The global pharmaceutical sector steps into 2015 with significant encumbrances. While the industry is bracing itself to face exceptionally high patent expiry levels, the number of novel medicines available to patients would also be fewer than before. Concurrently, the fastest growing global economies are likely to witness an accelerated growth in demand for medicines. In the face of these issues, the challenge for policymakers and healthcare systems across emerging and developed economies would be to determine the amount of worldwide pharmaceutical spending while targeting goals of enhancing health outcomes, expanding access of medicines to more number of patients and controlling medicine costs.
Consequently, 2015 is set to witness a rapid transition in the way countries handle their spending, with the emphasis being on creating a balanced combination of spending on generic and branded drugs. Further, a shift is also likely in the levels of spending in the high growth emerging economies as against spending in developed nations.
Spending on Generics Set to Tip Branded Medicines
The global rate of growth in pharmaceutical spending is witnessing an overall slump. While the annual spending growth hovered around 6.2% between the years 2005 and 2010, with an estimated $856 billion being spent in 2010, the growth rate has reduced to 3-6% in the last five year period with 2015 expected to witness a spending of just around $1,100 billion.
The industry is likely to see a distinct shift in the way countries across the globe spend on medicines in 2015. While spending is expected to continue on its downward trend across Europe and the US, a 10% increase over 2010 spending is being estimated in the 17 high growth emerging economies that include nations such as Mexico, India, China, Russia and Brazil.
Nations are also expected to spend more on generic medicines in 2015, spelling a continued downward trend for branded products that will see a decline to 53% in 2015 from almost 70% in the year 2005. The trend is seen as a direct consequence of developed markets grappling with the problem of patent expiries that are likely to offset the cumulative spending on branded medicines, both existing and new, and reduce spending by $120 billion through the year 2015. On the other hand, generic medicines will be in demand in the emerging markets, boosting spending growth in the segment from just 20% in 2005 to around 39% in 2015. While spending on generics is likely to increase by $150 billion in the high growth emerging economies, developed markets are also expected to spend more on generic medicines in the upcoming five-year period.
Factors Affecting Pharmaceuticals Sales
On the upside, factors such as expansion of insurance coverage in the US, continuing economic recovery and rising employment are likely to boost growth in pharmaceutical spending in North America to an average of 6.4% yearly up to 2018, although Latin America would see a slightly lower annual growth rate of around 6.1%. Western Europe, however, is expected to spend much less, with an average of just 2.2% per year in the same period. In contrast, spending on medicines in Australia and Asia is estimated to increase by an average of 10% up to 2018, bolstered by the introduction of various public health programs in China.
The industry is also set to taste the long-term impact of major policy changes made by nations in 2010. These include far-reaching reforms in Japan’s system of price-cuts every other year, USA’s passing of the Affordable Care Act and many other reforms aimed at rebalancing the priorities of every major market in Europe in medicine spending. Europe and the US also took significant steps towards developing scientific parameters for approving bio-similar, which is a relatively new area where businesses are finding it easier to draw on emerging markets.
In spite of the changing global trends in spending on medicines, growth in sales across the industry is expected to average around 5.1% per annum up to the year 2020, when global sales is estimated to touch the trillion dollar ceiling. Sales of biologic and specialty drugs that require complex production protocols are expected to account for more than half of these sales. Increasing demand for generic medicines, coupled with the imminent loss of revenue from patent expiries of blockbuster drugs had already fuelled a spurt of market consolidation via mergers and acquisitions in 2014. Amongst the significant deals made last year, which saw a record of $234 billion of acquisitions, is the acquisition of specialist drug maker Forest Laboratories by Actavis (ACT, Financial) for $25 billion.
Key Focus Areas
The industry is set for a dynamic year in 2015 in spite of the challenges staring in the face of pharmaceutical companies, both big and small. With continued R&D in genomics and the basic science of biology paying off, an array of advanced therapies based on the body’s own defence mechanisms are expected to be introduced, with auto-immune disorders and oncology standing to gain the most. Oncology medicines are set to dominate the sector with an estimated growth rate of over 10% CAGR between 2015 and 2020. While a bulk of the industry’s profit is likely to come from biologic and specialty drugs, therapeutic vaccines are also expected to make a significant contribution. The industry is also set to witness the launch of a number of innovative products that would offer patients novel alternatives for the treatment of incapacitating diseases of the central nervous system, thrombosis, diabetes and cancer.
The trend of M&A is expected to continue into 2015, with big players looking to improve productivity in R&D while minimising risk and offset costs towards developing new drugs. Early 2015 saw Roche (RHHBY, Financial) acquire a controlling stake in Foundation Medicine, a step that would strengthen Roche’s oncology business. Similarly, Johnson and Johnson (JNJ, Financial) struck a licensing deal with AC Immune, allowing the companies to collaborate for drugs to combat Alzheimer’s. Key market players looking at M&As in 2015 include Pfizer (PFE, Financial), GlaxoSmithKline and Bristol-Myers Squibb Co. (BMY, Financial) Pharmaceutical majors will also continue acquiring biotech businesses boasting of either novel technologies or products in late-stage development. To a lesser extent, some businesses will also be looking at acquiring providers of healthcare services and seeking joint ventures with insurance companies in a bid to spread their wings across the entire value chain in the healthcare sector.
2015 will be a year of consolidation and transition for the global pharmaceutical industry, as businesses adapt to structural changes resulting from growing threat to popular products at the top of the patent cliff from bio-similar and generic medicines. Companies will be looking to put their array of off-patent drugs on the block for potential out-of-industry buyers, resulting in a more diverse industry. High costs of in-house R&D will continue to propel larger players to toe the trend of mergers and acquisitions, with smaller companies holding the key to late-stage development products standing to gain the most. However, pharmaceutical sales are not likely to suffer, given the increasing demand for medicines amongst the emerging economies. While Novartis (NVS, Financial) is expected to maintain its position as market leader in terms of sales through 2015, experts list Merck (MRK, Financial), Bristol-Myers Squibb, Jazz Pharmaceuticals (JAZZ, Financial), Eli Lily (LLY, Financial) and Valeant Pharmaceuticals (VRX, Financial) as some of the stocks to watch in the coming year.
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