Life Sciences Takes a Cost-Conscious Approach to the Future
February 7, 2023
Before the COVID-19 pandemic, the life sciences industry was thriving. Today, the growing pressure to reduce drug prices coupled with heightened competition and economic pressures has caused companies to place more of an emphasis on reducing operation costs.
Meaghan Piscitelli, partner and co-lead for the global life sciences Vertical at Aon, explains that while research and development and supply chains were once the main catalysts for rising costs, today it’s inflation and economic pressures that’s driving cost savings initiatives in companies of all sizes, changing the make-up and market of the industry.
“People assume that the industry is somewhat recession-proof because there is always a growing demand for medicines and technologies and the population will always age,” Piscitelli says. “But now we’re seeing companies taking a cost-conscious and thoughtful approach to the way they operate their businesses.”
As life sciences companies contend with the forces that obligate them to take cost-cutting measures, three main areas have seen the most change: research and development, talent and partnerships and digitalization.
Research and Development
The life sciences industry has been increasingly investing in research and development — but these innovations have come at a cost. To maintain an advantage in the current economy, companies have had to adjust production processes and start investing in new areas.
More life sciences companies are focusing on optimizing processes to increase profit margins because of the rising cost of production. Inflation and supply-chain vulnerabilities have also inspired many companies specializing in medical devices and generic medications to relocate their production processes. In some cases, the rising costs of commonly used medications in the U.S., such as insulin, have spurred state governments to take legal action against large pharmaceutical companies.
On top of that, generic products and biosimilars entering the market at a lower cost for consumers heighten competition for companies. Consequently, organizations are tasked with maximizing the revenue of their drug patents, which have a lifespan of roughly 10 years. Once their most profitable drugs go off patent, companies need to find new sources of revenue. “If you are in a very competitive space, others will jump in to create a generic product as soon as yours goes off-patent,” says Lars Sørensen, co-lead of global life sciences industry vertical at Aon. “Companies have to come up with innovative ways to have stable budgets in the long term, meaning they are also willing to assume more risk.”
According to Sørensen, large life sciences companies have been selling off their generic, less profitable products and instead using that money for higher-margin rare disease research and gene therapies — a space that has ample opportunity for innovation and promising potential for capital. Adjusting these focuses has allowed companies to not only be more profitable, but also be more strategic about what they outsource, research, and buy.
Talent and Partnerships
In uncertain economic times, many life sciences companies have been slowing their hiring practices and altering their mindsets, focusing less on “nice-to-have” requisitions and more on critical, “need-to-hire” positions.
“The workforce is the most expensive asset for these organizations, so we’re starting to see companies become more cost-conscious about hiring talent, strategic organization design, or growing through the M&A space,” says Piscitelli. “They can lean on another company’s support instead of trying to do everything on their own.”
To reduce headcount internally while maintaining the drive to innovate, more large pharmaceutical companies are acquiring smaller startups. These smaller or targeted mergers and acquisitions allow big companies access to a more niche pipeline for research rather than trying to develop in an already competitive therapeutic niche, which saves time and money in the long run. This kind of optimization and collaboration also helps control the regulatory environment that companies must navigate to bring a drug to market.
The cost of taking a drug from initial discovery through to regulatory approval, could take about 10+ years and cost around $1.5 billion on average. Yet about 85 percent of drug candidates in clinical trials fail, according to Piscitelli.
“Early stage biotechs are banking on one, maybe two, programs,” says Piscitelli. “So, if they fail, that could be detrimental to a company. Big pharma companies are generally more stable, so if a compound fails, while yes it hurts from a monetary and time investment perspective, it’s not as detrimental as it would be for a smaller, earlier-stage company. Therefore life sciences companies are seeking ways to improve this process and potentially their hits on target.”
What’s more, after the successes it achieved during the COVID-19 pandemic, the industry has been in the spotlight to make advancements quickly. As such, digitalization is critical to making clinical trials more efficient and effective to save costs and time, and also collection and analysis of patient data. By updating digital, analytics and data capabilities, companies can more easily target patient populations and rule out certain compounds at earlier stages to avoid spending billions on taking a product to later stages if it may have potential high-risk factors of failure.
Sørensen explains that large pharmaceutical companies and smaller startups alike are using data more, but the risk of failure can hinder innovation. “Oftentimes, companies stop projects earlier if they don’t seem to be a new blockbuster,” he explains. “The risk there is that we might be missing out on new innovations which could benefit all of us.”
As digitalization in the life sciences industry improves in the next several years, some forecasts indicate 90 percent of clinical trials will use a hybrid of digital and in-person testing, and 10 percent will be entirely virtual. Moreover, by 2025, the market for prescription digital therapies will more than triple. These adjustments in life sciences could reduce costs in the near term — and support a more innovative and profitable future for the industry.
To find out more about Aon’s insights for the Life Sciences industry, click here.