Entering 2022, the opportunities for value creation in the biopharma industry are especially strong. A last-minute compromise on drug pricing in President Joe Biden’s US $1.75 trillion social-spending bill in November was an important step toward lowering out-of-pocket drug costs for seniors in the US and addressing high drug prices generally. The threat of reform, in the form of greater industry subsidies and reduced pricing power, has been a risk to biopharma for much of the last decade. Valuations of large-cap biopharma companies in aggregate have been at historic lows in part for this reason. Progress on this issue should now help refocus attention on company pipelines and overall research and development (R&D) productivity.
Among small- to mid-cap biopharma companies, 2021 was a challenging year. A significant pullback started in February, perhaps triggered by some high-profile clinical setbacks, unexpected regulatory decisions, high valuations, and a volatile market backdrop. However, looking to 2022, we remain very encouraged by the state of pipelines across the industry.
Today, advances in basic science, the advent of new drug-discovery tools, and entirely new treatment modalities are enabling the development of high-impact drugs for critical diseases. For example, antibody-drug conjugate technology allows more potent and less toxic treatment of more types of cancer, as evidenced most recently by a groundbreaking new drug for breast cancer. In addition, the once science-fiction concept of gene editing was recently validated for the first time in humans with the rare disease transthyretin amyloidosis. Lastly, the COVID-19 pandemic has notably rekindled interest in vaccine development, including for common respiratory viruses such as flu and RSV.
We are just as enthusiastic about the opportunities within medical technology. Many life-science tools and diagnostics companies excelled during the pandemic. Companies involved in the development of diagnostic-testing equipment were in high demand, as were those selling critical-care equipment to help hospitals cope with the surge in COVID-19 patients. Life-science tools companies, in particular, have strong fundamentals as they support both increased biopharma R&D and robust bioprocessing demand that helps bring advanced therapeutics to the market.
Importantly, many of these companies could exit the pandemic stronger than they entered, as a rise in their installed customer base should lead to increased recurring revenue in the years to come. Additionally, the pandemic has spurred governments globally to reassess their emergency preparedness. This should provide new sources of demand for many diagnostics companies, as well as increased government funding for life-science research.
Medical-device companies lagged relative to other parts of medical technology in 2021 but are poised for outsized growth in 2022 and beyond. The pandemic caused a halt in elective procedures, brought on first by hospital cancellations and compounded later by patient skittishness to schedule elective care. However, this drop in demand did little to slow the prevalence of underlying disease across patient populations. We expect to see strong multi-year demand in categories such as aortic-valve replacements, cataract surgeries, colonoscopies, and others that have been deferred since the pandemic.
Notably, lost in the short-term implications of COVID-19 is the fact that innovation pipelines across medical technology firms have never been stronger, with far more attractive medical-device categories poised to accelerate in the 2020s compared to the 2010s. In the coming years, we believe many firms will grow their addressable market through geographic expansion, new technologies, and the use of existing technologies to treat new patient populations.
The healthcare services subsector is also exiting the pandemic in a better position than it entered. The early stages of the pandemic were challenging for business models leveraged to underlying volume trends, such as post-acute care, hospitals, dialysis, and others. Conversely, managed-care companies performed well initially, as an overall reduction in healthcare utilization resulted in falling costs and rising profits.