Pharmaceuticals Sector Risk Report

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

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Fragmentation

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Internationalization

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Capital Intensity

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Profitability

Strengths & Weaknesses

  • This is a vast industry with an expansive market, providing a diverse range of products and services on a global scale.
  • The market is characterized by low fragmentation, with the top five companies commanding 30% of the market share, and the top ten accounting for 50%.
  • Entry into this sector is challenging due to high barriers, primarily because it demands substantial investments in research and development, along with a workforce of highly skilled scientists, making it financially burdensome for newcomers.
  • Even with significant R&D expenditures, averaging around 19% of revenues, firms in this sector manage to generate enough operational cash flow to sustain their activities.
  • The global increase in chronic diseases has heightened reliance on medications and health supplements, ensuring a steady demand.
  • Healthcare access is on the rise worldwide, particularly in emerging markets like Latin America and Asia.
  • Companies enjoy pricing power for patented treatments, as generic drug manufacturers cannot duplicate these formulas. This advantage allows branded drug producers to maintain higher profit margins and effectively manage inflationary pressures from rising ingredient costs.
  • The pharmaceutical industry operates under stringent supervision and regulation to guarantee the safety, effectiveness, and quality of medications. This oversight is enforced on both a global scale through international standards and locally by agencies such as the FDA in the United States and the EMA in Europe.
  • The presence of generic and biosimilar drug manufacturers creates relentless competition, as they provide comparable products at more affordable prices. Consequently, companies producing generic drugs face ongoing challenges in enhancing their profit margins.
  • While there have been some improvements in the approval processes for new medications in recent years, these procedures remain intricate and time-consuming, resulting in delays for new products entering the market.
  • The leading companies in this industry are predominantly based in the United States and Europe, which poses significant barriers to access for many individuals in developing regions such as Latin America, Africa, and Asia, making essential medicines less affordable and harder to obtain.

Sector Overview

What to watch ?

  • Aging population: With life expectancy at birth steadily increasing to an average of 73.2 years today—75.6 years for women and 70.8 years for men. Just two decades ago, this figure was only 67.1 years. This shift highlights the importance of addressing the needs of an older population.
  • Growing population: The global population has surged to 8 billion and is expected to reach 8.5 billion by 2030. This rapid growth brings with it a heightened risk of new infections and diseases, posing a continuous challenge for companies dedicated to research and development of innovative drugs and vaccines. To maintain public health and ensure stability, substantial investments in both financial and human resources are essential.
  • Faster approval processes:The annual approvals of new products by the FDA have seen a significant rise, driven by initiatives aimed at expediting and enhancing efficiency in the approval process. Over the last four years (2018-2021), the average number of approvals reached 53 products annually, a notable increase from the 39 approvals seen between 2014-2017 and just 29 from 2010-2013.
  • Pandemic boost to sales is expected to fade in 2023: the surge in sales driven by the pandemic is anticipated to diminish in 2023. While 2021 marked a remarkable year for the industry, with the 15 largest pharmaceutical companies experiencing an average revenue growth of +16.7% year-over-year, a more moderate growth of +7.6% is projected for 2022, followed by a slight decline of -2.0% in 2023. The substantial profits recorded in 2021 and 2022 were primarily fueled by Covid-related products, including vaccines.
  • Rivalry with generic drug-makers will intensify in 2023 as the number of expiring patents will be higher (vs the figures of 2021-2022).Once a generic drug enters the market, it is projected to reduce the revenue of its branded counterpart by approximately 70% to 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.the landscape is becoming increasingly competitive with the rise of specialty drugs or biopharmaceuticals—medications derived from biological sources like microbial cells or plant cultures. These products typically come with higher production costs, leading to elevated prices. However, their ability to effectively treat conditions that were once deemed untreatable has fueled their popularity. Just as branded drugs contend with generic alternatives, biopharmaceuticals are also facing competition from biosimilars, which are nearly identical replicas of the original biopharmaceuticals.

