Looking toward the new year is a good time to take stock of the life sciences industry’s digital maturity. This article provides ten observations from McKinsey’s work in this space, complemented by targeted analyses and a McKinsey survey conducted in November 2022 of one hundred digital and analytics (DnA) leaders in life sciences functional areas, such as R&D, manufacturing and supply chain (M&SC), commercial, and enabling functions such as finance and HR. Life sciences companies have historically lagged behind banking, telecom, retail, and other industries in digital maturity. A McKinsey analysis from 2016 identified a multitude of factors that make life sciences companies slow to adopt DnA innovations, including not fully understanding healthcare practitioners’ (HCPs) decision journeys, challenges linking DnA to the broader business, and difficulty maintaining an efficient operating model. Has the pandemic accelerated the adoption of digital technologies, have life sciences companies caught up at all, and how far are they from realizing the full potential of digital and analytics?
The results are sobering. The gaps with other industries are not closing, and the reported benefit to businesses is moderate. All players in the ecosystem can benefit from incorporating digital and analytics into every aspect of their operations to fully deliver on the promise for patients and societies. Here are our ten observations in detail.
Where the industry is now
1. The digital maturity gap persists between life sciences and digital leaders. Despite efforts made over the past few years, life sciences companies still trail cross-industry leaders in digital maturity by a factor of two to three times in every key dimension—strategy, culture, organization, and capabilities—without any clear signs of catching up.
Pharmaceutical companies (pharmacos) surveyed are slightly more mature than medical technology (medtech) companies: 55 percent of pharma DnA leaders say they have deployed some applications at scale, compared with 34 percent of medtech DnA leaders. Overall, commercial and R&D are more digitally mature than other functions, with more than 14 percent of DnA leaders in those areas reporting that digital applications are deployed at scale and are contributing tangible business value. Less than 6 percent of DnA leaders see the same in M&SC and enabling functions.
Life sciences has also struggled to execute on the idea of building novel digital businesses beyond digital solutions like apps supporting their existing products. The jury is still out on whether life sciences companies are the best owners of these, due to misalignment of incentives, the need for agility, and the capabilities needed.
2. Life sciences companies are starting to capture value from digital and analytics but are still just scratching the surface. Life sciences DnA leaders surveyed estimate that digital and analytics drove a 5 to 15 percent bottom-line improvement in specific pockets of their functional areas over the past five years, yielding an annual global impact of $6 billion to $9 billion. This compares with an estimated $130 billion to $190 billion that the full application of digital solutions and innovation along the life sciences value chain could bring.
The largest opportunities DnA could help unlock are derisking drug discovery, accelerating clinical trials, and reinventing engagement with HCPs. As a result, many leading companies are incorporating DnA into early-stage drug discovery and clinical development to shrink timelines and improve the probability of success. In addition, leading players are reinventing their interactions with healthcare providers and patients to provide enhanced and tailored experiences and achieve better treatment outcomes.
3. Early innovation is clearly catching up, but it took the top 40 life sciences companies until 2021 to overtake the big three tech companies (Alphabet, Amazon, and Apple). The top 20 pharmacos and the top 20 medtech companies generated more than 1,700 DnA and life sciences–related patents in 2021, a growth surge of more than 70 percent over 2017 that finally allowed the industry to overtake the combined volumes of Alphabet, Amazon, and Apple. Publications also increased by 28 percent in that period, reaching 650 last year.
In other industries, such as retail banking, strategic and financial benefits accrue to digital innovators. Still, despite the recent burst in digital innovation, there is not yet a clear correlation between life sciences companies’ digital maturity and their financial performance. This is probably because of long product development timelines and limited short-term benefits, especially in R&D, underlining the importance of defining and linking digital strategy to scientific and business value at every level of the organization.
