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.