It looks like 2009 will be a year of  increased uncertainty for the global pharmaceutical market. Fundamentals in the  US  pharmaceutical market are weak as growth is expected to reach recent historic lows during 2008 and  2009. Growth in the US  pharmaceutical market is affected by overall economic conditions and the increased  penetration of specialty and generic drugs. The outlook for emerging countries is more robust as double-digit growth is projected. 


 The global pharmaceutical market is expected  to grow 4.5–5.5% in 2009, a pace similar to that of 2008, according to a recent  analysis by IMS Health. Global pharmaceutical sales are expected to exceed $820  billion in 2009, reflecting sustained double-digit growth in key emerging  countries, but tempered by a slower pace in more established markets such as the United States. US pharmaceutical growth is expected to be only between 1 and 2% for both 2008 and 2009.

“In many respects, 2009 will reflect the new  shape of the global pharmaceutical market, the result of market factors that  have gained momentum over the past several years,” said Murray Aitken, senior  vice-president of Healthcare Insight at IMS, in a company press release. “Pharmaceutical  growth next year will hold steady at 2008 levels. The market will continue to  contend with a number of forces-among them the shift in growth from developed  countries to emerging ones, specialist-driven products playing a larger role,  blockbuster drugs losing patent protection, and the rising influence of  regulators and payers on healthcare decisions. Layered on top is the  uncertainty in the global economic environment and its effect on demand.”

IMS identifies the following as key market dynamics that will shape the pharmaceutical market in 2009: slowing growth in mature markets, rapid  expansion of emerging markets, growth in specialty products and generics, fewer  product approvals, uncertain macroeconomic conditions, and evolving healthcare  policy. 


 In 2008, the US  pharmaceutical market, the world’s largest, is projected to grow only 1–2% to  $287–297 billion, down from the 2–3% rate expected earlier this year. Contributing to the slower growth is  less-than-expected demand for recently introduced products as well as the  economic climate, which appears to be having an impact on doctor visits and  pharmaceutical sales, according to the IMS analysis. In 2009, the expected 1–2%  growth rate in the US  will result in sales of $292–302 billion and reflects the impact of  continuing patent expirations, fewer new product launches, and a tighter  economy.

The pharmaceutical market in the top five European Union countries (France, Germany,  Italy, Spain, and the United Kingdom) are projected to  grow 3–4% in 2009, reaching sales of $162–172 billion. In Europe,  growth driven by the aging of the region’s population and rising  demand for preventive care will be softened by the increased impact of health-technology assessments, the use of contracting by payers as a means to control  costs, and the decentralization of government healthcare budgets, according to  IMS.

Japan, the world’s second-largest pharmaceutical market,  is expected to see growth of 4–5% and reach $84-88 billion. Approvals  of new anticancer agents, disease-prevention programs, and the absence of the Japanese  government’s biennial price cuts all will contribute to stronger growth, notes  IMS. Government efforts to promote the use of generics will have only a modest  impact on the Japanese  market in 2009.


IMS projects that pharmaceutical  markets in China, Brazil, India,  South Korea, Mexico, Turkey, and Russia  are projected to grow at a combined 14–15% pace to $105–115 billion. These  markets are benefiting from the pharmaceutical industry’s increased focus on  these markets as a whole,  from greater government spending on healthcare, and from broader  public and private healthcare funding, according to IMS.


 Sales of products mainly prescribed by specialists are projected to grow  8–9% in 2009 and are expected to contribute 67% of total market growth. Sales  of biologics are forecast to grow 11–12%, according to IMS. Sales of  oncology products are expected to grow 15–16%, and HIV therapies 13–14%. In contrast, sales of products generally  prescribed by primary-care physicians are expected to grow only 2–3% because of  the loss of patent exclusivity for several blockbusters and fewer significant  product launches.


New product approvals remain at  historically low levels, with only 25 to 30 new chemical entities slated for  launch in 2009, estimates IMS. “In addition, many of these are  specialist-driven and niche products with relatively limited market potential.  Expected launches for 2009 include four or five potential blockbusters for  treating acute coronary syndrome, diabetes, rheumatoid arthritis, and meningitis,”  says IMS. 

