Uncertainty, it seems, is all around us. The European debt crisis appears to deepen each day. As a consequence, recovery activity in the US may be adversely affected and the country’s overall economy may face more significant threats to its stability than was previously anticipated. Political and social unrest not only disturbs countries in the Middle East, but also the centers of American and European cities.
One can therefore be forgiven for having a sense of unease when considering the economic prospects for 2012. The insecurity that surrounds the global economy carries through to the life science industry where executives continually caution investors and employees about the coming year due largely to an anticipated reduction in public sector funding for research and cutbacks in pharmaceutical drug discovery.
At first glance, the reasons for pessimism seem well-founded. Many life science suppliers in the US derive a significant percent of their sales from researchers funded by the National Institutes of Health (NIH). As a result, the annual NIH budget is seen as a bellwether of the industry and in 2011, the NIH budget was down 1% compared to 2010. Recently, Congress agreed to increase NIH’s budget to $30.7 billion in FY 2012, up $299 million from the previous year. Other factors creating funding uncertainty in the US include the tapering off of stimulus spending, proposed cuts to the National Cancer Institute, and reductions in funding at some of the largest genome centers. In Europe, the near-term looks somewhat better where the UK and Germany have so far resisted cuts to academic funding, but southern Europe is anticipating funding reductions to accompany across-the-board austerity measures.
The outlook in Asia remains mostly positive as China continues its ascendancy as a global force in life science research, and Singapore and South Korea emerge as new players on the world stage. Even Japan has rebounded somewhat following the natural disaster that befell the country in spring of 2011.
US and European pharmaceutical companies are expected to continue their efforts to reduce costs and make their operations leaner. Pfizer, the world’s largest drug maker is a case in point. In July of this year, the company announced it would cut its research spending in 2012 by as much as 25% and lay off more than 2,000 researchers. In November, PriceWaterhouseCoopers reported that venture capitalists invested $1.8 billion in 170 life sciences deals in 2011, which shows continued interest but nonetheless is the lowest number of deals since the first quarter of 2009.
Lost in this gloomy outlook, however, is a broader perspective. The life science tools industry came of age during a time when the NIH budget doubled from $15 billion to $26.4 billion between 1999 and 2003. Pharmaceutical R&D by US companies increased $17 billion in 1996 to $43 billion in 2006. This pace of growth could not be sustained indefinitely and indeed the pace of growth began to slow even before the 2008 recession.
Keep in mind, however, that the National Institutes of Health budget is an enormous $30 billion. In 2010, US pharmaceutical companies alone invested an estimated $49.4 billion in R&D and had more than 3,000 new drugs in development. While US venture capital funding for the life sciences sector has lost some of the momentum gained during the first half of the year, it remains on track to outpace investments made in 2010.
Put another way, business is still out there to be won. While the pie may not be growing at the brisk pace seen in the last decade there are many opportunities to increase share. Intriguingly, both mature and new technologies have the potential to open opportunities in entirely new markets. Over the coming days, we will suggest a few strategies for life science companies competing in these uncertain times.