The pharmaceuticals industry is one of the richest industries in the world, expanding at a rate of $300 billion (£186 billion) a year and anticipated to be worth over $1 trillion by 2014, according to IMS Health. However, it's also sailing into some serious headwinds that are slowing growth and hitting pharmaceutical companies where it hurts the most - profit margins.
The challenges the pharmaceutical industry faces make this industry an exciting one to follow, as it's being forced through a period of reinvention and the future health of the world depends on it. Here we give you a glimpse of the current big issues in the pharmaceuticals industry and how the worlds of finance, economics and commercial law will play a part in shaping its future.
Right here, right now
In 2012, the top three pharmaceutical companies in the world lost sales. As austerity bites in developed markets, rising healthcare costs are leading to cuts in healthcare spending on a national as well as individual level.
However, despite the age of the pharmaceuticals in industry, this has never before impacted sales in such a significant way. That's because many of the leading drugmakers (known collectively as Big Pharma) found they could rely on a significant proportion of their sales and revenue from blockbuster drugs. These unique, patent-protected medicines generate their respective drug companies well over $1 billion a year.
But now Big Pharma has had the carpet pulled out from under its feet. The patents on the majority of their blockbuster drugs are due to simultaneously expire in what has been dubbed the "patents cliff". This freefall of patent expirations of the world's most profitable drugs is the result of a drug patents boom in the 70s and 80s. And as patents only last up to twenty years, the resulting fallout of this near-simultaneous expiry is expected to cost the pharmaceutical industry $120 billion between 2010 and 2015.
Without the protection that these patents provide, Big Pharma is not only exposed financially, but also in terms of competition from smaller businesses, who can now make the same drug for a lower price - commonly known as a generic medicine.
Viagra's got some stiff competition
A well-known example of this is Viagra, one of Pfizer's most profitable drugs, the patent of which expired in June 2013. The little blue pill threatens to create a whopping $2 billion revenue gap in Pfizer's balance sheet, as rival drug companies have the opportunity to steal sales and market share from the pharmaceuticals giant by selling generic versions of Viagra under the name of its active ingredient, sildenafil.
There's speculation that these companies will sell their own versions of Viagra for 10 times less than its current price, perhaps for even as little as 85p. While this is good news for hard-up governments and individuals, it's bad news for Pfizer, which will have to consider the side effects of a once profitable segment of its business.
Regulation and scandal
The drug patent cliff is not the only thing that's bothering Big Pharma. As growth stagnates in traditional pharmaceutical markets, focus is shifting abroad to the BRICs and other pharmerging markets in the hope of digging up some profit. Drug sales in emerging markets are expected to grow by as much as $165 billion between 2012 and 2016.
However, it's not all gone as many of these companies had expected, and some are dealing with increasingly savvy governments who are no longer as easily willing to cooperate.
The Chinese government recently accused GSK, the UK's biggest drugmaker, of bribery and corruption. This has had a profound impact on the company's sales in China - a staggering 61 per cent drop since the scandal broke. This is just one example of how far governments in emerging markets are prepared to go in order to protect their own pharmaceutical industries.
There's also been some speculation that the China bribery scandal is a way of getting Big Pharma to reduce the costs of the drugs they sell to China, which relies heavily on pharmaceutical supplies from abroad. In 2011, it imported £6.5 billion worth of medicines.
Meanwhile, increasingly tough requirements from regulatory boards in developed pharmaceutical markets are slowing down, and in some cases preventing, the roll out of new products and hindering sales growth.
The future of Big Pharma
One of the main challenges Big Pharma faces is how to sustain revenue and boost profit when they can no longer fall back on their patented drug sales. The industry faces a challenging task to reinvent its strategy to deliver shareholder value and appease regulators.
However, it also means it's an exciting time to work in the pharmaceutical industry - or be involved in some way as a banker, lawyer, accountant or consultant.
In tough times, companies like to disguise any negative outlook by saying that they're focusing on their "core portfolio" or "core operations" and, right now, the future of Big Pharma is to downsize and re-focus on drug development.
The healthcare industry is under pressure to deliver results both in terms of healthcare solutions and profit. Yet Big Pharma spends more than any other industry on research and development (between 12-16 per cent of revenues), but it does not always lead to increased output of medications.
As a result, drugmakers are looking to segment or even offload parts of their businesses they no longer see as necessary, employing investment banks to assist them with the task of selling assets to buyers. For example, GSK recently sold its drinks brands Ribena and Lucozade to Japanese whisky and soft drinks company Suntory for £1.35 billion in order to focus on its core business - pharmaceuticals.
In addition to divesting parts of their businesses, Big Pharma is hunting for tie-ups to strengthen their market position. According to Dealogic, M&A activity is up by 15 per cent so far this year, although it's nowhere near post-financial crisis levels.
In particular, drugmakers are looking for future profitable areas of medicine. In part, consultancies will be advising on the emerging therapeutic areas, and, according to the latest predictions, future brand growth will be driven by drugs that treat cancer, diabetes, autoimmune disease and asthma. Anglo-Swedish company AstraZeneca recently acquired Siprogen, a cancer drug developer, for around £200 million in the hope of bolstering its presence in this growing category.
Big Pharma is not only facing challenges in terms of business structure. If the China bribery scandal is anything to go by, the industry is likely to face increased legal expenditure as disputes with governments, rivals and individuals increase in number.
Legal battles are breaking out between drugmakers over the sale of generic versions of blockbuster drugs. Pfizer recently received a $2.15 billion settlement from Teva Pharmaceuticals and Sun Pharmaceuticals after they launched a generic version of Pfizer's acid reflux drug before its patent expired. Conversely, Big Pharma is using the letter of the law to delay or prevent the sale of generic drugs even after patents have expired.
On the less contentious side of things, drugmakers are drawing up licensing agreements between themselves and generic manufacturers. The aim of these is to retain some profit for the Big Pharma companies, while allowing generic manufacturers to market their drug without dispute.
Where to find out more
- Keep up to date with the latest news and market movements by reading the Financial Times'sHealthcare industry section or watching Bloomberg TV**.
- If you want more in-depth analysis and sharper focused industry news, try reading some online reports from IMS Health.
- A company's annual reports are a great way of getting company information straight from the horse's mouth and they are often a great way of helping you form your own insights about a company and its industry.