The pharmaceutical industry showcased its remarkable capabilities during the trying times of the Covid-19 pandemic, leading to a significant surge in 2021 that carried over into 2022. This was largely due to the rapid development of new vaccines by laboratories. However, with widespread vaccine availability and the implementation of mandatory vaccination campaigns, the health crisis is nearing its end. Consequently, the sector is now experiencing single-digit sales growth, a stark contrast to the previous double-digit increases. This shift suggests a more stable outlook for the industry, with expectations of reduced earnings growth in the upcoming quarters.

Despite this slowdown, the pharmaceutical sector holds substantial growth potential in the medium to long term, driven by ongoing investments in research and development. This commitment enables laboratories to maintain a robust pipeline of new drugs while also enhancing existing treatments. Oncology remains a primary focus for pharmaceutical companies, representing a significant revenue source, while immunology and metabolic diseases, such as diabetes, are also poised for notable 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.

The largest consumers of pharmaceutical drugs globally include the United States, Germany, Switzerland, Belgium, and China. When it comes to production, the United States and Europe dominate the industry. For example, major American pharmaceutical companies generate approximately USD 360 billion in annual revenue, which is 1.1 times greater than their European counterparts and 4.3 times more than those in Asia.

Innovation serves as a crucial foundation for the sustainability of this industry. There are still numerous diseases that lack effective prevention or cures, presenting significant opportunities for scientific advancement and growth. Given the substantial investments required for research and development, it is likely that the US and Europe will remain at the forefront of this sector, as they host the largest laboratories in the world, both in terms of revenue and the number of patented drugs.

While patents typically expire after about 20 years, the ongoing pursuit of innovation and the acquisition of new patents enable manufacturers of branded drugs to maintain a degree of protection. However, it is important to acknowledge that generic drugs are increasingly entering various markets, especially in regions where governments promote their use, leading to heightened competition.

Drugs manufacturers:
a.    Active Pharmaceutical Ingredients (API): Active Pharmaceutical Ingredients (APIs) are the essential components of any medication that deliver the desired health benefits. These ingredients are derived from raw materials, carefully formulated to achieve specific strengths and chemical concentrations. Common examples of APIs include ibuprofen, loratadine, omeprazole, and acetaminophen. Every medication consists of two primary elements: APIs and excipients. Excipients are inactive substances, like lactose or mineral oil, included in the formulation to ensure the drug’s stability and regulate its absorption in the body.
b.    Patented drugs (also known as branded or original drugs): Original drugs are those that have successfully passed through extensive testing and rigorous clinical trials, which include four phases before entering post-market monitoring. This entire process typically spans around 15 years and requires substantial financial investment, often amounting to millions of dollars. Only large multinational pharmaceutical companies have the resources to develop these original drugs, which enjoy a patent protection period of 20 years. However, once this patent expires, other manufacturers are permitted to produce generic versions of the drug.
c.    Generic drugs: are non-branded medications that closely resemble their branded counterparts in terms of dosage, administration, safety, and efficacy. They are generally more affordable, making them more accessible to consumers, as their manufacturers do not incur the costs associated with developing a new formula but instead replicate an existing one.
d.    Biotechnology: represents the intersection of biology and technology, focusing on the application of living organisms and molecular biology to create healthcare-related products. Currently, about 17% of total drug revenue comes from biopharmaceuticals, which are primarily utilized in treating oncology, metabolic disorders, and infectious diseases. The term biopharma refers to companies that integrate both biotechnology and chemical processes in their research and development efforts.

Contract Research and Manufacturing Services (CRAMS):encompass a range of services within the pharmaceutical and biotechnology sectors that require significant research and development as well as large-scale manufacturing capabilities. This term is commonly used to describe outsourcing in the industry and represents one of the fastest-growing segments in the market today.

Drug marketing: involves the promotion of pharmaceuticals and medical devices by both private and public organizations to healthcare professionals and consumers. Effective marketing strategies are essential for the successful sale of drugs and treatments, as they must be tailored to meet the needs of various stakeholders.