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When is the downturn going on? Three ways to help pharmaceutical companies withstand the "cold winter"

 Last Update: 2023-01-05
 Source: Internet
 Author: User

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What is clear is that winter is
coming.
Thankfully, though, the pharmaceutical industry has a thick coat
.

"Our economists and the market's expectation seems to be a mild 6 to 9 month recession in 2023," said Arda, head of U.
S.
health sciences and health industry markets at Ernst & Young (EY).
"But the cloak that protects pharmaceutical companies from the winter is fundamentals
," Ural said.
”

Ural argues that a potential recession can be predicted by several factors, but this is a unique period
in economic history.
Just in early November, the Federal Reserve Board (Federal Reserve) raised interest rates again aggressively to curb inflation
.
Meanwhile, unemployment remains historically low
.

One of the key indicators that signal a recession is an inversion of the yield curve, where the yield on the 10-year Treasury note falls below
the yield on the 1-year Treasury.
Ural listed 6 times this has happened since 1980, followed by a recession, and now it is happening
.

Although these larger economic factors affect businesses in any industry, rigid demand for medical products tends to sustain pharmaceutical companies and the entire medical industry
.

"Pharmaceutical companies are driven by their own dynamics, not more of a macroeconomic context
," Ural said.
According to him, the basic situation of prescription issuance, number of clinical trials, R&D investment, and FDA approval at this stage is stable
.

Still, leaders in the biopharmaceutical industry should prioritize three areas
as they prepare for a potentially downturn year.
Ural added that as fundamental factors that make the pharmaceutical industry relatively recession-resistant, these priorities will play a role in
the turbulent times ahead.

1 Focus on driving growth

One way to observe the growth of the pharmaceutical industry is through one of its cores: prescriptions
.
According to a report by EY, the compound annual growth rate of patient prescriptions has remained at 3.
4%
since 1992, even under the influence of economic disruptions such as the COVID-19 pandemic, the subprime mortgage crisis, and the bursting of the dot-com bubble.
In addition, Ural noted that the engine behind growth is innovation, something that biopharmaceutical companies have recognized and achieved
over the years.

An EY analysis found that the number of clinical trials has surged 191 percent since 2012, and R&D as a percentage of sales has increased 15 percent
.
Naturally, this has led to more FDA approvals — from 2010 to 2021, the median was 43 per year, compared to 26 in the previous decade
.

But while the industry has seen continued growth in this area, individual leaders need to keep an eye on their own progress, especially the products
they are developing.

"Every company is different, but if you look at the number one difference, that's growth and how to improve the [return on investment]
of liquid assets.
" "It's a widely accepted fact that 70 percent of the products brought to market don't meet expectations, so better commercial performance of existing products is the number one priority
," Ural said.
”

That means driving research and development, which Ural sees as the foundation of
the industry.
In a recent EY survey, life sciences CEOs said they were more likely to increase investment
in areas such as innovation and R&D.
They also point out that M&A is an important lever, which brings us to secondary priorities
.

2 Optimize your portfolio

In terms of trading, a recession could be an opportunity
.
Lower valuations allow companies with strong balance sheets and ample cash flow access to new platforms, technologies or businesses
that help scale.

Ural said that "the dividends of COVID-19 have passed"
.
He was referring to the peak of Biotech at the end of 2021, which is now down more than 50%.

"It's a sugar excitement as companies that aren't IPO ready are going public driven by COVID-19 therapeutics and vaccines, valuations are highly valued by investors, driving biopharma stocks up, and now they're returning
.
"

Now that valuations are low and Biotech's cash reserves are running out, the chances of buying are high
.
But Ural also says that just like their pipeline, buyers need to have a strategic vision in therapeutic areas and expertise to scale up in the right way
.

"Pharmaceutical companies have to grow, and with winter coming, we need to wear that coat
.
We can afford it because we have a good balance sheet
.
Ural concluded
.

3 Management costs

Increased product sales and deals can only partially shield pharmaceutical companies from the winds of a harsh recession, rather than focus on reducing costs, especially at a time
of rising inflation.
Ural noted that the Fed's rate hikes have ended the "era of free money.
"

This is where pharmaceutical companies need to focus on their sales and administrative expenses or selling, general and administrative expenses
.

"The cost of capital has to be managed harder, which is beyond the control of pharmaceutical companies
.
" "But what can be controlled is selling and overheads — in the pharmaceutical industry, it has been hovering around 28 percent of revenue, and even though digitalization, intelligent automation and robotic processes are already available, it hasn't changed
over time," Ural said.
”

Other industries are more likely to integrate these technologies than the pharmaceutical industry, and cutting these costs will be crucial
at a time when money is not so cheap.

"It's time to improve financial resilience, to plan and digitize back-office processes, and to focus on raising money that is no longer free
," Ural said.
Invest that money in R&D and infrastructure
.
This is a historic moment
for the pharmaceutical industry driven by growth and innovation.
”

For the pharmaceutical industry, to step back and solve fundamental problems, leaders need to consider where their strengths lie and what levers they can pull to take advantage of the inherent resilience
of the industry.

"I think these are easier said than done
, but they can be done.
" Ural added
.

References:

References: References:

1.
3 ways pharma can weather a recession； pharmavoice

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