Five-minute focus: the pharmaceuticals industry

Find out about this sector with Will Hodge's quick picture

The pharmaceuticals sector is an exciting and fast growing industry, forecast to be worth £800 billion worldwide by 2020, doubling its 2007 value. The sector is also one of the most active in terms of mergers and acquisitions (M&A) activity as major players jostle to take advantage of new developments and geographical opportunities. One of the most exciting developments is the growth of new markets, particularly the highly-populated countries of India and China. Meanwhile, new growth areas such as genomics and biotechnology are driving significant investment in research and development.

Key companies

Pfizer (US)

P/E ratio: 20.7

Pfizer is the world's largest pharmaceutical firm in terms of annual sales revenues. The company produces a range of medicinal products, including Viagra, and recorded sales of £42 billion in 2011.

Novartis (Switzerland)

P/E ratio: 16.7

Novartis is the world's second largest drug manufacturer in terms of revenue, having reported £37 billion in sales in 2011. The company is one of the largest manufacturers of generic drugs.

Sanofi (France)

P/E ratio: 13.4

Sanofi is one of the largest pharmaceutical companies in Europe, having expanded its empire through a 2004 merger with rival Aventis.

GlaxoSmithKline (UK)

P/E ratio: 13.8

GSK is a major producer of prescription and over the counter medication. Its best-known products include Sensodyne, Horlicks, and Gaviscon. The company is the fifth largest company on the London Stock Exchange, by market capitalisation.

AstraZeneca (UK/Sweden)

P/E ratio: 7.4

Major pharmaceutical company AstraZeneca was founded in 1999 through the merger of the Sweden-based Astra AB and the UK-based Zeneca Group.

Hoffmann-La Roche (Switzerland)

P/E ratio: 17.6

Basel-based Hoffmann-La Roche is a major player in the pharmaceutical and diagnostics field. The company reported sales of £28 billion in 2011.

Johnson & Johnson (US)

P/E ratio: 21.5

Johnson & Johnson is an international pharmaceutical firm, managing 250 subsidiary companies in over 57 countries. The company's best-known brands include Band-Aid bandages, Johnson's baby products and Neutrogena skin and beauty products.

Merck & Co (US)

P/E ratio: 19.7

Merck is one of the largest manufacturer of pharmaceuticals in the US and underwent a significant expansion in 2009 following a merger with rival firm Schering-Plough in a £26 billion deal. The company reported £30 billion in sales in 2011.

Key issues

Emerging markets

Pharmaceutical companies are noticing rapid growth in demand from emerging markets as income levels in these countries rise, leading to greater expenditure on healthcare. The Indian drug market alone is forecast to be worth around £13 billion by 2015. This changing dynamic is causing drug companies to shift their focus away from the traditional markets of Europe and North America towards Asia and other developing regions and several major players are expanding aggressively here, particularly Sanofi, Pfizer, GSK and Merck. Doing so requires companies to develop products aimed at treating the illnesses and conditions specific to these regions. For example, Both GSK and Novartis are reported to be investing heavily in the development of asthma drugs, due to the prevalence of respiratory conditions in China.

The personal touch

Among the biggest developments taking place in pharmacology is the move towards personalised medical care with personalised medicine and therapies demonstrating increased effectiveness in the treatment of many diseases and conditions, including cancer. As such, some pharmaceutical manufacturers are moving away from typical clinical trials aimed at producing medication for the mass market, and are targeting specific patient groups. This development requires companies to undertake more specialised marketing and to take a greater role in diagnostic procedures.

Ageing populations

Increases in life expectancy, coupled with much of the baby boomer generation reaching retirement age, is leading to a rise in chronic health conditions associated with old-age, including diabetes, hypertension, arthritis and dementia, as well as various forms of cancer. There are forecast be more than 100 million citizens over the age of 50 in the US alone by the end of 2012, with over 65s comprising the largest segment of the population for the first time. Pharmaceutical companies are investing heavily in this rapidly growing market by researching new treatments and products to combat old age. Pfizer, one of the largest multinational drug manufacturers, has launched Get Old - an online social media platform for individuals to discuss topics related to ageing.

Generic pharmaceuticals

Another area of the pharmaceutical industry that has been expanding has been the generic pharmaceutical industry. Generic drug making refers to the production of a pharmaceutical product once the original patent for the drug (which limits its manufacturing and retailing to the original developer) has expired. Companies which choose to manufacture drugs originally developed by another company gain the benefit of not having to undertake clinical trials for their products, saving considerable expenditure in the process. Not having to conduct clinical trials has substantially reduced the cost of bringing a product to market (the total cost of which is estimated at over £1 billion), creating the potential for significantly greater profit margins.

Key recent deals

*Sanofi acquires Genzyme (***February 2011)

French pharmaceutical giant Sanofi acquires US biotech firm Genzyme in a deal worth more than £12.7 billion.

*Johnson & Johnson - & Synthes (***April 2011)

Johnson & Johnson merges with Swiss-owned medical devices firm Synthes to create the world's largest manufacturer of orthopaedics.

*Takeda enters eastern Europe (***May 2011)

Japan-based Takeda buys Russia's Nycomed for £8.7bn, providing Takeda access to the eastern European market.

*Watson up to third place (***April 2012)

US-based Watson Pharmaceuticals agrees to buy Actavis Group for £4.6 billion, making the company the world's third-biggest generic drugmaker.

*Par Pharma buyout (***July 2012)

Investment firm TPG Capital purchases US-based Par Pharma for £1.2 billion.

*GSK takes over Human Genome Sciences (***August 2012)

GSK completed the takeover of biopharmaceuticals manufacturer Human Genome Sciences in a £1.9 billion deal.