Pharmaceuticals: Risk
The turnover of the major laboratories will remain under pressure in 2010 as a result of lost income from blockbuster drugs, vigilance exercised by payer institutions on health spending, stiffer conditions for approval of new drug launches, and competition from generic drugs. In emerging countries, the development of the middle class and implementation, albeit gradual, of health systems, augur new source of growth. With relatively little concentration today, the sector will continue its efforts on consolidation.
The pharmaceuticals market will likely grow in 2010, up between 4% and 6% (source: IMS Health), driven by the resumption of activity in the United States, the main consumer country (46% of sales) and by the dynamism of emerging markets (12% of sales). Other sources forecast a more moderate growth (up 3%). Among the factors with a positive impact on sector activity, some are structural in nature, like the ageing populations in mature markets and the development of a middle class in some emerging countries coupled with implementation of embryonic health systems. Other factors are attributable to current economic conditions like the fears related to the H1N1 flu pandemic, expected to particularly benefit the five major laboratories that have staked out positions in the vaccine segment.
The degree of concentration in the sector is very low with the five leading laboratories together claiming just 27% of the global market. And the crisis is expected to speed up changes under way by spurring mergers and acquisitions activity with large laboratories buying out smaller entities that outperform in R&D terms but have been weakened by the tighter credit conditions or taking stakes or entering into partnerships involving competitors that manufacture generic drugs. Despite the size of the resulting M&A transactions, the large margins that the global leaders continue to enjoy enable them to remain relatively independent of bank credit in financing the deals. They have also enhanced their cash flow through drastic reductions in costs, notably in the sales area, and through relocation of research facilities abroad.
Risks nonetheless remain, especially the continuing cycle of expiry of blockbuster drug patent protection that began in 2006 and will affect over $130 billion in sales (15% of global turnover) over the coming five years. It is thus urgent for major laboratories to consolidate the sector, acquire small biotechnology entities capable of providing new molecules, and invest in R&D (preferably facilities in Asia and cancer-related research, which generate very high revenues), and create and launch their own generics even before the patents expire. Despite such moves, which will continue in 2010, the productivity of R&D today does not suffice to offset the losses incurred when their patents fall into the public domain.
And the current turbulent times have intensified another ominous trend: the tendency of countries endowed with health protection systems to accelerate the reduction of health spending in both unit and total cost terms and thereby stem the growth of their public sector deficit and debt. That is the case for the United States where health spending represents 16% of GDP, Europe (between 8.5% and 11% of GDP depending on the country), and Japan (8.1% of GDP). And the situation in the United States is exacerbated by the rise of unemployment with the number of people eligible for the Medicaid program increasing in consequence. Regulators are more expected to impose increasingly stringent requirements as regards drug cost-effectiveness by stiffening the rules for approval of new product launches and imposing controls throughout the life of a drug. The trend toward tighter oversight could directly benefit laboratories: the United Kingdom and Germany plan to reimburse R&D costs for drugs that prove cost effective. In the United States, health system reform will be financed by cuts in spending and a better management of Medicare and Medicaid ($485 billion over 10 years with the major private laboratories and organizations agreeing to reduce their drug costs by $80 billion over the same period). At this stage, this reform does not plan to put off the free drug pricing (drugs are currently 40% more expensive than in Europe). In Europe, the various authorities did wait for the crisis to act on limiting health spending especially by reducing the number of drugs covered by public health insurance, an approach thus expected to gain momentum in the future.
It is difficult for generic drugs to penetrate a Japanese market over 90%-controlled by major laboratories, which will consequently continue to enjoy good margins. The renegotiation of drug prices held every two years and scheduled next in 2010 could prove less favorable to them with Japan burdened with the highest debt of any industrialized country.
In emerging countries - particularly China, where 20% growth is expected in 2010, and India, the development of a middle class apt to consume drugs even in the absence of an effective health protection system will underpin sector activity. Implementation of local private health coverage systems and broader access to healthcare by previously excluded population segments enhanced the business outlook for laboratories. But with the lower drug prices prevailing in those markets, their margins will be correspondingly tighter than those enjoyed in mature markets. In other emerging countries, the sector will contend with declines in activity with the economic turbulence undermining consumer purchasing power. That will particularly be the case for Russia, Mexico, South Korea, and Turkey, where drug prices have been subject to drastic reductions.
In this context, generic drugs will achieve outstanding growth with the penetration rate notably reaching 60% in the United States. But margins in this segment will nonetheless also be subject to pressure. Niche or specialty markets for vaccines or biotechnological drugs, will remain very dynamic albeit already in competition in some cases with their generic equivalents, more difficult to develop bio-similar drugs, a product category where the competition will also be fierce.
Grading and description are forecasted for 2010. Updated on globalEDGE April 2010.