 
Economic conditions will play a role in worldwide growth for the pharmaceutical  market in 2009. In the US,  the correlation between economic factors and pharmaceutical growth is stronger  in the current slowdown than in previous downturns, given the continued shift  of drug-related costs to patients, says IMS. IMS estimates that in 2009, the  downturn will effectively reduce growth in the US by 2–3 percentage points. Other  markets with large out-of-pocket spending requirements, including Brazil, India,  and Russia,  also are likely to be affected by economic changes.


 An additional $24 billion of branded products, including  anti-epileptics, proton-pump inhibitors, and antivirals, will lose their market  exclusivity in the top eight markets in 2009, according to IMS Health. This loss of patent protection will contribute to generics sales of more than $68 billion  in 2009, and a 5–7% growth rate, which is similar to the rates in 2008 but  lower than the levels experienced in 2006 and 2007. The decline is being driven  by growth slowdowns in the US  and UK,  where competition among generic-drug manufacturers is strong. 


In 2009, growth across the leading European markets will be affected by payer actions, which include increased rebating and contracting in Germany, expansion of regional  formularies in Italy, a 5% decrease in branded prices in the UK, a 10% price reduction on several brands in France, and the expansion of the  reference pricing system in Spain, according to IMS.Meanwhile, the impact of health-technology assessors  will be seen in Germany  by reimbursement limitations for new drugs not determined to be cost effective.  In the UK, the pharmaceutical market may be affected by any policy change that allows  patients to buy additional treatments not offered by the National Health  Service, according to IMS.

Other issues identified by IMS as potentially having an effect on growth  prospects for 2009 are healthcare policy changes in the US with the change of administration, the deregulation  strategies of the pharmacy sector in Europe, and the rise of biosimilars,  particularly in Europe. 
  

Articles

Global Feature

Near-stagnant growth for the US pharmaceutical market, the rising influence of emerging markets and specialty products, and increased penetration of generic drugs are major issues for the global pharmaceutical market.

Global Pharmaceutical Growth Tempered by Lagging US Market

Executives at major pharmaceutical companies are in the midst of an extended effort to drastically reduce costs in the face of dramatic revenue losses. Staff reductions and facility closings have grabbed the headlines, with sales forces and obsolete manufacturing operations taking the brunt of restructuring initiatives. Only the effort to rebuild new product pipelines through in-licensing and acquisitions has garnered so much industry attention in recent years. 

A major element of cost-reduction strategies has been increased sourcing from Asian countries, especially India and China. The appeal, of course, has been the perception that those countries offer abundant scientific talent and investment capital at much lower prices than equivalent human resources in North America and Western Europe. The major beneficiaries thus far have been contract research organizatons (CROs) providing labor-intensive drug discovery services and chemical manufacturers producing low-value intermediates and generic active pharmaceutical ingredients (APIs). Increasingly, however, higher-value activities are migrating offshore, especially in the areas of clinical research, data management, and custom chemical manufacturing. 

There are strong indications, however, that the terms of trade are becoming less favorable for the emerging Asian economies. Resource prices are rising rapidly across a number of fronts. 

 Overall labor rate inflation is hovering around 10% annually in India and China, and rates in the pharmaceutical sector appear to be growing even more rapidly. In India, while equipment operator wages remain less than 50% of equivalent labor rates in developed economies, salaries for degreed pharmaceutical professionals in such areas as quality assurance and analytical chemistry reportedly are now equal to those paid in the United States. In China, the heavy dependence on scientists returning from the US and Europe is raising the price of senior scientific knowhow. Further, the 

 recently reported that the Chinese government is pressuring major employers to allow employees to join the state-approved labor union, which is pushing for better salaries, benefits, and working conditions. 

 The avoidance of environmental standards and regulations, which can help lower costs, has long been a dirty secret of outsourcing to India and China. However, the Chinese government appears to be cracking down on major water and air polluters. Word throughout industry is that many companies forced to shut down for the Beijing Olympics may not be allowed to reopen. Chemical firms' pollution mitigation efforts are raising costs, and the reduced number of vendors may be raising prices. 

