Investments in the life science and pharmaceutical industries are a different ballgame.

For one, the investment horizons are different. The financial calculations and duration of sunk investment has to factor in research and development, product development, regulatory clearance. The timeline to returns can be staggering if you are not familiar with the industry.

As with everything that needs to be done right, one must be able to drill down into the key factors that drive such considerations and taking them onboard in order to truly appreciate what drives the investment decision.

Government’s tightening healthcare budgets and pricing pressures on products

Government procurement matters. It is still on the key drivers of growth and business in this space. Subsidies, cost control policies, bidding frameworks, transparency etc – it is a regulatory maze that needs seasoned legal and regulatory expertise.

And then there is the ever-present political pressure to tighten budgets. It has been more than 4 years since the first covid case but governments budgets have not fully recovered from the spending that was diverted into healthcare ranging from provisions for test kids, to investing in hospital beds, procurement of vaccines and therapeutic products for patients diagnosed with covid.

Governments may still be sitting on huge inventory of products that they are looking to write-off but may have to continue maintaining it thus incurring the costs of storage of such products. The ever-looming Covid variants that are still evolving have been putting governments on their toes as they prepare themselves for the next outbreak if ever it is going to arise.

The Covid episode has also brought to the foray the need for governments to build up the pandemic preparedness and all of this further contributes towards putting more funds towards building an inventory for vaccines and therapeutic products that can help their countries survive through any future pandemic[1].

All of this means a potential exponential increase in healthcare budgets that must be funded by cost savings that governments need to extract from other areas. This potentially means tighter squeezing in pricing of medicines offered by pharmaceutical companies[2] and dropping margins. This in turn, could reduce investment tolerance and capacity for pharmaceutical companies to fund innovative product developments.

A by-product of this is increasing rationalisation of the workforce by the pharma companies in order to drive more cost efficiencies by reducing the costs base to provide for the price cuts.[3] The offshoot of such workforce rationalisation is that any excesses arising from the rationalisation has led to an increase in cash that the pharmaceutical companies are holding which they are now looking to invest in opportunities.

The excesses in cash can also be attributed to in part by divestments in consumer healthcare portfolios (see paragraph below on portfolio rationalisation). With the excesses in cash, there is reduced reliance on borrowings to fund the acquisitions and put them in a better position to drive investments.

With this in mind, we should see an increase in the investment activities by the large pharmaceutical companies in the next year and the nature of such investments will be driven by the factors below.

Shareholders’ activism driving the decision on assets portfolio rationalisation

Shareholders are also seeing a decline in their shareholder value whilst holding on to the shares in the pharmaceutical companies.

Although pharmaceutical companies have been traditionally defensive stocks due to their regular revenue streams that are less affected by economic externalities, the reduction or even removal of dividends payouts by the pharmaceutical companies have driven shareholders to demand to see more increase in capital gains through the increase in the value of their shareholding interests.

Such demands have translated to more shareholder activism as they demand to see better pipelines and lesser traditional assets that provide lower margins. This in turn has driven pharmaceutical companies to look to divesting assets that are of lower margins but potentially contribute to higher costs of operation.

The first target for such divestment will be their consumer healthcare assets.[4] However, these are usually proverbial “cash cows”. In divesting these assets, the pharmaceutical companies may also be taking away their constant revenue stream that has been funding their product development costs.

As such, pharmaceutical companies are now likely to look to investing in products that can help maintain a constant revenue stream which can include products that support chronic disease management[5]. The investments can include acquiring companies that have such assets in the pipeline or companies that are selling such products that are either still enjoying patents or those that have patents expired but still command a sizeable margins as compared to their consumer healthcare products portfolio.

Social corporate goals are becoming company targets and performance indicators

Increasingly, and consistent with the shareholders’ activism, the social corporate goals, values and principles of pharmaceutical companies are coming into the limelight.

This is in part contributed by how pharmaceutical companies are being perceived post-covid. The reputation of pharmaceutical companies have declined[6] after covid due to the pricing decisions of the pharmaceutical companies in relation to the covid vaccines and therapeutic.

With such pressures mounting on pharmaceutical companies, they are also looking to invest in their social corporate goals which can extend to environment sustainability goals, inclusion and diversity goals and responsible uses of artificial intelligence.

With respect to environment sustainability goals, this can take the form of switching to renewable sources of energy in the resource intensive manufacturing sites[7] or reduction in single use resources in their supply chain.

