Biopharma companies have enjoyed 30 years of high productivity, with average total shareholder return (TSR) growing at a compound annual rate of 17%. New research from Bain & Company shows that the biopharma sector will continue to be productive but see dampened returns over the next five years. Beyond that, companies will face an increasingly challenging landscape.
Bain’s new study, “Three Prescriptions for the Future of Biopharma Productivity,” shows that to preserve productivity, biopharma companies will need to adapt tried-and-true approaches to the evolving environment and adopt new practices.
“With rapid advances in innovation and patient outcomes over the past few decades, biopharma has brought life-sustaining medicines to patients across disease areas and geographies,” said Eli Weinberg, partner at Bain & Company. “The sector has consistently enjoyed strong financial returns as a result, even amid previous downturns.
"However, that tune may be changing in today’s tumultuous environment, and we expect pressures to intensify from multiple directions in the years ahead. Biopharma companies that develop a refined definition of category leadership and embrace new digital enablers around that will be best positioned to continue to deliver financial performance and patient benefits.”Eli Weinberg
30 years of standout productivity
Compared with other industries, biopharma has been a productivity powerhouse. Biopharma companies’ average TSR grew at a compound annual rate of 17% from 1990 to 2022. While TSR growth dipped slightly over the past two years, it remains considerably high at 13%.
Revenue growth has been a strong contributor to this success: The biopharma sector’s combined revenue is 16 times higher now than it was in 1990. Such revenue growth alone is enough to deliver healthy TSR, but other factors have also been influential.
Multiple expansion has played nearly an equal role to revenue growth, serving as one of the biggest swing factors in a company’s TSR, particularly during periods of low revenue growth. And while capital structure has made a minimal contribution to overall industry TSR, it has made a significant difference for some individual companies that have managed their capital effectively.
Revenue growth slowing over the next five years
Bain’s research shows that revenue growth may now be slowing, reducing TSR growth and marking the end of an era.
A confluence of factors is already casting a shadow on the outlook. Historically somewhat immune to downturns, biopharma is feeling the effects of the uncertain macroeconomic environment more acutely than in the past. Pricing pressure from multiple governments, increased competition for patients, loss of exclusivity, and saturation across geographies are threatening revenues. Margins are being squeezed by the increasing costs of manufacturing, marketing, clinical trials, labour, and more in today’s high-inflation environment.
Over the next five years, Bain expects TSR to be slightly lower but still positive, around 6% to 10%, which is in line with the historical S&P 500. There are, of course, substantial influences that will play a role, including the effect of pricing and exclusivity legislation in the US and Europe, regulatory scrutiny on M&A, and the success of new therapeutic modalities.
Headwinds to intensify beyond the next five years
Past this five-year outlook, Bain expects headwinds to intensify, slowing biopharma’s productivity drastically from 2027 to 2032. Over that time, Bain estimates that maintaining more than 10% industrywide TSR could require adding more than $500 billion per year in revenue—compared with the current $300 billion per year in biologics and $200 billion per year in oncology—while modestly expanding margins, according to our estimates.
Building resilience through category leadership
It will be important for companies to learn from what has worked consistently for the past 30 years and apply it in the current context. For example, focusing on category leadership, the strategy of leading in a set of disease areas that have overlapping physician call points is consistently linked to high TSR. From 2010 to 2022, the most focused category leaders achieved a median annual TSR of 16.7%, compared with just 8.7% for their peers that took a broader approach. That’s because category leaders enjoy multiple advantages that support both the enterprise value and capital structure components of TSR. They have more successful R&D trials, higher launch revenues, greater M&A opportunities, and stronger capital structure performance than their counterparts.
Three paths to maintaining TSR in the years ahead
Redefine category leadership in the era of genomic medicine. As treatment regimens and therapies become more complex and increasingly biomarker-driven, category leadership will continue to be important.
Don’t shy away from digital disruption. The biopharma sector was already being disrupted by process automation, digital-based customer interactions, machine learning, and more. Now, generative AI is accelerating the pace of change tremendously, with use cases that extend across functions. Companies that take a digital-first approach and disrupt their operating models ahead of the pack will be productivity leaders, outpacing companies that move more slowly or take a wait-and-see approach.
Embrace consortia approaches. Novel modalities have unprecedented clinical potential, but they also carry high risks and financial uncertainty. Going forward, basket trials (those that test a new drug on different diseases with the same mutation or biomarker) and umbrella trials (those that evaluate multiple therapies for a single disease) can spread the high costs of clinical trials across multiple biopharma companies. This democratization will play a critical role in the progress of advanced modalities for rare diseases.