Pharmaceuticals

A medicine for business optimism

Sector
Value

1300bn USD

M

MEDIUM RISK for entreprises

  • Fragmentation

  • Internationalization

  • Capital Intensity

  • Profitability

  • Structural rise in demand boosted by growing middle classes in emerging markets and ageing population as a whole
  • Resilience of drug spending irrespectively of economic cycle
  • Increasing R&D costs well covered by strong cash generation
  • All Western public health insurance systems putting strong downward price pressures on not innovative enough medicines
  • Drug pricing issues, especially in the US, tarnishing the whole pharmaceutical sector’s reputation
  • Strict healthcare laws and regulations
  • Generic drug makers suffering from average profit margin (much) lower than that of patented drug ones

What to Watch?

  • Level of M&A activity aiming at bolstering drug makers’ pipeline as a more efficient alternative to internal R&D spending
  • Competition from generic and biosimilar medicines eating away at patented drug market shares
  • Yearly number of new drug launches in the US
  • Negative regulatory fallout from drug price gouging in the largest pharmaceutical market 

After the world pharmaceutical market came through its latest patent cliff three years ago, it has resumed its sustained growth path, with the global prescription drug market up +5.2% at USD830bn in 2018 compared to 2017. This enviable growth was fueled by the upswing of +9% in the number of new medicines launched last year in the US market, especially in the innovative therapeutic field of oncology. As the most innovative medicines are also the most expensive ones, physicians often prescribe the latter for their patients. This helps boost the pharmaceutical market’s value.

All over the world, even in regions where medicines appear to be hardly affordable, demand has been growing in volume. As the largest drug outlet, with a global market share amounting to 35% in value, the US alone has of course an edge over everyone else, all the more so because US drug prices appear to be the highest on average worldwide. Asia’s demand is catching up with that of Europe, fueled by its growing ageing population. Additional volumes make it possible for drug makers to bring down fixed costs of their plants in spite of cheaper prices when it comes to selling generics. The latter help ease the financial burden of public social security schemes but they do so at the expense of (much) lower margin levels for laboratories like, for example, the world’s largest generic drug maker, TEVA, which did not succeed in getting back to profitability last year.   

All drug makers have to cope with governments’ tightening cost controls over drug price-fixing. This is especially the case for US laboratories nowadays as they are struggling to overcome political hurdles in regards to drug price-gouging. Because of lower pricing power, they are no longer comfortable with spending that high R&D amounts or with buying out too expensive biotech firms. However, we expect sales of global prescription drugs to rise between +3% and +5% in 2019.

Prescription branded drugs: Patent expiration puts a part of their sales at risk as competitors can manufacture their drugs at lower cost

Generics: Market growth potential stemming from patent expiries of branded drugs. Parallel rise in biosimilar sales corresponding to branded biotechnological drugs going off patent

OTC: Non-prescription drugs whose growth rate has been lagging behind

Key players

Country Role Sector risk
United States

#1 producer

#1 importer

A

Low risk

Switzerland

#3 producer

A

Low risk

China

#2 producer

A

Low risk

Contact

Contact Euler Hermes

Economic Research Team

research@eulerhermes.com

Sector Risk Analyst

Marc LIVINEC

marc.livinec@eulerhermes.com

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