  Rising energy costs and constraints on shipping infrastructure are driving up shipping costs dramatically. According to a report from CIBC World Markets, cited by McKinsey & Company in an August report on the global supply chain, shipping costs from Asia have nearly quadrupled. Where shipping costs from China once added 3% to the cost of a product ex-factory, they now add 11%, according to CIBC.  

 Naturally, the concerns over product quality from China in the past year have increased the amount of supply-chain due diligence by pharmaceutical companies. Companies are realizing they must audit not only their immediate source of supply, but also the companies farther back in the supply chain that are providing the raw materials to their suppliers. Additional audits are raising the cost of sourcing from emerging markets, especially for companies that don't have sourcing infrastructure established in those regions. 

The net result of these changing resource price dynamics is that the resource-price advantage of outsourcing to emerging markets (at least to India and China) is eroding rapidly. Major pharmaceutical companies will continue to seek offshore sourcing opportunities, partly because they are committed to emerging markets for top-line growth, and partly because they are slow to realize that emerging markets no longer provide automatic cost savings. But as Lonza's CEO noted in his 2008 mid-year financial review, the "club" of offshore sourcing that major pharmaceutical companies have used to get better pricing from suppliers is much "softer" than it was a year ago. 

If the "low-hanging fruit" of plant closings, sales-force reductions, and Asia sourcing have been harvested, where can pharmaceutical companies turn to reduce costs? Pharmaceutical executives will do well to remember that costs are driven by two factors: the amount of resources being used and the price of those resources. In other words: 

Plant closings and sales-force reductions have been obvious opportunities to reduce the 

, but future cuts will start getting closer to the bone. Companies will have to take a closer look at their research and development operations, despite their critical role in revitalizing pipelines. These new efforts are widening the view to see what is being done and who is doing it. One consequence, undoubtedly, will be a continued growth in the volume of activity being outsourced to both CROs and contract manufacturing organizatons (CMOs).  

Industry is starting to see some examples of extreme outsourcing initiatives such as Eli Lilly (Indianapolis) outsourcing most of its animal toxicology to Covance (Princeton), and Novartis (Basel, Switzerland) outsourcing its biologics development to Lonza (Basel). Because of their business models, CROs and CMOs have an incentive to manage the quantity of resources used to earn profits. These organizatons are more effective than pharmaceutical companies at managing the 

 side of the cost equation, and have been early adopters of resource-saving innovations such as electronic data capture. 

A more profound change will come, however, as major pharmaceutical companies rethink their entire drug development model, especially with regard to the amount of work they undertake during each stage of drug development. A prime example of this model change is industry's focus on achieving proof-of-concept before investing substantial resources in a new drug candidate.  

However, achieving significant cost savings will require a major rethink of the early development model in particular. In an eye-opening article in the March 2008 

, the founders of Lilly's Chorus virtual drug-development initiative argue that getting to proof-of-concept involves asking a very different set of questions from those asked when moving a drug to commercialization. As they note, early development is about "seeking truth" not about "seeking success" and should be conducted through a series of short, targeted experiments aimed at discovering the "intrinsic attributes" of the candidate. The authors claim this approach has helped reduce early-development times by half and early-development costs by two-thirds.  

Heavy-handed tactics have enabled major pharmaceutical companies to achieve a first tranche of cost reductions. But deeper cuts are needed, and the next round will require much more innovative thinking to determine how to drive down the amount of resources used in drug development.  

  is president of PharmSource Information Services, Inc., and publisher of 

Outsourcing

As offshore savings decline, pharmaceutical companies still have a lot of work to do to reduce costs.

Minding Your P's and Q's

Financing for the US  biotechnology industry is expected to reach only $10 billion (excluding  partnering deals) in 2008, which would represent the lowest amount raised by  the industry since 1998. Through the first three quarters of 2008, nearly all  forms of public and private financing are down from annualized levels in 2007  and 2006, with initial public offerings (IPOs) taking a particularly hard  hit.  

