D than almost any other sector. It’s expensive (and growing) and a long, time consuming process to develop new therapies and medicines.2 The stages involved in bringing a new drug to market begin with basic research, drug discovery, and preclinical trials; then proceed to three stages of human clinical trials, which culminate in a drug’s approval (or rejection) by the FDA or other regulatory agency; and finally culminate in pharmacovigilance (i.e., post-approval safety monitoring). Biopharmaceutical companies conduct laboratory screening of numerous chemical compounds (5,000 to 10,000) for each new drug approved for use in humans. Less than 12% of drug candidates that even make it into Phase I clinical trials are ultimately approved by the FDA.
In addition to the high failure rate, the drug development process has grown increasingly expensive. According to a 2018 report “Unlocking R&D Productivity: Measuring the Return from Pharmaceutical Innovation 2018” by the Deloitte Center for Health Solutions, the average cost to develop an asset, including the cost of failure, has increased in six out of eight years.3 The report estimates that the cost of developing a new drug almost doubled from an average cost of $1.19 billion in 2010 to $2.17 billion in 2018.3 The 2019 version of the report concludes that the average cost of bringing a new drug to market has increased by 67% since 2010 alone.
On average, over 20% percent of life sciences companies’ sales is invested in R&D since 2000.4, 5 The United States has been the world’s largest global funder of biomedical R&D investment over the past two decades considering all investments made by government, companies, foundations, and universities. This strong investment in and output from R&D and innovation should not be cause for complacency.
Development of New Medicines
As of 2020, biopharmaceutical companies in the United States have more than 3,400 drugs under clinical development, accounting for almost half of the estimated 8,000 medicines under development globally.5 Since 2000, the FDA has approved more than 500 new medicines. Most of the drugs currently under development are innovative new chemical entities, new biologic entities and vaccines that seek to tackle some of the world’s most challenging diseases, including Alzheimer’s and cancer. In addition, the United States biopharmaceutical companies have come together and collaborated to achieve one common goal – ending COVID-19. A shared vision of innovative discovery and research allows biopharmaceutical companies to respond to the coronavirus swiftly, with active trials for both treatments and vaccines already in process.6
Federal Government Funding
A signature strength of America’s biopharmaceutical innovation system has been the complementarity between public and private-sector investment in life sciences R&D. The federal government, principally through NIH, funds basic research in the life sciences that sets the stage for the industry-led basic and applied R&D activity. That activity leads to the commercialization of new medicines and treatments. NIH-funded basic life-sciences research creates a platform for innovation that has led not only to the discovery of new medicines, but to new tests, new procedures, and new equipment. NIH’s FY 2019 funding of $39.3 billion has been increased to $41.69 billion for FY 2020 (including an additional $3.59 billion for three coronavirus-related emergency supplemental appropriations).
Investments by Public and Private Capital Markets
This year is looking to become an all-time record period for public equity raises in the biopharmaceutical sector. Activity in 2020 is driven mainly by biotech, followed by pharmaceuticals. The biopharmaceutical IPO market is dominated by the U.S and, in recent years, the China IPO market has rapidly become the second most important. Public market activity is a good indicator for investor’s desires to finance innovation.
In terms of venture capital (VC) funds raised, there has been more than $24 billion raised in new healthcare-related funds thus far in 2020. This is far above the record set in any previous year. These investment funds from the private market also help drive innovation.
Patenting and Scientific Publications
A bell weather of a nations’ investments in R&D is also the output of patents and scientific publications. Robust and reliable intellectual property (IP) rights and protections have helped drive innovation and enhance patient access to breakthrough therapies. Innovators are also relying on these strong protections to discover new medical advances that will keep patients healthy.
