Biotechnology, Pharmaceutical, and Life Sciences
Villanova Consulting Group Biotechnology, Pharmaceutical, and Life Sciences Industry Report 2024Written by: Olivia ZimmermanOverview
The biotechnology and pharmaceutical industry plays a crucial role in improving public health and advancing medical knowledge through developing drugs, disease research, and biotechnological tools. This industry strives to assist both humans and animals in living healthier lives and fight illnesses through cutting-edge biological and chemical research. Specifically, biotechnology uses living organisms to manufacture products or to solve problems. The sourcing of DNA is at the heart of the research and development (R&D) of biotechnology firms. In contrast, pharmaceutical products are primarily created from artificial and chemical sources. These two sectors work together to create an industry that is categorized by a focus on R&D, innovation, and the continuous creation of medical advancements and solutions.
The biotechnology and pharmaceutical industry is projected to have a compound annual growth rate (CAGR) of 5.45% and reach $105.11 billion by 2030. This market is currently being driven by R&D and cost-effectiveness. Investments in cutting-edge therapies, such as regenerative medicine, have allowed biotechnology and pharmaceutical companies to pioneer groundbreaking treatments. Contract research and production have also allowed these companies to develop and manufacture products at a low cost.
Key Companies
The global pharmaceutical market is worth more than 1.5 trillion USD. Some of the most well-known players in this industry in the United States include Johnson & Johnson, Merck, and Pfizer . These companies are not only involved in the business of pharmaceuticals, but also work heavily with biotechnology in manufacturing medical technology, consumer health products, vaccines, and more. An example of this is Johnson & Johnson, a company that makes the majority of its revenue through creating medical devices, products for consumer health, and diagnostics.
Johnson & Johnson held the top spot for the world’s largest biotech and pharma company for more than a decade, but Eli Lily and Co. and Novo Nordisk have recently replaced Johnson & Johnson as the front-runner. As of early March 2024, Eli Lily and Co. reached a market cap of nearly 740 billion USD, significantly leading other large biotech and pharma companies when considering market capitalization . Novo Nordisk is trailing behind as the second leader with a market cap of nearly 430 billion USD. The rising popularity of diabetes and weight-loss treatments have helped fuel Eli Lily and Novo Nordisk’s growth over the past year. Novo Nordisk’s blockbuster drug Ozempic is known to effectively control type 2 diabetes. Novo also manufactures Wegovy to treat obesity. Similarly, Eli Lilly produces Mounjaro and Zepbound, which are indicated for the same two conditions. Not only have these drugs skyrocketed in the past year, but they are expected to continue to do so with advancements such as a pill form and the potential benefit of reduced cardiovascular risk.
Porter’s Five Forces
Porter’s Five Forces provides a framework that helps businesses to analyze the competitive positions and profitability of a market that they are considering entering. Specifically, these five forces include threat of new entrants, power of suppliers, power of buyers, availability of substitutes, and competitive rivalry in the industry. Here is how each force can impact the biotechnology and pharmaceutical industry.
Threat of Entry
The threat of new entrants into the biotechnology and pharmaceutical industry is relatively low due to the high costs of research and development, the specialized knowledge needed, and the numerous required regulatory compliances. Although there are opportunities for new companies to disrupt the field, it is difficult for new entrants to disrupt the established market leaders.
Power of Suppliers
The biotechnology and pharmaceutical industry is categorized by high levels of competition due to the vast power that is held by large companies. These companies are granted power through patents, which gives them leverage to produce their own unique products. The prices of drugs and necessary medications are typically inelastic, further granting suppliers the power to set prices that benefit their company. Lastly, many companies in this industry specialize in niche medicines or tools, further amplifying their supplier power. This specialization offers companies a strategic advantage in creating their products or medicines in areas such as sourcing, distribution, and marketing.
Power of Buyers
Something unique to the pharmaceutical and biotechnology industry is the fact that buyers have an extreme lack of power when it comes to prices. Physicians that prescribe drugs are ethically not allowed to set a price, so they do not profit from the sale. Insurance companies only have a say in the amount that they will pay to the distributor. The pharmacies and medical institutions that fulfill prescription are the only institutions that have slight power in price negotiation, yet this power is minimal.
Threat of Substitute Products or Services
The effects of substitutes are dependent on the individual drug or product. Once a drug loses its patent, a generic version can enter the market, typically at a lower cost. The expiration of a patent can cause revenues to fluctuate significantly. For example, a drug that brought in $100 million a year ago can become one that only earns $1 each year overnight. In addition, counterfeiting drugs has become an international problem. A counterfeit drug duplicates a formula, often using lower-grade materials, and sells it at a lower price.
Competitive Rivalry
The biotechnology and pharmaceutical industry is categorized for having extremely high levels of competition. Companies within this industry compete fiercely for advantages and market exclusivity through the development and possession of patents for drugs. The industry also exhibits a pattern of firms merging or larger firms buying smaller firms that own new drugs or promising research.
