June 2, 2023

Biotechnology: The boom and its impact

In recent years, biotechnology has been one of the fastest-growing industries globally. Biotech has been responsible for many innovations that have had a positive impact on society, including new treatments for previously incurable diseases, advances in healthcare technology, and more efficient manufacturing processes. Within this rapidly-growing sector, we’ve seen particularly dramatic growth among small biotech companies exploding into the market.

However, this type of growth and innovation comes with a large price tag, with research and development (R&D) costs skyrocketing into the billions of dollars. With rising inflation and cost of capital, how does our industry continue to bolster much-needed innovation when aiming for potentially narrower or more specialized markets?

Innovation demand

Some of biotech’s most dynamic and rapidly growing markets reside within the pharmaceuticals sector. The demand for innovative products spans a broad spectrum,  from non-opiate pain medication to cures for diseases, such as Type 1 diabetes, and beyond. Coupled with these demands is the expectation that pharmaceutical sales are expected to rise around the world as the global population continues to age. This industry is primed to take center stage.

As innovations evolve, they will create tangential benefits in other categories. For example, breakthroughs in biotech will be leveraged within the agricultural industry to address crop yield waste and food security. As healthcare service providers look to create systems around patient-centered care, these types of collateral innovations are likely to move in parallel.

Cost of new innovations

Along with the social and economic benefits of biotech innovations comes an extremely high cost of developing new treatments and technologies. In fact, the average cost of bringing a new drug to market is currently estimated at approximately $1.1 billion.

The high, upfront R&D cost of launching new drugs and technologies means that many biotech companies can expect to operate at a loss for several years before their products become profitable. This long lead time may pose a barrier to entry for new investments, as innovative ideas struggle and compete to secure the funding needed to reach commercialization.

In recent years, we’ve seen heavy investments from private equity firms and venture capitalists, who seek to take advantage of the high demand and equally high payouts. With increasingly high price tags, however, this is not an industry where failure is welcomed.

Profit margins and innovation

What happens when, simultaneously, the biotech industry matures, the economy constricts, governance shifts and access tightens? The result is an environment in which profit margins are likely to narrow. In response to this, the industry is already seeing some consolidation, especially in the pharmaceutical space, with larger companies acquiring and merging smaller ones into their product pipelines.

While this doesn’t spell the end for these smaller companies, it may mean a reduction in innovation as company priorities shift to developing products that have the greatest chance to be winners. One can’t dispute the benefit of innovation that eradicates a rare genetic disease, but the immediate profitability for companies and investors in smaller or highly-specialized niche markets makes the economic justification much more challenging.

To maintain innovation in the biotech industry, policymakers may need to consider further incentives to encourage companies to invest in riskier projects. This could include tax breaks or grants for companies that invest in R&D for rare diseases or other niche markets. Additionally, regulatory agencies may need to consider streamlining the drug approval process in order to reduce the time and cost of bringing new treatments to market.

Maintaining innovation

The biotech industry can make a significant, positive impact on society, but the high costs of developing and administering new treatments and technologies pose significant challenges.

To maintain innovation in this space, it will be critical for organizations to work together, and to look at the collective benefit to society beyond a single ‘sale’ or revenue stream. This collaboration can’t be confined to the U.S. alone; it needs to expand globally, to foster an environment of growth. Support from regulatory agencies and policymakers is also needed to offer streamlined approvals, grants or creative incentives to offset the cost associated with bringing these innovations to market.