Five Ways That Biopharma Remains Susceptible to Economic Changes

The economy can be difficult to understand. Consider a biopharma industry dependent on long-term speculation and government policy, and it quickly becomes clear why understanding the economy remains important. This exclusive article uses straightforward explanations to convey the relationships between interest and inflation, and why pharma can absorb certain economic blows that biotech cannot. 

Inflation is the rate of increase in prices of goods over time. Intuitively, this means that inflation rates depend on the ‘goods’ being considered, whether it’s coffee, automotives, or the pipettes your company wants to buy.

As strange as it sounds, the world needs inflation and central banks are tasked to hit the number just right. Too high, and prices rise too rapidly for consumers to keep spending and companies struggle to forecast financial activity. Too low, and governments lack the leeway to slash inflation rates to encourage spending during a recession before hitting a negative inflation rate (i.e. deflation, which poses the danger of reducing short-term spending as people will expect lower prices in the future).

Interest rates (on loans, not savings) reflect the additional charges incurred from borrowing money from a lender. Higher interest rates make borrowing more expensive, making loan-heavy corporate activities like M&A, specialised equipment purchases, and payroll during slower business periods. On the other hand, lower interest rates make borrowing less expensive. 

Central banks can change interest rates to counteract inflation. For example, during demand-pull inflation (when prices rise because demand exceeds supply, think masks during COVID-19), central banks may raise interest rates to limit access to money and reduce demand.

Importantly, interest rates also affect a government’s ability to borrow money in the form of bonds (a form of interest-based loan provided by an investor to a government).

San Diego's biotechnology ecosystem is booming. At its heart, it consists of a mosaic of startup and mature companies working on the honorable task of discovering new therapies for patients, but it's also peppered with organizations helping turn promising new drug candidates into clinical-stage products, and beyond. 

In our inaugural San Diego spotlight feature, we're taking a closer look at Catalent’s San Diego operations. From early development through clinical supply, Catalent's San Diego facilities provide a connected pathway designed to help biotech companies move candidates into the clinic faster and with less complexity. 

A 68,000-square-foot development facility supports early-phase small-molecule and peptide drug candidates through preformulation testing, formulation and analytical development, GMP manufacturing, stability testing, clinical packaging, with strategies for compounds with poor solubility. 

What makes Catalent San Diego unique is the seamless transition from development to clinical supply. As programs progress, sponsors can leverage two closely connected facilities to support development, packaging, distribution, and clinical trial execution through a single integrated network. 

Catalent's purpose-built clinical supply facility extends that support through clinical supply management, packaging, complex labeling, cold-chain services, storage and global distribution. Together, the two facilities can help biotechnology companies move candidates from early development through clinical supply, helping sponsors reduce complexity and maintain momentum as programs advance towards clinical trials, all within San Diego's growing life sciences community. 

Periods of high interest rates can punish smaller biotechs looking for loans, especially given the delay between drug discovery and commercialisation. Pharma companies can often access cheaper loans given their existing portfolios and a history of revenue generation, whilst biotech firms (often spending-heavy and revenue-poor) will settle for more expensive and restricted loans. This difference helps to explain why smaller biotechs are more willing to sell ownership (as shares) during funding rounds, whilst big pharma seeks loans. 

As drug patents near their expiry, pharma companies may aim to acquire other companies (often biotechs) with promising, early-stage drug candidates in order to secure future revenue. Since a target company can be worth billions of dollars, a buyer commonly can incur debt during this purchase, in the form of a leveraged buy-out (i.e. the buyer pays using a minority cash deposit and a majority loan, akin to financing a house or car) or another payment structure. Higher interest rates make this debt more expensive, deterring pharma from costly acquisitions.

In many countries, a national payer system is responsible for handling price negotiations for medicines. Higher interest rates can make government borrowing more expensive, reducing public healthcare budgets. This undoubtedly affects pharma more than biotech, since large pharma companies possess marketable medicines whilst biotech firms focus on R&D. 

Biotech often relies on licensing or partnering to obtain sufficient funds for R&D. During periods of high interest rates, pharma may demand lower upfront payments, stronger milestones or more favourable royalties because its cost of capital has risen and its investment hurdle is higher. Lower rates can improve deal terms and increase the number of partnerships. 

Higher inflation can also balloon raw material costs related to expanding manufacturing capacity by making specialised equipment, technology upgrades, and regional manufacturing requirements more expensive. In tandem, higher interest rates can make purchasing new buildings more costly.  This mainly affects pharma companies trying to scale up manufacturing capacity, whilst biotech firms can be affected if they choose to construct a specialised biologics manufacturing facility.

Pharma and biotech are unusually susceptible to changes in interest and inflation rates, given their dependencies on deferred returns, acquisitions, price negotiations, and more.