Experts continue to highlight the importance of strong IP protections that encourage innovators to develop new solutions, especially those related to COVID-19. It is important that governments create the right policy framework and necessary incentives to upscale innovation. Patent protection enables companies to recoup their R&D investment and continue to produce innovative, new drugs in the future. According to Dr. John Wetherell, Partner and Patent Counsel at Pillsbury Winthrop Shaw Pittman LLP, “the US is no longer the leader in patent innovation due to recent patentable subject matter cases that have negatively impacted patent protection.” One example is the Myriad Genetics case versus Alice Corp. involving naturally occurring molecules. Another example involves the use of artificial intelligence (AI). It appears that The US Patent and Trademark Office (USPTO) doesn’t want to grant patents for an invention by AI on the ground that an “inventor” must be a natural person under 35 USC. Section 100(f). It’s difficult to achieve innovation without the protection of knowledge and ideas, and that’s particularly the case in an industry whose products require significant capital to develop in a process that usually takes longer than a decade.
From 2009 to 2018, life-sciences patents issued by the USPTO to US inventors increased 142%, from 1,597 in 2009 to 3,863 in 2018.7 However, patents issued to foreign inventors grew at a faster rate, 168%, over this time. The number of US pharmaceutical patent applications to USPTO increased over eight-fold from 1,261 in 1991 to 10,630 in 2019, while the number of US biotechnology patent applications increased 6.5-fold, from 641 to 4,175 over that time period.
The five leading nations for scientific publications in the health sciences as of 2018 were the United States, China, the United Kingdom, Japan, and Germany.8 The United States produced over 140,000 such publications in 2018, up 40% from about 100,000 in 2000. China’s biology and biomedicine scientific publications increased from 6,200 in 2000 to over 52,000 in 2018, an eight-fold increase. Germany’s and the United Kingdom’s publication levels remained mostly level, although India’s more than doubled over this time.
Innovation Through Acquisition
According to Pitchbook data ending September 30, 2020, M&A deal activity in North America rebounded in the third quarter of 2020 as corporates and financial sponsors alike looked to the middle market to complete deals. Some M&A is being pursued as firms jostle to take advantage of opportunities presented by the COVID-19 crisis, whereas other firms are engaging in M&A activity as a defensive measure to simply stay afloat. The healthcare sector, including biopharmaceutical subsector, has seen a healthy rebound in the 3rd quarter.
Traditionally, there have been three drivers of M&A in the life sciences sector: 1) access to innovation; 2) portfolio realignment; and 3) economies of scale / cost pressures. In the early days of the COVID-19 pandemic, biopharmaceutical companies appeared reluctant to engage in M&A as they focused on COVID solutions as well as the impact on their overall business. Going forward, however, expect M&A demand to accelerate and acquirers that have healthy balance sheets and firepower to allocate will deploy the capital to buy innovation and growth.
The market is also showing much more interest in high innovation molecules, particularly growth-focused new chemical entities. The level of interest in generic and mature molecules appears to be dropping according to data from Torreya Partners.
Economic Benefit from Innovation
The life sciences industry makes important contributions to the United States economy not only by creating direct net economic benefit and activity but also by supporting indirect activity.6, 9 It has been reported that approximately 73% of survival gains in cancer are attributable to innovative treatments, including newly developed medicines. Furthermore, there would be $500 billion in net present value benefits delivered with a 1% reduction in mortality from cancer, while a cure could deliver $50 trillion in present and future benefits. Likewise, the financial impact of Alzheimer’s disease is expected to soar to $1 trillion per year by 2050, with much of the cost borne by the federal government, according to the Alzheimer’s Association report “Changing the Trajectory of Alzheimer’s Disease.”10
Based on estimates by the Pharmaceutical Research and Manufacturers of America (PhRMA), the life sciences industry also generates significant downstream economic impacts.9 The US pharmaceutical industry produced $181.8 billion of value added in 2018, up 107% from the $88 billion it produced in 2002. Thus, far from being the leading cause of rising US health-care system costs, greater levels of life sciences innovation will be key to limiting the growth of healthcare system costs. That said, significant economic benefits can continue to be achieved if innovative medicines could make progress toward addressing some of the most intractable diseases.
