Biopharma’s Drawdown Is a Chance to Build Biotech Back Better

The biopharma industry is in the midst of a significant downturn after experiencing a sharp decline in venture funding and rising lab vacancies. Despite a brief rebound after the COVID-19 pandemic, the industry now faces the prospect of a forced reset as stakeholders recognize the need for a more sustainable business model. The industry's internal rate of return (IRR) for drug discovery fell to just 1.2% in 2022, far below its average cost of capital (11%), largely due to increasing prices and diminishing sales.

The decline in drug approvals per billion dollars invested can be attributed to Eroom's Law, which highlights the declining productivity in biopharma compared to other sectors. The Baumol effect also plays a role, as labor-intensive activities like clinical-stage drug development have become increasingly expensive due to lower productivity growth.

The COVID-19 pandemic exacerbated these pressures, leading to a scarcity of resources and a lack of incentives to control spending. The industry's financials were temporarily masked by declining interest rates and increasing drug prices, but these factors came to an abrupt end in 2022 when the Federal Reserve initiated a series of interest rate hikes and the passage of the Inflation Reduction Act brought government price controls to biopharmaceuticals.