In advance of the third quarter 2023 earnings reporting season, William Blair equity research analysts Max Smock and Matt Larew provided an analysis of leading indicator data that they believe drive demand for the biopharma outsourcing industry.
In the report, Smock, who covers pharmaceutical outsourcing and services companies, and Larew, who covers life science tools companies, examined the biotech industry’s funding levels, product pipeline, and pace of spending on research and development.
Biotech funding in the third quarter was $11.5 billion, down 5% year-over-year and 4% sequentially. Follow-on funding was the primary headwind in the quarter, with the $3.9 billion raised coming in 31% below the prior year and 19% below the prior quarter. More encouragingly, venture/private funding remained solid (up 11% year-over-year off a soft comp and down 2% sequentially), and IPO funding increased sequentially for the third straight quarter (although the amount raised is still well below pre-pandemic levels).
While the sequential step down in total funding is discouraging, there are some signs that the market could turn a corner heading into the end of the year. The $5.2 billion raised in September is tied with May for the most raised in any month this year and represents the best month for funding since April 2022. In addition, there is some growing optimism around the public market in particular picking up in the near term, with Endpoints News recently pointing to 5 to 10 companies potentially hitting the market between Labor Day and Thanksgiving (two of these companies subsequently went public in mid-September).
Still, given the recent shift in interest rates and the performance of notable IPOs so far this year (median decline of 36% for eight U.S.-listed IPOs where the company raised more than $50 million), Smock and Larew are skeptical that there will be a meaningful near-term rebound in public funding.
Product pipeline growth continued to moderate through the end of September and is now below pre-pandemic levels (5% total growth versus 7% average for 2017 through 2019). Surprisingly, strength in preclinical once again partly offset softness in late-stage clinical, with the number of preclinical programs up 9% year-over-year through the end of September (in line with pre-pandemic norm of high-single-digit growth).
Biopharma R&D spending as of the second quarter of 2023 (data for the third quarter of 2023 will be available after third-quarter earnings) was up 11% year-over-year, which is above the midsingle-digit growth observed over the last decade and is consistent with the strong growth last quarter. According to data from FactSet, total biopharma R&D spending is forecast to increase by 8% in 2023 (down slightly from the 9% increase following first-quarter earnings), while 2024 spending is expected to grow by a more muted 4%.
Overall, Smock and Larew believe these statistics paint a negative picture for the biopharma outsourcing industry. Funding was down year-over-year for the 10th straight quarter, product pipeline growth continued to moderate, and while biopharma R&D spending remained strong, forecasts suggest that spending growth is poised to decelerate in the second half of 2023 and remain depressed in 2024.
These negative metrics sync with the results from Smock’s recent CRO Survey, where responses indicated a soft near-term spending environment on an absolute basis and relative to historical norms, as well as fewer projects being funded in the coming year; however, Smock said it is admittedly difficult to reconcile these metrics to recent upbeat commentary from companies in the space, with several management teams pointing to positive upticks in biotech request for proposal (RFP) flows over the last couple quarters.
To request a copy of the full length “Pharmaceutical Outsourcing & Services: Third-Quarter Update on Biotech Funding, Pipeline Growth, and R&D Spending” report as well as the CRO Survey referenced herein, or for more information on the companies from each analyst’s coverage list, please contact us or your William Blair representative.