Factors Affecting Future Sustainability of Innovation
Drivers of long-term innovation combine a steady talent pipeline, a supportive government platform, and incentives to fuel development of new ideas that tackle big problems but also meet economic needs. Policymakers should focus on solutions that correct market failures, increase competition, and lower costs for patients.11, 12
For instance, the decision to implement artificial price controls would come at a steep price in terms of future research into the most innovative medicines and cures of tomorrow, including undermining investment in COVID-19 vaccines and treatments. H.R. 3, the Lower Drug Costs Now Act, was introduced by legislators in late 2019 and seeks to establish a fair price negotiation program, protect the Medicare program from excessive price increases, and establish an out-of-pocket maximum for Medicare part D enrollees, as well as for other purposes.
Analysis of H.R. 3 by many within the industry feel strongly that it would have a devastating impact on the innovative biotechnology sector, resulting in many fewer medicines coming to market and available to patients. The White House Council of Economic Advisors similarly found that as many as 100 fewer medicines would enter the market over the next decade as a result of these foreign price controls. Of particular note, the capital loss caused by H.R. 3’s foreign price controls would lead to a 90% reduction in medicines developed by small US biotech companies – or 56 fewer approvals over the next decade. It is these small companies that are driving more than 70% of all innovative R&D, including for COVID-19, yet they are the ones that will be most negatively impacted by President Trump’s Executive Order.
Potential solutions include reforms that end incentives and effects of the drug rebate system, by making sure patients pay based on the discounted price of a drug rather than its artificial list price, and by eliminating incentives for companies to increase list prices just to pay ever greater rebates demanded by the middlemen. Make patient access and affordability paramount, by drastically reducing what patients pay for the drugs they need, and by removing other barriers to access imposed by insurance companies. Move towards a value-based system for payment of drugs by removing federal barriers to innovative financing arrangements. Lastly, promote generic and biosimilar entry after patents expire to create headroom for future innovation, and target abusive practices that unfairly restrain competition.
The life sciences industry makes important contributions to the US economy. The US is a leader in the world on most indices of R&D investment and innovation based on new medicine approvals versus other countries and geographies. America must continually bolster its biopharmaceutical leadership position, especially as China implements ever-more aggressive policies to improve their life-sciences competitiveness, not only in production but also in innovation.
Prioritizing innovation today is the key to unlocking post-COVID crisis growth. US life-sciences companies depend upon the profits earned from one generation of innovation to finance investment in the next, a dynamic especially vital in such a capital-intensive industry as biopharmaceuticals. The ability to earn profits from successful drugs is foundational to perpetuating that dynamic.
The United States has become a leader in the life sciences sector thanks to the adoption of a broad set of public policies including increases in public investment in biomedical research; effective technology transfer and commercialization mechanisms; robust IP protections; a pricing system that allows innovators to earn sufficient revenues to reinvest in innovation; tax incentives to encourage investment; and an effective drug approval system. If the United States is serious about maintaining its leadership in life sciences innovation, then it’s time for policymakers and regulators to articulate and embrace a robust sectoral competitiveness strategy. Let’s not put innovation at risk with poor choices.
12Ensuring US Biopharmaceutical Competitiveness. https://www.gtipa.org/organizations/information-technology-and-innovation-foundation, July 16, 2020
David H. Crean, Ph.D. is a Managing Director at Objective Capital Partners, a middle market investment banking firm located in southern California, where he leads the firm’s Mergers and acquisitions (M&A), strategic advisory, and valuations with life science and healthcare companies. Dr. Crean has in excess of 25 years of life sciences R&D and corporate development transactional experience in the healthcare and biopharma industries. Dr. Crean holds FINRA Series 79 and Series 63 licenses and is a Registered Investment Banking Representative of BA Securities LLC, Member FINRA SIPC. In parallel to his investment banking leadership, Dr. Crean serves in leading roles on the Boards of Directors for Histogen, Inc. (Nasdaq: HSTO) as Board Chairman and Chair of Audit, and the California Life Sciences Association (CLSA) as Chairman of Development and a member of its Executive Committee.
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