As for inclusion and diversity goals, this can take the form of ensuring greater diversity in their patient pool when they recruit for clinical trial studies which in turn also helps increase the receptiveness and acceptability of authorities of the results of the clinical trial studies. In order to drive such inclusive and diversity goals, pharma and life science companies are likely to look into collaborations or investments to acquire or invest in clinical research organisations that have proven track record of being more diverse in their enlistment of patient pool as well as looking at collaborations with such organisations which are located in countries that have access to patients pools which were previously not represented in clinical trials such as Asian countries or African countries[8].

Precision medicines driving key investment targets

Precision medicines[9] is the next buzz word after rare diseases in the pharmaceutical space. The industry is dubbing precision medicines as the future of medicines[10] and health ministries[11] are also embracing the same idea. The foundation of precision medicine lies in the data that can be collected and processed in order to drive greater customisations in the medicines for patients.

However, not all data are accessible to the pharmaceutical companies and with greater scrutiny from government on regulating privacy of individuals, it has also posed greater barriers to entry in relation to obtaining data.

On that note, to drive faster innovations and be a leader in precision medicines, pharmaceutical companies have to look into investing in companies that can give them such wide access to clinical trial data or even data of patients that can allow them to use such data in a compliant manner.

Additionally, given that precision medicines is largely a fairly new research area, there are not a lot of big players that have the agility or the risk appetite to take on research into this field.

The result of this is that most of the companies that have started any research and development or have any pipelines in this field will likely be the smaller and newer biomedical companies.

Accordingly, the focus of investments is likely to turn to this segment of the market and this can mean an increase in volume of transactions but small in value as the valuation of such assets are more risk averse and likely to be funded by internal cash than institutional borrowings given the uncertainty in the outcome of the assets.

This would also mean that we can see more asset acquisitions rather than share acquisitions since the value lies in the assets held by these companies rather than the companies themselves which are likely to be very new companies with light capital.

Conclusion

As mentioned at the beginning, the investment horizon and landscape of pharmaceutical companies are quite niche. Not all investments are made with solely the products in mind as there could be other factors driving the decisions.

Please note that this article is not intended to be and/or does not constitute investment advice. Should you wish to discuss the contents of this article, please reach out to the author.

Author: Frederick Tay

Footnotes

[1] See for example: U.S. Department of Health and Human Services (HHS), through the Administration for Strategic Preparedness and Response (ASPR), announced the selection of initial next-generation vaccine candidates and more than $500 million in awards for Project NextGen which is meant to kick start trials and technologies for development of vaccines and therapeutics platform: Project NextGen Selects Initial Vaccine Candidates and Awards Over $500 Million to Advance Development of Vaccines and Therapeutics | HHS.gov

[2] See for example: The Inflation Reduction Act in the US aims to lower the cost of prescription drugs: Inflation Reduction Act becomes law: How it will affect your health care (nbcnews.com);

[3] See: At Least 24,000 jobs in the pharmaceutical sector have been laid off with potentially no backfills for those positions: The 6 Largest Biopharma Layoffs of 2024 So Far | BioSpace; https://www.forbes.com/sites/ritanumerof/2023/08/22/mass-layoffs-continue-across-the-biotech-sector-what-does-this-mean-for-pharmas-future/

[4] See: Some pharma companies are divesting or divested their consumer healthcare arm - J&J spin-off: pharma continues to cut the cord on consumer healthcare - Pharmaceutical Technology (pharmaceutical-technology.com);  The End Of The Big Pharma Conglomerate (oliverwyman.com)

[5] See: Obesity, diabetes meds to take over as 2030's top sellers: Evaluate (fiercepharma.com)

[6] See: Has COVID-19 changed public perception of pharmaceutical companies? (europeanpharmaceuticalreview.com)

[7] See for example: Building sustainability in manufacturing operations | McKinsey

[8] See for example: “Minority Representation in Clinical Trials in the United States: Trends Over the Past 25 Years” Mayo Clin Proc. n January 2021;96(1):259-266 (showPdf (mayoclinicproceedings.org))

[9] See: Precision medicine: Concept and tools - PMC (nih.gov)

[10] See for example: Precision medicine in 2030— seven ways to transform healthcare Cell 184, March 18, 2021 (S0092-8674(21)00058-1.pdf (cell.com))

[11] See for example: https://www.healtheuropa.com/210m-precision-medicine-programme/84899/ and https://www.npm.sg/news-and-events/press-releases/singapore-launches-next-phase-of-national-precision-medicine/