4. US venture funding in digital health peaked during the COVID-19 pandemic and is now stabilizing at twice its historical base, with the big three tech companies’ investments edging out those of the top 40 life sciences companies. Funding along the life sciences value chain jumped from $5 billion in 2019 to more than $20 billion in 2021 (Exhibit 1), with more than 45 percent of the funding in commercial solutions. Funding in research and development ranked second, totaling $6.4 billion, with almost equal interest from investors in research and early development ($3 billion) and development, regulatory, and safety ($3.4 billion).
Year-to-date funding and digital-health stock indexes, such as the MSCI ACWI IMI Digital Health Index, for 2022 have almost halved compared with 2021, partially because of a general public-market correction. However, they are still twice their 2019 levels.
The US life sciences sector still leads Europe and Asia in DnA investments. The top 20 pharmacos and the top 20 medtech companies made slightly more DnA-related major deals in the United States than in the European Union over the past five years—32 versus 26— but on average, the US deals were about five times larger, $700 million versus $150 million in the European Union. This is a strong indicator of the difference across continents in the level and pace of innovation.
Globally, the big three tech players are edging out the top 40 life sciences companies as leading strategic investors. The top 40 life sciences players have invested almost $20 billion in DnA deals since 2017, but less than $6 billion in the past three years; big tech players invested $10 billion in tech-related healthcare deals, $8 billion of that in the past three years. Big tech players can leverage their ability to generate cash flow to fuel their M&A activities, while life sciences companies tend to prioritize asset acquisitions over DnA deals.
Where the industry is going
5. Hiring and spending are accelerating, but not by much. The hiring rate of DnA talent by life sciences companies is accelerating slightly, from 2 to 4 percent a year over the past five years to an expected 3 to 5 percent a year over the next three. Only 10 percent of respondents said they had grown the talent in their functional areas by more than 30 percent, and only 9 percent said that they are targeting such an expansion over the next three years. Hiring is generally more robust in R&D and commercial, and it’s expected to remain so.
Similarly, leaders expect to grow their DnA spending by another 10 to 15 percent over the next three years, starting from today’s baseline of 8 to 12 percent of their function’s budgets. Only 7 percent of leaders expect to increase their investment by more than 30 percent over the next three years.
6. Analytics rule the world of life sciences tech investments. Life sciences companies make 45 percent of their tech investments in three analytics-related technologies—applied artificial intelligence (AI), industrialized machine learning (ML), and cloud and edge computing—and expect to derive most of their short- to medium-term benefits from them.
Applied AI has permeated the life sciences value chain, allowing more business decisions to be made based on data the organization has generated or acquired. Cloud and industrialized ML allow life sciences companies to adopt new AI approaches more reliably and at a faster pace and larger scale, accelerating tech-driven innovation.
Cloud technologies are increasingly being embraced by life sciences to speed tech-enabled business transformations; in 2021, more than 80 percent of the top 20 global pharma and medtech companies were operating in the cloud. In addition, companies are increasingly leveraging the cloud to shift IT infrastructure management and to fill gaps in their software development and analytics capabilities, buying software as a service rather than building and operating it themselves.
Despite the high media attention, longer-term bets such as quantum technologies, Web3, advanced connectivity, and immersive reality together account for only about 15 percent of life sciences tech investments.
Beyond focusing on a single tech trend, the research shows that DnA leaders could consider investing in a combination of trends to unlock the most innovation and new sources of value. For instance, life sciences companies could accelerate drug discovery, create more personalized treatments, and optimize treatment plans for patients by leveraging a combination of Al and ML, cloud computing, quantum technologies, and bioengineering.
7. The plan for the future is largely the plan of today. DnA leaders are betting that the areas that have brought the most value to date will be the primary value drivers for the next few years.
In the past three to five years, each function has had two or three areas in which digital and analytics brought noticeable changes and moderate impact. These included disease state and target understanding in research and early development, clinical trial planning and execution in development, regulatory and safety, end-to-end supply chain in M&SC, go-to-market and field force effectiveness in commercial, unmet medical need in medical, and shared services productivity in enabling functions.
