It’s no longer big news – the U.S. congressional “supercommittee” tasked with finding $1.2 trillion in federal spending cuts in the next 10 years has failed. On November 21st, the committee conceded failure and, barring the miraculous passage of any budget legislation over the next year which would meet those deficit objectives, the sequestration plan goes into effect starting Jan 2, 2013, cutting $1.2 trillion across-the-board. As a life science tools company that sells products in the United States, especially if you make a substantial fair amount of your money in the US and have exposure to academic research institutions, this should rightly scare you.
The sequester would cut 7.8% from the National Institutes of Health, the National Science Foundation, and the Centers for Disease Control. That’s a huge cut that equates to over 2,500 less NIH grants and 1,500 less NSF grants in 2013 compared to 2011. While the sequester isn’t a certainty at this point – details could still be revised and a budget agreement could still be reached – President Obama has stated that he would veto any plan that doesn’t meet the deficit reduction goals, making a deal unlikely.
Consider this – the NIH spends over $31.2 billion on life science and medical research annually. To give this some perspective, PhRMA estimates that in 2009 the ENTIRE PHARMACEUTICAL INDUSTRY spent $65.3 billion on R&D (although reported data from CapIQ would suggest that number is at least 50% higher). As one can surmise from these numbers, the pharmaceutical and biotech industries are highly unlikely to make up for the loss of R&D spending. If the sequester goes through as currently planned, my estimate would be that life science tools companies can expect a 3% to 4% decrease in their US sales, presuming that their current market shares between industry, academia, etc. are proportional to the respective current R&D spending. Obviously companies that sell a disproportionately large amount to academia and other organizations highly dependent on NIH funding will see a greater decrease in sales. Likewise, companies that sell products which make work in the lab more convenient will likely feel the pain somewhat more than essentials.
With governments across the globe having major budget problems, leaner times for life science funding are extremely likely to become a reality. The companies that will be able to succeed in spite of it will be those that understand their exposure to potential reductions in funding and plan accordingly.