Key Internal Factors Impacting Cost of Goods Sold for Biopharmaceutical Companies
Manufacturing costs have been rising rapidly, and there is no end to this increase in the foreseeable future. According to BCG (Boston Consulting Group), about 40% of companies are currently expecting the cost of goods sold as a percentage of revenue to increase over the next three to five years. Some of the many factors that go into this cost increase for biopharmaceutical companies include the increasing use of modalities, efforts to create more resilient supply chains, and the pressures to have better ESG commitments.
The Increasing Prevalence of New Modalities
After decades of drug development, there are currently about 18 promising drug modalities that will assist in developing an array of innovative drugs. Modalities are medicines that are developed by humans that address smaller populations and require more-personalized supply chains. These drugs that are being developed include DNA and RNA-based therapeutics, cell and gene therapies, and viral vectors, and the market for them is growing quickly. Beginning in 2021, these new modalities drove more than half of the revenue of biopharma with the mRNA vaccine for COVID-19. Other products that are based on these modalities aim to treat rare diseases and cancers in which the number of patients is low, but the medical need is extremely high. Currently, eight out of the top ten biopharma products are based on new modalities, and the median addressable population is 2 million.
Scale is the primary driver of the cost of goods sold. Therefore, the smaller addressable populations and smaller product volumes largely impact the costs of manufacturing each unit. Each time a product’s volume is cut in half, the cost per unit increases by about 40%. Therefore, as specialized drugs designed for smaller patient populations become more prevalent, the cost of goods sold correspondingly rises.
Supply Chain Resilience
Throughout the past few decades, major biopharmaceutical companies have relied on specialized global sources for drug substance production and packaging. However, recent events such as the pandemic, geopolitical issues, and trade barrier inefficiencies have displayed how fragile the global supply chains. Almost every one of the top biopharma companies has been significantly impacted by such disruptions in the past five years. To build supply chains that are better equipped to handle unforeseen circumstances. These efforts to increase the resilience and efficiencies of supply chains have contributed to the significant increase in the cost of goods sold for major biopharma companies.
ESG Pressures
Large companies have been facing increasing pressures from investors, regulators, and employees to be more conscious of their environmental, societal, and governance commitments. Specifically, biopharmaceutical companies are being asked to improve patients' access to medicines and higher sustainability standards. As companies try to make drugs more affordable for lower-income populations and reduce their carbon emissions, it is likely that these initiatives will factor into higher costs of goods sold.
Thesis
Despite recent challenges, the biotechnology and pharmaceutical industry remains pivotal in advancing medical knowledge and public health through innovative drug development, disease research, and utilizing biotechnology tools. The industry’s focus on research and development and continuous medical advancements positions the industry for a promising outlook for the rest of 2024. Despite threats posed by the increasing interest rates, the biotechnology and pharmaceutical industry is expected to maintain its growth trajectory. Specifically, the recent phenomenon of weight loss drugs is expected to contribute significantly to the industry’s growth. Moving forward, biotechnology and pharmaceutical companies should continue to focus on innovation, cost-effectiveness, and sustainability to continue to drive industry growth.
Resilience Despite High Interest Rates
The Federal Reserve is holding interest rates higher for longer. The federal funds rate, which is currently at a target range of 5.25% to 5.5%, will be held steady until the Federal Reserve is comfortable with the trajectory of inflation. A high interest rate increases borrowing costs, which can impact companies that rely heavily on financing for operations, research, and development. Although higher interest rates can have negative impacts, the biotechnology and pharmaceutical industry often demonstrates resilience in such conditions.
The healthcare field is not heavily impacted by interest rates because healthcare is considered a necessity rather than a discretionary expense. Therefore, the demand for healthcare products is relatively consistent which helps to maintain a steady revenue for the industry despite high interest rates.
Large healthcare companies, such as Johnson & Johnson for example, have strong, established financial foundations and diverse revenue sources which can act as a buffer against the impacts of increasing interest rates. However, smaller healthcare companies that rely heavily on borrowing for development and financing may face more harsh impacts of high interest rates and may experience stunted growth and innovation.
As shown in the graph above, the spending and performance of the healthcare sector, including pharmaceuticals and biotechnology, often remains relatively stable due to the essential nature of its products and services.
The Increase in Appetite for Obesity Drugs
As depicted in the graph below, the U.S obesity market is expected to reach $44 billion by 2023, growing at a CAGR of 53%.
Drugs such as Ozempic, Wegovy, Mounjaro, Zepound, and more have been making headlines for their weight-loss effects. The rapid increase of usage of these products are driven equally by diabetes and obesity purposes. According to the Centers for Disease Control and Prevention (CDC), the prevalence of obesity in the U.S. has grown from 30.5% over 1999–2000 to 41.9% over 2017– 20208 . The rise in popularity of these products is expected to transform how both obesity and diabetes are managed, both of which will make drastic changes to the healthcare industry. Specifically, the surge of these drugs will impact the biotechnology and pharmaceutical industry as it will create an opportunity for growth by presenting companies with the chance to engage in the creation of these weight-loss products and explore how certain medicines work in tandem with weight-loss drugs. This sudden burst of weight-loss drug popularity reflects the industry’s evolution in the approach to managing complex health conditions and presents tremendous opportunity for the industry to continue to grow, both financially and in its capacity to improve quality of life for patients worldwide.
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