2023 reflections and 2024 predictions for the pharmaceutical industry

With the departure of the casual investors who flooded the market during the COVID-19 pandemic, the dust settling on the Inflation Reduction Act, and the tightening of pharma budgets, 2023 was ultimately a year of correction.

Adequate reflection upon the past 12 months is not possible without first glancing slightly further back to 2020. The pandemic saw slowed rates of clinical trials, except for COVID-19 vaccines, and a deluge of investment in the race to create the vaccine. As more investors joined the fray, funding was pumped into the pharma and biotech industries. This spurred M&As and numerous transactions. Leaving 2022, we were moving out of a period of overspending that had massively shaped the industry over the last two years. The slowed spending of 2023 facilitated a shakeout that was a few years in the making. 

A shift in supply and demand

From a microeconomic perspective, it is no surprise that the pandemic saw a change in consumer spending patterns. Reduced spending during lockdowns resulted in the accumulation of pent-up consumer demand. When restrictions eased, demand overwhelmed supply capacities. Challenges in traffic, oil production, supply chain issues, big resignations, displacement of jobs and job losses further hindered supply from meeting the elevated demand.

There were simply not sufficient numbers of workers in many sectors. One instance in San Diego port, there were over 100 cargo ships waiting to be unloaded which was, in part, a consequence of labour shortages. This was not helped by the blockage in the Suez Canal that further stressed the supply chain, holding up approximately $400 million per hour in trade.

The overconsumption of digital technology during the pandemic led to a limited supply of chip microprocessors. Imperative to quotidian digital practices, chip microprocessors are dominated by TSMC with the company controlling more than half (56.4%) of their production. Their influence on the industry also exacerbated this bottleneck. 

Rising inflation across the globe

The combination of these conditions created pressure on interest rates. In the USA, inflation was running high, and, for the first time in a long time, all three core legislative powers of the US government were with the Democrats.  Biden’s presidency, the House of Representatives, and the Senate were all aligned. With this mandate, they passed the Inflation Reduction Act to address the USA economy, such as creating an environment for green industries. The act also stipulated cost containment of prescription drug price, including discounting overused drugs for the elderly.

The energy crisis has further exacerbated inflation, especially in EU regions. Since the Russian invasion of Ukraine, gas imports from Russia to the EU have been significantly reduced from over a third (35.7%) to one-tenth (12.9%) of the total gas imports of the EU. European countries were forced to seek alternative sources to ensure supply security. While higher LNG imports were pursued, they came at a steep cost. Increasing usage in LNG resulted in EU countries facing a bill of €70 billion ($78 billion) to refill the gas storage facilities this summer, a cost six times higher than the previous year.2023 was shaped by high inflation worldwide, which has declined from peak pandemic levels, though remained as of October 2023 at 3.2% in the US, 3.6% in EU regions, and 4.6% in the UK.

In the pharmaceutical sector, companies have faced substantial increases in expenses as the cost of capital surged, which made investment in biotech and research more costly, prompting a reduction in funding. Investors who entered the market in 2020 and 2021, particularly those non-specialist investors, have withdrawn their investments. Moreover, excessive spending in recent years prompted a reduction of financial commitments in 2023.

This year, the shakeout has influenced every industry related to pharma, from major consulting firms to boutique operations. The year began with mass layoffs in the tech industry, swiftly followed by more of the same in pharma (inc. Pfizer, Novavax, Amgen) and consulting firms (inc. McKinsey, EY, Deloitte, Accenture). The knock-on effect of this has been the increase in competition with more people chasing scarce investments.

What will 2024 hold for the industry?

In 2024, we can expect the pharma industry to come back stronger. This will be driven by the low cost of capital, and the steadying inflation rates in the US and Europe.

It is, of course, near impossible to have a conversation about the future without mentioning AI - Artificial Intelligence and Machine Learning. The ability to leverage AI will be a differentiating factor and we anticipate greater focus and scrutiny on AI generally. AI can be applied across drug development stages, from discovery of candidate molecules to streamlining clinical trials, with potential to reduce both the time and cost involved in bringing a new drug to market.

Companies will continue to be at the frontier of bringing safer and more effective drugs in areas with huge unmet need. Areas that will grow include obesity / diabetes, oncology, neuroscience. The market for anti-obesity treatments is relatively new, but is expected to grow rapidly with Goldman Sachs predicting a $100 billion global market by 2030..  Oncology will continue to be targeted as there remains unmet need for patients and companies will explore novel combinations, cell therapies and precision medicine. Neuroscience will also be a growth area, with demand for Alzheimer's treatments such as Eisai’s Leqembi and Lilly’s donanemab (if approved) increasing as the population ages. 

Exemplified by Pfizer’s purchase of Seagen for $43 billion, we can also expect to see more M&A in 2024. Large companies will continually seek to strengthen their pipelines through acquisitions, particularly of clinical or commercial stage companies.     

The influence of Chinese pharma in Europe is also likely to shape the industry landscape in 2024. In both generics and biosimilars, as well as the emergence of companies such as BeiGene that are increasing their presence ex-China. This is true of in BeiGene’s case with a flagship biologics manufacturing and R&D centre in New Jersey.