The Global Pharma
universe today has low valuation multiples, definitive five-year free cash
flows and a strong dividend yield which hedges the downside, while dwindling
R&D productivity and an uncertain pricing environment rules out any major
upside for this universe. Although fundamental growth drivers like higher
prevalence of chronic illnesses and an aging population remain intact, in this
challenging environment, where is Global Pharma headed?
Rationalization is Just a Matter of Time
The US, which to date
has been the largest pharma market, will be forced to give into economic
pressure and pricing flexibility will be increasingly difficult.
US is the highest
spender on healthcare: The US spends twice the number of healthcare dollars per capita
than any other major industrialized nation. This is despite the fact that in
2007, 21% of total prescription drug sales and 65% of total prescriptions
dispensed were for generic drugs. Over the past 30 years, US healthcare
expenditures have grown at 2.8% per annum; faster, on an average, than the rest
of the economy. If this continues, in another 30 years, healthcare expenditures
will consume 30% of the gross domestic product – a proportion that exceeds the
current government spending for all other purposes combined! The retail
prescription drug prices increased an average of 6.9% a year from 1997 to 2007
more than two and a half times the average annual inflation rate of 2.6% over
the same period. The current recession will likely result in a growth of
enrollment to medical insurance, as unemployment increases and employer
sponsored coverage declines. This escalating healthcare burden is not
is not viable: There
is little flexibility for insurance companies to increase copayment levels from
patients since they are already at 25% and among the highest when compared to
other developed nations.
grow with greater availability of therapeutic and generic substitutes, putting
a further squeeze on prices.
Cancer drug prices are
aggressive and can only go down: The oncology market has shown remarkable
growth in recent years, driven by a high level of unmet need. While this will
provide companies with opportunities, increasing pharmaco-economic vigilance
from cash-strapped healthcare payment systems will keep prices in check.
Combinations of two
drugs (biologics or chemicals) are being increasingly used in clinical trials. Such
combinations, which may provide higher efficacy and lower individual side
effects, will reduce the acceptance of new expensive drugs.
Obama’s Agenda: With
a view to control healthcare expenditure, the US President-elect has suggested
measures like re-importation of drugs, greater generic drug use by Medicare,
Medicaid, etc, and establishing a government institute for comparative research
R&D productivity –
Economy-Driven Slowdown by the FDA?
Of late, The US Food
and Drug Administration (FDA) appears hesitant to approve drugs merely on
acceptable efficacy and safety data from clinical trials. The drug must prove
better than an existing therapeutic option or address a large unmet need.
Merely being “non inferior” or having a different mechanism of action may not
be enough. R&D output is thus dwindling while several patented drugs face
generic exposure in the near future. Global Pharma companies reported
cumulative pharma sales of ~$360b in 2007. If Global Pharma were to just
maintain these revenues, they need to get 200 New Molecular Entities (at an
average peak sales of $750m) approved by the FDA in next eight years – that is
25 NMEs every year! This is obviously impossible.
The FDA approved only
18 NMEs (nine from global companies) in 2007, the lowest single-year number
since 1983. Until third quarter 2008, 15 NMEs/biologics had been approved of
which the Global Pharma share is only five; missing the requirement by 23. Two
hundred and sixty NME’s /biologics were approved from 1993 to 2000, while for
the period between 2001 and 2008 only 165 have been approved. This decline in
productivity comes at a time when the worldwide pharmaceutical industry is
estimated to be spending more than $40 billion each year on R&D activities!
Emerging Markets –
Much Ado About Nothing
Emerging markets like
Brazil, Russia, India, China, South Africa and Turkey, much hyped by all as
growth drivers of the future, have been unable to deliver. These are extremely
price sensitive markets with very little reimbursement. The biggest brand in
India clocks revenues of $20m, while most “blockbusters” reach their plateau at
~$7m, around two years after the launch. In China as well, peak sales of any
expensive patented product cannot break the $25m barrier. Assuming Global
Pharma companies take 35% share in the emerging markets, the yield would be
$10b in annual sales, a small fraction (2.5%) of the current base. Inability of
the governments to subsidize high priced medicines for large patient pools and
pharmaco-economics decisions at the physician and patient family levels will
not allow high growth rates from these markets in the foreseeable future.
Biogen Idec launched its product Avonex for Multiple Sclerosis through Nicholas
Piramal (market leader ranked 4th in India), but generated poor demand as the
product was sold at its US price.
THE WAY AHEAD
The Global Pharma
business model that is best suited to meet the challenges will have the
- A large portfolio with moderately priced products that serves
the need of larger patient populations versus premium priced products with
- Innovation risk hedged by a presence in
- A balanced spread of revenues across markets
including emerging markets, with a strong base business driven by
- Increased “externalization” of R&D through in-licensing,
etc. vs. in-house R&D to improve Global Pharma’s risk-reward scenario
- A dynamic management willing to take austerity measures
Use the cash! Robust free cash flow
and net cash position can be leveraged in this economic downturn to make
sensible acquisitions. As valuations have taken a hit across the healthcare
sector, it is an opportune time for Global companies to use the mileage of
their cash positions to make small-mid size acquisitions. Pfizer, Roche, Merck
and Novartis are well positioned to leverage this opportunity