M&As And Specialty Products Give Hope To Global Pharmaceutical Outlook

By Ed Miseta, Chief Editor, Clinical Leader

All is not rosy in the pharmaceutical world, as lingering effects of the patent cliff and negative rating activity cast a bit of a shadow on companies. But increased M&A activity and the growth of specialty pharmaceuticals will give some companies in the pharmaceutical space something to be hopeful about. This according to a new report from Standard and Poor’s on the outlook for the global pharmaceutical industry.

Despite the lingering effects of the last recession, the S&P Industry Report Card projects the U.S. pharmaceutical market will grow somewhat independent of overall global GDP, posting gains of between 4% and 5% in 2014 and 2015, due primarily to ongoing pricing power in the U.S, strong growth in the specialty drug segment, an aging population more prone to using prescription drugs, and increasing disposable income and medical coverage in emerging markets. These gains would be double the global GDP growth rate.

The global market is expected to grow from $718 billion in 2013 to $1 trillion by 2020, although the European market is expected to generate only minimal growth or a modest decline due primarily to stringent pricing practices put in place to try and contain health care costs. An aging population and increasing incidence of cancer and diabetes is expected to somewhat offset these austerity measures put in place by government. The Japanese pharma market is expected to grow by 2% to 3%, while emerging markets are predicted to grow faster than any other region, comprising nearly 25% of the global pharma market by 2020. This growth is again a reflection of increasing disposable income, but also increasing penetration of medical coverage and higher incidence of cancer and diabetes.

Special Pharma Is Fastest Growing

The special pharma market is expected to experience healthy growth by the end of 2015, advancing nearly 16% in the U.S. alone. This is due to a growing patient population in the oncology and hepatitis C therapeutic areas, but also the ability of those drugs to command higher prices due to innovation and efficacy (cure rates and extension of lives). Limited competition in this area and the difficulty of getting approval for generic versions of these medicines will further serve to support growth.

As an example in the area of Hep C, the report notes Gilead's Sovaldi as an example. The treatment, which sells for $84,000, is innovative, boasting a high cure rate in 12 weeks. Even at that price the treatment is more cost effective than hospitalizations or liver transplants made necessary by the disease. Newer Hep C treatments from Gilead and AbbVie may be launched by the end of 2014.

In the oncology space, PD-1 inhibitors which use the body's immune system to fight tumors are also entering the market at a high price point. These inhibitors will treat difficult cancers such a melanoma by shrinking the tumors.  

Mergers And Acquisitions Impact Market

M&A activity will continue to impact the pharma market as companies seek targets to boost growth. In 2014 this activity increased substantially, hitting levels not seen in 5 years. By the midway point of the year, $87 billion in acquisitions were on the books, more than that recorded in all of 2013. Much of this activity was due to U.S companies acquiring overseas firms, providing access to overseas cash and savings via the process known as tax inversion (something the U.S government is hoping to bring to an end). This was certainly the case with the proposed mergers of AbbVie and Shire, Mylan and Abbott, and Pfizer's failed bid to acquire AstraZeneca. 

Standard and Poor’s believes the resurgence in M&A activity is primarily the result of three factors:

• Companies efforts to boost low organic growth rates to offset patent expirations
• A growing effort to focus on specialty pharmaceutical assets to replace or offset crowded therapeutic classes, and
• The prospect of tax savings and increased access to cash trapped overseas via a tax inversion.

Despite these bright spots, the report’s overall rating outlook for the pharmaceutical industry is negative. According to the report, “The nonstable outlooks on the pharmaceutical companies we rate are predominantly (almost two-thirds) negative, and primarily driven by the high level of leveraging M&A activity in the U.S. during 2014.” In all other corporate sectors, the ratings were more balanced between positive and negative outlooks. The report did note that in the global pharmaceutical sector, few negative outlooks or downgrades were the result of company-specific operating issues. They were also not related to broader pharmaceutical industry trends, which continue to be favorable. It is also important to note that many mergers and acquisitions will be beneficial to firms in the long run, but with this activity they do take on increased debt loads that may take time to pay down.

For more information on the report click here.