A rebound in the US market, driven by specialty sales, and emerging-market volume growth are driving pharmaceutical industry growth. How has the market fared thus far in 2015 and what can be expected in the near-term?

The global pharmaceutical industry is facing moderate growth over the next five years, marked by a rebound in US pharmaceutical growth and strong, but slower growth from emerging markets. At the same time, specialty products have and are expected to assume a greater role in new product growth, a trend that is shifting the balance of market share among the large pharmaceutical companies and mid-sized pharmaceutical companies. Graham Lewis, vice president, global pharma strategy, IMS Health, offered a market outlook through 2018 at PharmaChem Outlook: The Market Opportunities and Challenges, an education program at DCAT Week ’15, which was held March 16-19, 2015 in New York and organized by the Drug, Chemical & Associated Technologies Association (DCAT), a not-for-profit, member-supported business development association for the global pharmaceutical manufacturing industry. 

US and Pharmerging markets lead industry growth

Led by the US and Pharmerging markets, a term used by IMS to denote the most promising emerging markets, the global pharmaceutical market is projected to increase at a compound annual growth rate (CAGR) of 4-7% to 2018 and reach $1.3 trillion, according to estimates from IMS. Data are based are ex-manufacturer price levels and do not include rebates and discounts. The US and Pharmerging markets are expected to account for more than 60% of sales and 80% of sales growth to 2018.

Propelled by a rebound in the US market, overall CAGR in developed markets is projected at 3-6% for the forecast period of 2014-2018 with CAGR in the US of 5-8% (see Table I). Growth in the five major markets of the European Union (EU)(France, Germany, Italy, Spain, and the United Kingdom) is mixed with a projected CAGR through 2018 of 2-5% each for Germany and Italy, better growth of CAGR of 4-7% for the UK, but negative to minimal growth for France and Spain (see Table I).

Pharmerging growth will still be strong, but slower than historical levels with an overall CAGR to 2018 of 8-11% (see Table II), according to IMS, compared to a CAGR of 13.6% from 2009 to 2013. For the forecast period of 2014-2018, the pharmaceutical markets of China, Brazil, and India are expected to increase at a CAGR of 9-12% and of 7-10% in Russia. CAGR in Tier 3 Pharmerging markets (defined by IMS to include Mexico, Turkey, Venezuela, Poland, Argentina, Saudi Arabia, Indonesia, Colombia, Thailand, Ukraine, South Africa, Egypt, Romania, Algeria, Vietnam, Pakistan and Nigeria) will be 5-8% to 2018 (see Table II). Note: The data as presented is as of March 2015. .   

By 2018, the US is forecast to remain the largest pharmaceutical market, followed by China, Japan, and Germany (see Table III), and Brazil is expected to surpass France, which will drop to the number sixth position. By 2018, 10 of the top 20 pharmaceutical markets will be in Pharmerging markets (see Table III). On a regional market basis, the US is forecast to hold 35% of the global pharmaceutical market and Pharmerging countries a combined 29%. The EU 5 (France, Germany, Italy, Spain, and the UK) will hold a combined 14% and the rest of Europe (excluding Russia, Turkey, Romania, and Ukraine, which are included in the pharmerging countries), 5%. With the resurgence of the US pharmaceutical market and slowing growth in Pharmerging markets, the growth differential between developed and Pharmerging markets is narrowing. The differential was approximately 14.2% in 2009, and this has since narrowed to 3.5% (as of September 2014), according to IMS. 

Innovation drives resurgence in the US
The rebound in the US pharmaceutical market in 2014 is expected to continue through 2018 but with several mitigating factors. Overall, the US market is forecast to increase at a CAGR of 5-8% between 2014 and 2018, a strong improvement from 2012, when the US reported a decline in real-per-capita spending on medicines of 3.5% and a decline in nominal spending of 1%, representing historic lows. The rebound in 2014 was attributable to several factors: a lessening of generic-drug incursion due to fewer patent expiries in 2014 comparative to recent years as well as the strong performance of select new drugs, most notably, Gilead Sciences’ Sovaldi (sofosbuvir), a drug to treat hepatitis C virus (HCV) infection. Sovaldi was one of the industry’s top-selling drugs in 2014 with 2014 global sales of $10.28 billion following its approval in the US in December 2013 and in the EU in January 2014, according to Gilead’s reported 2014 results, and further contributing was Harvoni, a combination therapy of sofosbuvir and ledipasvir for treating HCV injection, which had 2014 global sales of nearly $2.13 billion, according to Gilead’s reported 2014 results.

