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Pharmaceuticals Industry Risk Report

Successful new launches are reshaping the industry, with numerous discoveries still in the pipeline

L

LOW RISK for entreprises

  • Fragmentation

  • Internationalization

  • Capital Intensity

  • Profitability

  • Fragmentation

  • Internationalization

  • Capital Intensity

  • Profitability

  • 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).

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 2023, the FDA approved 55 new drugs, while between 2018 and 2022 the average number of annual approvals was 49 products and between 2013 and 2017 it was 36.
  • Pandemic-driven revenues were completely eroded in 2023: In 2020 and 2021, revenues in the sector grew on average by +8% and +15% y/y, respectively, vastly driven by pandemic-related sales. However, they peaked in 2022 when sales grew only by +1.2%, declining then by -2.1% in 2023.
  • Anti-obesity drugs boom: A wave of new drugs launched to fight diabetes and obesity are generating a furor among consumers around the world, generating exponential revenue growth for the laboratories behind this discovery, which have already built an oligopoly. With nearly half the world’s population expected to be obese or overweight by 2030, demand for these products will continue to skyrocket, offering a significant boost to revenues in the coming years.
  • Rivalry with generic drug-makers will intensify in 2024 as the number of expiring patents will increase. Patents last 20 years on average, so it is crucial to continue investing in R&D and innovating to get new ones that allow manufacturers of branded drugs to remain relatively protected against generic-drug players. 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.
  • AI incorporation: Artificial intelligence will start to play a key role in laboratories, generating time savings through the automation of clinical trials and faster discovery, development and marketing processes, bringing more efficiencies to the entire production chain of the pharmaceutical industry.
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Having proved its prowess to the world during the challenging pandemic crisis of 2020-2022, business activity in the health industry expanded significantly, with the top 30 pharmaceutical companies in the world consolidating revenues of USD891bn in 2022, a peak never seen before, given the record speed at which laboratories managed to create new Covid-19 vaccines and related treatments. With the health crisis behind us, revenues in 2023 declined by -2.1%, but margins improved a bit, thanks to lower input costs.

For 2024, we expect revenues to jump by around +5% y/y, with increases of +6% and +7% in the US and Europe, respectively, and a slight decline of -2% y/y in APAC. This improvement should be supported by new drugs addressing untreated diseases.

In terms of consumption, the world’s top five importers of pharmaceutical drugs are the US, Germany, Switzerland, Belgium and China. In terms of production, the US and Europe are and will remain the industry leaders by far. For reference, Big Pharma in the US generates around USD450bn of revenues per year, which is 1.3x higher than that of European peers and 4.6x higher than that of Asian peers.

Historically, sales growth in the pharmaceutical sector has always been driven by the oncology and immunology segments, and these two areas have also been the focus of the sector's research & development spending. However, in 2024, one of the areas where sales growth rates will be particularly high is the weight-loss business segment, which includes treatments for diabetes and obesity. As of today, there are four treatments that, on top of being approved by the FDA and the EMA, have no major side effects in patients. However, these successful drugs have been developed and commercialized by few companies, which, by operating under an oligopoly, have managed to gain pricing power. Revenues for these companies are expected to soar by +25% on average this year, after jumping +27% in 2023. Demand will be particularly high in North America, given the large share of the population suffering from obesity. More precisely, 43% of Americans are considered obese (vs an average of 25% for the OECD group). As a result, diabetes and hypertension are the two most common diseases in the country.

The Inflation Reduction Act will have an impact on drugmakers in the US as high drug prices continues to weigh on American households. Per year, a US citizen spends USD1,432 on medicines, which is 2.3x more than the average of OECD nations. Just across the border, Mexico’s per capita spending is 2.2x less than the OECD average. As this situation continues, we expect more political actions to control prices. With the implementation of Biden’s IRA, the sector should prepare to see changes in the way prices are negotiated. For instance, this year for the first time Medicare will be negotiating with pharmaceutical companies the price of 10 expensive and highly used drugs, with new lower prices being applicable from January 2026. Further negotiations will follow in 2025 to cover a full list of 30 drugs, with the potential to save Medicare USD98.5bn over a decade.

For the long-term, the main pillar for the industry to remain relevant is innovation. As of today, there are still hundreds of diseases that cannot be fully prevented or cured, which means there is a lot of room for science exploration and growth potential.  M&As are an efficient and commonly used way to generate greater synergies and boost innovation in this industry, and we expect this strategy to be strongly deployed in the years to come. Oncology will continue to be the focus of R&D as it is still the number one source of income for pharmaceuticals. As of today, there are around 16,000 different cancer-related drugs in the pipeline, of which 43% are in the pre-clinical phase and 18% in the discovery phase. Immunology holds second place, with 5,775 drugs in the pipeline, while diabetes ranks third with 1,400.
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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 recipients). The recipients 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 accessible, 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, referring 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.

Contacts

Maria Latorre
Sector Advisor
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Allianz Research
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