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Pharmaceuticals

Pandemic-driven revenue growth fades, but robust pipeline of new medicines will assure growth in the mid-term

Last update – December 2022

Sector rating 


LOW RISK FOR ENTERPRISES
Fragmentation

Internationalization
Business environment risk
Capital Intensity

Political risk
Profitability
Commercial risk

Strengths & weaknesses

  • Large-scale sector with a wide, stretched market, offering a wide variety of products and services worldwide.
  • Low fragmentation: the top 5 players together hold 30% market share, while the top 10 hold 50% of the market.
  • High barriers to entry, notably as the sector requires significant investments in R&D as well as highly trained personnel (scientists), which is too costly for new companies.
  • Despite the high expenditure in R&D (around 19% of revenues), companies in this sector are able to generate sufficient cash from operations to cope.
  • Chronic disease cases have risen globally, making people more dependent on medicines and health supplements, which guarantees demand.
  • Access to healthcare has been improving globally, especially in developing regions such as LatAm and Asia.
  • Pricing power for treatments that benefit from patent protection since companies that produce generic drugs cannot replicate the formula. In parallel, this allows branded-drug sellers to have larger margins and absorb the inflation effect (higher ingredient prices).
  • In order to ensure the safety, efficacy and quality of medicines, the pharmaceuticals sector is highly supervised and controlled, both globally (international standards) and locally (FDA in the US or EMA in Europe).
  • Constant competition from generics and biosimilar drug producers as they can offer equally effective products at lower prices. As a result, generic drug-makers are constantly struggling to increase their profit margins.
  • Although the approval processes for new medicines have been somewhat simplified in the last few years, they are still complex and lengthy, which delays the launch of new products to the market.
  • The biggest players in this sector are American (and some European), which means that access to many medicines is not easy or affordable for people living in developing countries (LatAm, Africa, Asia).

Sector overview

What to watch ?

 

  • Aging population: The life expectancy at birth has been rising progressively and today it is at 73.2 years on average (75.6y for women and 70.8y for men). At the beginning of the century, the average was 67.1 years.
  • Growing population: The global population is currently at 8bn and this figure is projected to reach 8.5bn in 2030. The more people there are, the greater the number and frequency of new infections and diseases on the planet. This represents a persistent challenge for companies focused on doing research and development on new drugs and vaccines. To ensure sanitary stability, a lot of capital and human resources have to be invested.
  • Faster approval processes: The number of annual FDA approvals of new products has increased markedly, thanks to its initiatives to speed up the processes and make it more efficient. In the past four years (2018-2021), the average number of annual approvals was 53 products, while between 2014-2017 the average was 39 and between 2010-2013 it was 29.
  • Pandemic boost to sales is expected to fade in 2023: Although 2021 was an excellent year for the sector (revenues grew on average by +16.7% y/y for the 15 largest pharmaceutical companies in the world), moderate growth is expected for 2022 (+7.6% y/y) and a slight contraction for 2023 (-2.0% y/y). Covid-related products (including vaccines) were the main contributors to the substantial profits that were generated by the sector in 2021 and 2022.  
  • Rivalry with generic drug-makers will intensify in 2023 as the number of expiring patents will be higher (vs the figures of 2021-2022). It is estimated that once a generic drug is available in the market, it can cut the revenue of the branded drug by around 70%-80%.
  • Competition will also grow from specialty drugs or biopharmaceutics, i.e. drugs manufactured from biological sources (living organisms such as microbial cells or plant cell cultures), implying higher production costs and therefore higher prices. Despite being more expensive, biopharmaceutical products are becoming popular, given their proved capacity to treat previously untreatable illnesses. In parallel, in the same way that branded drugs face competition from generics, biopharmaceutical products also face competition from biosimilars, which are an imitation (almost an identical copy) of original biopharmaceutics.

