Female scientist analyzes liquid in the beaker

How life sciences companies can thrive amid inflation and a downturn

Despite a variety of challenging macroeconomic factors, history shows life sciences companies can, and should, still invest in innovation.

In brief

  • Inflation, higher interest rates and a potential recession: life sciences companies’ traditional resilience is being tested on many fronts.
  • History suggests those life sciences companies should still have the ability to focus their investments on innovation and growth.
  • Economic turmoil could afford the opportunity for life sciences executives to take a long-delayed look at areas for cost containment.

Life sciences companies are facing a new economic environment that may test the industry’s historic resilience.

The industry is typically seen as relatively protected from, if not counter cyclical to, adverse macroeconomic conditions for several reasons. The sector provides lifesaving drugs and medical devices with inelastic demand. It is driven by innovation and has historically shown a limited impact from economic slowdowns. The essential need for many of the medications and the growing R&D spending to develop new treatments serve as a buffer.

The current economic environment, with a potential recession looming even as the US Federal Reserve aggressively raises rates to tamp down decades-high inflation, could challenge this resilience. To test this hypothesis, Ernst & Young LLP teams analyzed a variety of foundational metrics that measure how the industry has performed during periods of economic disruption. 

The results support the idea that CEOs and their teams need to focus even more sharply on driving the performance of existing products to meet patient needs, seeking bolt-on acquisitions to boost innovation, and managing SG&A spending that has yet to come down despite the promise of digital tools and managed services.

Life sciences companies have shown steady growth for decades


Even if rising costs for food, energy and housing may put some pressure on the disposable income of consumers, dispensed prescriptions have shown a steady increase (with a compound annual growth rate of 3.4% from 1992 to 2021) for the past three decades, despite three economic slowdowns (Figure 1). The increase is due to an aging population, better diagnoses of existing diseases and the ability to treat new diseases.


Figure 1: Dispensed prescriptions (1992–2021)


The bar chart illustrates the number of prescriptions dispensed has shown an increasing trend over the years, suggesting an ever-rising demand for essential pharma products even during recessionary periods, indicating the sector’s robustness to withstand slowdowns.

Another measure of resiliency is the continued R&D spend and the number of clinical trials in Phases 1 through 3, as analyzed at clinicaltrials.gov. Both measures continued to increase, regardless of the macroeconomic environment, indicating that biopharma companies continue to invest in new drug development even in downturns. In fact, the number of clinical trials has surged 191% since 2012, and R&D as a percent of sales is up 15% over the same period (Figure 2). This helped lead to an increase in FDA approvals, which reached a median of 43 per year from 2010 to 2021 vs. 26 per year in the previous decade.

Figure 2: R&D spend and clinical trials

The line and bar charts show an upward trend in clinical trial activity in the last two decades, along with increasing R&D spend, further indicating that biopharma companies continue investing in new drug development, unaffected by downturns.

The life sciences workforce has also grown at a faster rate than the overall US labor force over the past 30 years, reaching more than 1 million employees in 2021. The only slight dip was between 2009 and 2014, the period of the notorious patent cliff, during which over $100 billion in revenue was lost due to expirations of the small molecule assets.

Figure 3: Labor workforce trend

Data shows that biopharma workforce growth has outpaced the overall employed workforce in the US over the years. Even during recessionary periods, biopharma had fewer layoffs compared with the overall economy.

A new challenge for life sciences companies

To be sure, the combination of an economic slowdown that may be triggered by the Fed’s quantitative tightening, the rising cost of capital to fund M&A and R&D and other capital investments and increasing costs to develop new treatments may be more of a challenge. The war in Ukraine, lingering supply chain disruptions due to p /content/ey-sites/ey-com/en_us/home//content/ey-sites/ey-com/en_us/home/topics/ceo/ceo-outlook-global-report.html andemic closedowns in China and rising labor cost also are pressuring margins, while revenue is being squeezed by new regulations like the Inflation Reduction Act, new competition and the loss of exclusivity.

Patent expirations put $226b in global prescription sales at risk through 2026, according to a report from Evaluate Pharma.¹

Leaders still focusing on innovation and growth 

Still, life sciences companies cannot afford to dial back on research and innovation — the foundation of the industry. For companies with a strong balance sheet and cash flow, a downturn still represents an opportunity to seek acquisitions for key capabilities or technologies at potentially lower prices.

Fortunately, in the latest EY CEO Outlook pulse, life sciences leaders say they are more likely to increase than decrease investments in areas like innovation and R&D, as well as M&A.

CEO Outlook
of life sciences executives say investments in innovation and R&D will increase over the next six months.

At the same time, the industry can address its long-overlooked cost base. Historically and over the last decade, the SG&A level has remained steady around 28.8% of sales. Today’s digital, outsourcing and intelligent automation capabilities are on full display in other industries, and while the biopharma industry is a pioneer in innovation, its adoption of these digital tools lagged significantly over the years. Back-office processes, automation and utilizing shared services are proven examples for lowering SG&A spending. Together, these strategies can meaningfully move the needle on costs, allowing pharma companies to fund continued innovation.

Don’t miss the M&A opportunity 

The economic environment is among the most challenging in decades for life sciences companies, but historically the biopharma industry has proven to be resilient to macro challenges. However, the industry needs to overcome endemic issues, such as revenue leakage from losing patents on biologics, regulatory pressure on pricing and persistent SG&A costs. Still, with those challenges comes opportunity, both to acquire new sources of innovation and to make a step change in costs — two tools to increase long-term value by using M&A to grow the topline and digitalization to grow the bottom line.


A challenging macroeconomic environment may test life sciences companies’ historic resilience. But history also shows that these companies should have the wherewithal to continue investing in the innovations that can help foster growth. One potential difference: high inflation, rising rates and a potential recession could create the backdrop for executives to take a look at managing selling, general and administrative (SG&A) spending.

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