Saturday, October 16, 2021

Pandemic fallout: Pharma execs should discard conservative playbook, take aggressive action, says report

“Steady as you go” has been a reliable mantra for major pharmaceutical companies seeking long-term, consistent growth.

But those who employ this strategy may actually be at risk for losing ground in a changing landscape, according to Ernst & Young’s Life Sciences Earnings Analysis and Industry Outlook. The inaugural quarterly edition of the report examines the Q1 performance of top companies and identifies key trends in the pharma industry.

So why would “steady as you go” suddenly be a risky course of action? EY’s report explains that the coronavirus pandemic has threatened business continuity in such a way that it will eventually force industry stratification, with winners and losers clearly emerging.

“There are some seismic shifts in the underlying impacts of the COVID,” said Arda Ural, EY’s Americas industry markets leader for health sciences and wellness, in an interview. “You can’t stick with the old cookbook. The post-COVID world is not going to be the same. There’s going to be a lot of parameters thrown at you, so you have to understand how to right the course at every turn.”  

According to Ural, the pandemic has created more variability in the industry. He believes now is the time for companies to reimagine the future of the pharmaceutical supply chain through re-onshoring or near-shoring of manufacturing. This trend however could have a negative impact on capital investment, gross margins and tax rates.

RELATED: 2021 forecast: In spite of COVID-19–and partially because of it–biotech IPOs have a record year

At the same time, the inevitable loss of exclusivity for drugs will heighten the importance of companies diversifying and replenishing pipelines through internal R&D and acquisition of external assets.

Given the altered environment, EY advises executives to consider a “vigorous offense as the best defense.” For companies that experience a slowdown in earnings or fall short of expectations, “aggressive actions are necessary, not optional.” 

There are other lessons to be learned from the pandemic, said Ural.    

“We just went through this experiment we didn’t ask for,” Ural said. “And we understood that some remote selling models might be viable moving forward. That’s why steady-as-you-go would be a mistake. If you’re going back to pre-COVID, then you didn’t learn anything.”

At a micro level, Ural declined to identify individual pharma companies as front-runners or laggards through the first year of the pandemic. But among the top 17 firms listed in the report, S&P Capital IQ assigned a “buy” rating to all but four. Those receiving a “hold” rating were Biogen, GlaxoSmithKline, Novo Nordisk and Teva.   

The positive overall ratings reflect a favorable growth outlook for the industry, which EY chalks up to a “renaissance of scientific innovation.”

The report cites the record number of products currently under review by the FDA, the 53 approvals registered in 2020 and the 18 in the first quarter of this year, putting the industry well ahead of last year’s pace. This momentum is a “bullish indicator of future industry performance,” says the report.

As for the future, M&A will remain an important component of growth, along with equity capital markets. Last year, $52 billion of equity capital was raised in biopharma, doubling the figure of 2019. According to EY, the top 12 companies by market cap have more than $170 billion in “dry powder” at their disposal.

“The liquidity in the industry is very compelling right now,” Ural said. “For every company, this is the time for looking at portfolio optimization even more so than before. Liquidate non-core assets and refocus because the valuations are compelling enough.”

RELATED: Pharma stocks fell in 2018, but innovation soared with 62 new drugs set for $24B in yearly sales: report

Another future concern for pharma leaders, especially with a change of the guard in Washington, D.C., is drug pricing. EY urges executives to track policy developments, but more importantly to advocate for the industry, stressing the high costs and risks inherent in R&D and the benefits that can accrue. 

After all, the perfect example of the value of innovation is close at hand with the industry’s rapid and effective response to the pandemic.

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