Having proved its prowess to the world during the challenging times of the Covid-19 pandemic, the pharmaceutical sector experienced a boom in 2021 that continued in 2022, thanks to the speed at which laboratories managed to create new vaccines in record time. However, as almost everyone has had access to these vaccines and governments have implemented mandatory vaccination campaigns, the health crisis is almost behind us. Because of this, the sector has begun to see single-digit sales growth compared to the previous trend of double-digit growth. As a result, we believe the outlook of the sector is rather stable, and expect lower earnings growth in the coming quarters.

Nevertheless, the pharma sector has a lot of growth potential in the medium and long term since it is constantly investing in R&D, which allows laboratories to have both a huge pipeline of drugs in the discovery phase and also to improve existing medicines. Oncology is perhaps the segment where pharmaceutical companies dedicate most of their efforts today as it is also the number one source of income. Immunology and diseases related to metabolism such as diabetes are the other segments that will see significant growth.

However, market growth expectations differ from region to region: In developed regions such as North America and Europe, growth of +4.2% is expected between today and 2025, while in Latin America and India growth of around +11% is expected, and in Africa growth of +5.5%. This is explained demographically by the growing number of individuals in these areas (LatAm and Asia), and by the growing middle class with greater access to healthcare.

In terms of consumption, the world’s biggest importers of pharmaceutical drugs are the US, Germany, Switzerland, Belgium and China. In terms of production, the US and Europe are by far the industry leaders. For instance, large American pharma companies generate around USD360,000mn of revenue per year, which is 1.1x higher than European peers and 4.3x higher than Asian peers.

Innovation is one of the main pillars that helps this industry stay on its feet. There remain hundreds of diseases that cannot be fully prevented or cured, which means that there is a lot room for scientific exploration and growth potential. Due to the high volume of investments required for R&D, we believe that the US and Europe will continue to be the key players in this sector since they are home to the largest laboratories worldwide, both in terms of sales and number of patented drugs.

Even though patents are constantly expiring (they last on average 20 years), continuing to innovate and obtain new patents is allowing manufacturers of branded drugs to remain relatively protected. Nevertheless, it is a reality that generic drugs are penetrating more and more in some markets, particilary those where governments encourage the use of generic drugs and thus the competition is stiffer.

Subsectors

Drugs manufacturers:
a.    Active Pharmaceutical Ingredients (API): API is the part of any medication that produces the intended health effects. They are produced from raw materials with a specified strength and chemical concentration. Examples of APIs include: ibuprofen, loratadine, omeprazole and acetaminophen. All drugs are made up of two core components (APIs and excipients). The excipients are chemically inactive substances, such as lactose or mineral oil in the pill, which are used to help the medication remain stable and to control its absorption.
b.    Patented drugs (also known as branded or original drugs): Original drugs refers to drugs that have been approved for marketing after many tests and rigorous clinical trials (there are four phases before the post-market monitoring). This takes about 15 years of R&D and millions of dollars of investments. Only large multinational pharmaceutical firms are able to develop original drugs, which benefit from a patent period of 20 years. But once the patent expires, other manufacturers can start to produce generic versions of the drug.
c.    Generic drugs: Drugs that are not branded but that are very similar to a branded drug in terms of dosage, administration, safety and performance. Generic drugs tend to be cheaper and therefore more accessibl, since their manufacturers did not have to invest in discovering/creating a new formula but only replicate an existing one.
d.    Biotechnology: This is the merging of biology and technology, refering to the branch of applied science that uses living organisms and molecular biology to produce healthcare-related products. Today, approximately 17% of total drug revenue is derived from biopharmaceuticals, which are mostly used in oncology, metabolic disorders and infectious diseases. The term biopharma describes companies that use both biotechnology and chemicals in their R&D.

Contract Research and Manufacturing Services (CRAMS): The field encompasses those services in the pharmaceutical and biotechnology industries that require extensive R&D and large-scale manufacturing facilities. It is a clinical term used for referring to outsourcing and it is one of the fastest-growing segments in the sector today.

Drug marketing: This refers to the marketing of drugs and medical devices by private and public organizations to doctors, clinicians and consumers as drugs/treatments need to adopt particular marketing strategies to be sold effectively.

Contact 

Maria Latorre
Allianz Trade
+33 1 84 11 50 50
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