G20 economic stimulus packages offer little direct aid to branded pharmaceutical players

Historically, pharmaceutical companies have faced a number of major challenges, both internally and externally, which have shaped the industry as it exists today. Ongoing issues include the declining efficiency of internal R&D processes, together with growing competition from both branded and generic players in increasingly crowded markets, ultimately resulting in fierce price competition. Heightened regulatory pressures mean that companies are more restricted in their promotion of products to patients and physicians, while payer decisions are even more critical to whether a drug is prescribed.

However, these issues are not new; the industry has long been aware of these potential problems and has already implemented strategies to evolve from its traditional industry model towards Pharma 2.0, a leaner, globalized entity which achieves increased scale 'virtually' rather than through accretion. Pharma 2.0 is focused on targeting high-growth markets through collaborative alliances, the use of 'smart' sales and marketing strategies, and product pricing that will make cost-effectiveness the central tenet.

In the last 12 months the industry has begun to face additional, unprecedented political and economic challenges. Many leading economies are now entering potentially deep and long recessions, and this new economic reality, combined with President Obama's overhaul of US healthcare, has increased the pharmaceutical industry's vulnerability just as it embarks on its first steps towards Pharma 2.0.

The G20 pledge

On April 2, 2009, leaders from 19 of the world's largest national economies, plus the European Union, met in London to discuss how to resolve the global economic downturn. The delegation pledged to:

• repair the financial system to restore lending;
• strengthen financial regulation to rebuild trust;
• fund and reform international financial institutions to overcome this crisis and prevent future ones;
• promote global trade and investment while rejecting protectionism, to underpin prosperity;
• build an inclusive, green and sustainable recovery.

Although these initiatives will have a positive effect on the pharmaceutical industry, it will take time.

Government stimulus packages

While the G20 meeting offered little direct encouragement for pharmaceutical and biotechnology players, in February 2009, President Obama set out his US economic stimulus package, which contained a number of provisions designed to boost the healthcare system. These include an allocation of $40.8 billion towards health insurance for the growing unemployed population and an extra $89.7 billion as a temporary increase in federal medical assistance. The reforms also include an expansion of the State Children's Health Insurance Program and the more ambitious goal of achieving universal health coverage, which will have a net positive effect on the nation's healthcare (Yourish, 2009).

Similarly, part of the $100 billion Japanese economic stimulus package, laid out by finance minister Kaoru Yosano in April 2009, included support for nursing and medical services (Seager, 2009). As a result of the European Union leaders meeting in March 2009, Bulgaria stated that it has increased its capital expenditure by $4 billion for 2009, part of which will be directed towards healthcare-related projects (Reuters, 2009).

Despite a much needed injection of healthcare funding, the overall picture still looks far from rosy for the pharmaceutical industry. Prior to the economic downturn, the industry's projected revenues for 2007-13 were already forecast to grow by only 2.0% annually, compared to 8.2% between 2001 to 2007. This deceleration was attributed to the 2011 patent cliff, as well as missed launch opportunities (Datamonitor, PharmaVitae Company Comparator Tool, IMHC0080, January 2009). The industry now faces additional economic pressures, both directly and indirectly, as a result of the global economic downturn.

Future growth in the emerging markets impacted

The global economic downturn has not only affected rich nations, but is also crippling the economies of emerging markets. In 2008, China, India, Brazil, Mexico, South Korea, Turkey and Russia were set to grow by 14-15% from 2008, compared with total pharmaceutical market growth through this period of only 4.5-5.5% (IMS, 2008).

This was the potential silver lining for the industry, which was to offset the approaching 'patent cliff' of 2011. However, now even this growth opportunity is no longer a certainty, at least in the short term, with healthcare funds unlikely to support the buoyant double digit growth previously predicted. Consequently, Datamonitor now expects the average annual sales growth of the top 20 pharmaceutical companies to fall below 2% over the next five years.

Enduring the recession

The pharmaceutical industry has already implemented a swathe of cost-cutting strategies, while as a result of the biotech funding crisis, many smaller companies face potential bankruptcy as traditional sources of funding (debt markets, public offerings, private placements and convertible bonds) are still largely closed for cash-burning firms. The industry will also struggle to justify the cost of expensive prescription drugs over the next few years, with greater pressure from payers to produce more robust pharmacoeconomic data.

Furthermore, due to the worsening economic conditions in the US, uninsured patients are now even less able to cover the costs of their healthcare. With the growing size of the uninsured population, patients are increasingly switching from branded to generic drugs where available, in addition to making other personal cost-cutting healthcare choices. All of these trends ultimately impact on pharmaceutical sales.

However, if the initiatives set out in the G20 summit reduce the severity and length of the recession, unemployment rates should be reduced. Particularly in the US, individuals will potentially regain their private health insurance status, eventually restoring pharmaceutical sales growth in the US to a level prior to the recession. Additionally, restoring the flow of working capital among financial institutions will have a significant impact on biotech and smaller pharmaceutical companies, which are currently facing a funding crisis. In fact, while this part of the industry will benefit from greater amounts of cheaper debt, it will reduce Big Pharma's 'window of opportunity' with which to acquire these struggling companies at potential bargain prices.

On balance, Datamonitor believes that the G20 leaders' healthcare stimulus packages will have little direct positive effect for Big Pharma, as much of the spending will filter through healthcare systems, ultimately boosting generic drug volumes at the expense of branded players.

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