Life sciences companies are a vital player in the healthcare delivery system through their discovery, development, manufacturing and marketing of innovative treatment options for patients. This role, and the innovation brought by the sector, are increasingly visible during the COVID-19 pandemic as life science companies lead the charge to develop novel treatments and vaccines, often in collaboration with startups, academic groups and public health organizations. In addition to ensuring patients have access to therapeutics when they are likely to improve their health outcomes, the activities of Life Science companies aim to achieve commercial success and economic returns on the investments they make in research and development. These returns are then continually reinvested, thus sustaining the cycle of investment and innovation, not just for large pharma companies, but for all those in the innovation ecosystem.
Even before the emergence of COVID-19, pharmaceutical companies faced challenges in maintaining their financial health — typically measured in terms of operating margins — as Research and Development (R&D) investment levels have climbed and commercialization returns have been constrained.
Over the past 5 years, R&D expenditure has escalated, increasing by 26% or $22.6 billion, and rising 2.1% as a percentage of total sales (from 17.2% to 19.3%). The increase in R&D spending reflects both increased trial activity and the growing complexity of trials – reflecting the number of subjects, research sites, endpoints and inclusion/exclusion criteria included in those trials1 (see Exhibit 1),
These trends in R&D costs have occurred at the same time multiple changes in the marketplace for medicines have constrained the level of commercialization returns achieved by life sciences companies.
Among the key elements of change are:
Collectively, these changes contribute to a constrained level of sales growth for typical life sciences companies (see Exhibit 2).
The combination of the rising investment in research and development with a more constrained environment for commercialization returns provides significant pressure on life sciences companies as they seek to maintain or increase their operating margins.
For the 15 largest life sciences companies, based on their corporate entities, operating margins averaged 25.7% in 2019, up about 1.0% over the prior five years. Over the next five years, if these companies are to maintain that level of operating margin, they will need to reduce Selling, General and Administrative (SG&A) operating costs by about $23 billion in order to maintain their current level of Research and Development activity. This is based on modeling the level of future growth from new and existing products, price changes and losses of exclusivity. Cost of goods sold are assumed to remain at current levels of 28.1% of sales. R&D activity — related to drug discovery, clinical development and registration — is assumed to incur 5% higher costs each year, reflecting increased specialization and complexity of efforts. With a $23 billion reduction in operating costs — about 15% of total SG&A in 2019 — these companies would, in aggregate, be able to deliver a 25.7% level of operating profit in 2024 (see Exhibit 3).
1IQVIA Institute for Human Data Science. The changing landscape of research and development: innovation, drivers of change, and evolution of clinical trial productivity. Apr 2019
2IQVIA Institute for Human Data Science. Global medicine spending and usage trends: outlook to 2024. Mar 2020.