What it will take to succeed and scale
8. The challenge has shifted from strategic alignment and executive leadership to data and talent. The top hurdle to scaling life sciences DnA in 2020 was a lack of leadership support and misaligned strategy, but that is no longer the case (Exhibit 2). Instead, the key challenges today include the following:
- Lack of high-quality data sources and data integration. This challenge is cited by both pharma and medtech DnA leaders as a top issue. In addition to accessing existing data, DnA leaders are increasingly interested in supporting decision making by generating new data from business operations, such as new digital channels for HCP engagement.
- Lack of the right DnA talent. To scale DnA transformations successfully, life sciences companies need cross-functional teams with experienced leaders and accomplished DnA practitioners. In addition, life sciences companies still require the role of translator, because most DnA experts don’t have degrees in life sciences or prior knowledge of a specific therapeutic area. The reverse is true for colleagues on the business side. It is, therefore, critical to have experts who can bridge the gap between the business and analytics teams to facilitate cross-functional collaboration.
- Lack of adoption and scaling. In many functional areas, DnA solutions still are not deployed at scale. In R&D, for example, many companies are still producing proofs of concepts and pilots detached from business needs without a plan or the means to scale them. In addition, many life sciences companies fail to recognize the need to transform the mindset and culture of their organizations to drive DnA adoption at scale.
9. The field is moving from ‘hard’ capabilities to more focus on ‘soft’ elements. Two-thirds of life sciences DnA leaders say they have focused on developing a value-linked blueprint and strategy, and around 60 percent indicate they have also made progress in setting up the “hard” capabilities to scale DnA, such as digital and analytics solutions (62 percent of respondents), data architecture (65 percent), and technological infrastructure (56 percent). The adoption of these hard capabilities has improved by 1.5 to 2.3 times over 2017. On the “soft” capabilities front, the adoption of appropriate talent strategies and agile operating models has improved from 29 percent in 2017 to 46 percent, and the adoption and scaling of DnA has improved from 10 percent in 2017 to 46 percent today, though both are still underdeveloped.
Our survey results suggest that many life sciences companies are about to reach an inflection point in their DnA transformation journey and could benefit from evaluating the options ahead. Broadly, there are three archetypes for scaling DnA: DnA-targeted partnerships and acquisitions, arm’s-length digital business building, and digital transformation of the core business, which is arguably the hardest but generally delivers the highest long-term value.
In December 2022, at a McKinsey-hosted Quantum Jump event on digital and analytics transformation, 61 percent of participants indicated their businesses have adopted an agile approach to digitally transforming their core business. Only 24 percent of participants indicated DnA-targeted partnerships and acquisitions, and 15 percent picked arm’s-length digital business building.
10. Medtech DnA leaders are trailing behind other life sciences colleagues in scaling DnA. DnA leaders regard a leadership-backed, impact-driven blueprint (25 percent) and fit-for-purpose and scalable digital and analytics solutions (27 percent) as the two most important factors for scaling DnA. This is reflected in how they have approached DnA transformations so far. Although the “soft” capabilities are still underdeveloped, pharma DnA leaders have started to shift their focus to adoption and scaling (19 percent), whereas medtech DnA leaders still focus less on these. Across the board, medtech companies have invested less, have fewer DnA applications with visible business value deployed at scale, and still have less focus on the soft elements. Although medtech companies are behind pharma companies in digital maturity, their successful adoption of DnA can help provide better products and services to patients. In turn, this will help close the digital maturity gap between life sciences and digital leaders. The COVID-19 pandemic has pushed the life sciences industry to rethink its approach to adopting digital and analytics. Thanks to some initial proof points and investments in hard capabilities, life sciences companies now have an opportunity and need to accelerate and scale to capture DnA’s full value.
The answer to the industry’s challenges may lie in fusing digital and analytics with those competencies that have historically made life sciences successful: innovation, HCP, and patient relevance. By bringing these capabilities together, the industry could change the game and deliver greater benefits for patients. If it doesn’t, it risks missing out on much of its potential.