“In terms of biotech IPOs, 2008 is shaping up to be one of biotech’s  worst in history with only one completed to date,”said G. Steven Burrill, CEO  of Burrill & Company, a private merchant bank, in an Oct.1, 2008 press  release. “Except for venture-capital deals, which have remained at steady state  for the past three quarters, generating about $1 billion each quarter, all  other forms of financing have fallen compared to the first quarter of 2008 and  comparative 2007 figures.”

Collectively, financing for US biotech public and private firms was $2.5 billion in the third quarter, bringing the year-to-date total to almost $8.2 billion,  according to Burrill & Company. “The industry is on pace to generate about  $10 billion in the year. You have to go back to 1998 to find a smaller amount  that was raised by the industry,” said Burrill.

A look at the numbers shows the difficult time US biotech companies are having  this year in raising money. US biotech companies raised only $6 million in IPOs  through the third quarter of 2008, which includes no IPOs in the second and  third quarters and only $6 million in the first quarter of 2008. These levels  are well below financing through IPOs in 2007, when $2.04 billion was raised,  and in 2006, when $920 million was raised, according to Burrill & Company. 

Other forms of public financing in 2008 are down from 2007 and 2006  levels. Follow-on offerings accounted for nearly $1.71 billion through the  third quarter of 2008 for US biotech companies. For the full-year 2007,  follow-on offerings tallied $6.31 billion, and in 2006, they were $5.77 billion. Funds raised from private investment in public equity was $881 million through  the first nine months of 2008 compared with $1.62 billion for the full-year  2007 and $2.02 billion in the full-year 2006, according to Burrill & Company. Roughly $2.39 billion was raised 

 debt by US biotech companies through the first three quarters of 2008, compared with $6.75 billion for the full-year  2007 and nearly $14.0 billion in 2006.

Private financing in the form of venture capital has been the one bright spot in the US biotech industry. Through the  first nine months of 2008, roughly $2.93 billion was raised through venture  capital, which was a reasonable pace compared with venture capital of $4.43  billion raised in 2007 and $4.24 billion in 2006.
 

 The value of partnering deals is also low in 2008. Through the first  nine months of 2008, financing from partnering deals in the US biotech industry was $10.19 billion, which is well off the pace set for the full-year 2007,when  $22.37 billion was raised, and the full-year 2006, when $19.80 billion was raised. 

Although they declined by almost $1 billion in the third quarter of 2008 compared  with the second quarter of 2008, partnering deals generated more than $2.9  billion for US biotechnology companies. Notable deals in the third quarter  included a partnership worth up to $820-million between GlaxoSmithKline (London) and Valeant Pharmaceuticals (Aliso Viejo, CA)  for the investigational drug  retigabine, a  neuronal potassium channel opener for treating  epilepsy.  Pfizer (New York) signed a deal worth potentially $725 million with Medivation (San Francisco) to develop and commercialize “Dimebon” (dimebolin), Medivation's investigational drug for treating Alzheimer's disease and Huntington's disease. 

The troubling financial times for US biotech companies is evident in potential cash flow problems. In the US, 38% of 370 small biotech  companies are operating with less than a year's worth of cash, and nearly 100  publicly traded biotech companies have less than six months' cash, according to  a recent article in the 

The financial strength of the  biotechnology industry is critical for contract manufacturers that supply the  industry, particularly those that supply smaller companies. Stefan Borgas, CEO of  Lonza (Basel, Switzerland), one of the largest  contract manufacturers of biologics and small molecules, noted in the company’s  third-quarter earnings release dated Oct. 27. 2008, that its biopharmaceutical- services business was negatively affected by several project delays and cancellations  in the early phases because of a slowdown in funding for smaller biotechnology  companies. 

1. J. Whalen and R. Winslow, “Cash-Poor  Biotech Firms Cut Research, Seek Aid,” 

Biotech

Uncertain economic times crimp the financing flow into the US biotechnology industry.

PTSM: Pharmaceutical Technology Sourcing and Management-11-05-2008

Global Pharmaceutical Growth Tempered by Lagging US Market

Minding Your P's and Q's

US Biotech Financing Expected to Reach Decade Low in 2008