Nominal spending on medicines reached $373.9 billion in the US in 2014, up 13.1% year over year, the highest growth level since 2001 when growth was 17.0%, according to a recent analysis by the IMS Institute for Healthcare Informatics, Medicines Use and Spending Shifts: A Review of the Use of Medicines in the US in 2014. Overall spending on medicines in the US increased $43.4 billion to $373.9 billion in 2014, according to the IMS analysis. Spending on new brands increased by $20.2 billion in 2014, triple the previous level. New drugs for the treatment of hepatitis C, cancer and multiple sclerosis, and higher spending on diabetes drugs contributed the most to spending growth. Another key trend continued in 2014 in the US was the rise of spending on specialty medicines. IMS defines specialty medicines as products that are often injectable, high-cost biologics or require cold-chain distribution. They are most used by specialists and include treatments for cancer and other serious chronic conditions. In the US, spending on specialty medicines has increased $54.0 billion over the past five years and contributed 73% of overall medicine spending growth in that period. In 2014, spending of specialty medicines in the US increased by 26.5% to $124.1 billion, according to IMS. Increases in specialty spending were driven by new medicines for autoimmune diseases, hepatitis C, and oncology, which collectively accounted for $34.7 billion of the increased spending. The largest single driver of specialty spending growth in the US was for treatments for hepatitis C, which totaled $12.3 billion in 2014. Spending on oncology and autoimmune treatments increased 16.8% and 24.0% respectively and spending on MS drugs increased 24.4%. Overall, specialty medicines accounted for $16.3 billion or 81% of the $20.2 billion in total new brand spending in the US. Four new treatments for hepatitis C increased spending by $11.3 billion in the US in 2014. Other new medicines, including treatments for multiple sclerosis (MS), cancer, and diabetes, drove $8.9 billion of increased spending in the US.

Overall, spending on protected brands in the US increased $25.6 billion in 2014 following an increase of $18.3 billion in 2013. The decline in the volume of protected brand products reduced spending by $700 million in 2014. Prices for branded products rose in 2014 at an average rate of 13.5% on an invoice level but were reduced to a 5% to 7% increase when taking into account off-invoice discounts and rebates. Overall prices increases for protected brands increased spending on medicines in the US in 2014 by $26.3 billion, contributing 8.2% to total market growth on an invoice price basis. Estimated net price growth was lower as the result of rising off-invoice discounts and rebates that offset incremental price increases and reduced the net price growth contribution to 3.1%.

The impact of patent expiries, which had slowed spending in the past five years, reached a recent low, of only $11.9 billion in 2014, almost one-third of the level in 2012 when patent expiry peaked and reached $29.3 billion. Some key patient expiries included Eli Lilly’s Cymbalta (duloxetine), a serotonin and norepinephrine reuptake inhibitor indicated for major depressive disorder, generalized anxiety disorder, anxiety, and certain pain indications, in 2013, and in 2014, Pfizer’s Celebrex (celecoxib), a nonsteroidal anti-inflammatory drug for treating arthritis among other indications A period of fewer patent expiries since the middle of 2013 drove most of the reduced impact, according to the IMS analysis, but off-patent brands that did not face generic competition reduced the impact in 2014 by an estimated $4 billion to $5 billion. Generic drug spending increased $9.5 billion in the US in 2014, driven by increased spending on generic mental health, pain, and cancer medicines. Despite the lower level of expiry impact in the US in 2014, the share of prescription medicines dispensed in the US as generics increased by 2% to 88% in 2014, according to the IMS analysis.

Another positive indicator in 2014 was the uptick in the number of approvals of new molecular entities (NMEs) by the US Food and Drug Administration’s Center for Drug Evaluation and Research (CDER), which totaled 41 NME approvals in 2014, a recent high and more than the average number of NMEs approved annually during the past decade, according to CDER. In 2014, the FDA approved 27 NMEs in 2013 and 39 NMEs in 2012. From 2005 to 2013, CDER averaged 25 NME approvals per year, which was bolstered by approval levels in 2004 (36 NMEs approved), 2011 (30 NMEs approved), 2012 (39 NMEs approved) and 2013 (27 NMEs approved). The period of 2005 to 2010 was a slower period for NME approvals. In 2005, 20 NMEs were approved, 22 in 2006, 18 in 2007, 24 in 2008, 26 in 2009, and 21 in 2010, according to information from CDER.

As Lewis pointed out, however, despite these positive developments for  the US pharmaceutical market, there are several mitigating factors that could curb growth. “2014’s exceptional growth, driven by Sovaldi, is unlikely to repeated,” he said. “Moreover, overall volume growth remains subdued in the US market, and prices increases will be eroded by payers, possibly resulting in a zero-sum game.” Another important consideration is the increasingly specialized nature of new drug development. Of the 41 NMEs approved by the FDA in 2014, approximately 41% (17 of 41) were approved to treat rare or orphan diseases, defined as diseases that affect 200,000 or fewer people, a positive sign for overall product innovation but reflective of more niche markets.

Among developed markets, however, growth prospects are strongest in the US for innovative products. For the forecast period of 2014-2018, IMS estimates a CAGR of 5-8% in the US for protected products compared to only a CAGR of only 1-4% in the EU 5 (France, Germany, Italy, Spain, and the UK) and Japan for this period.

The rise of specialty medicines
Specialty medicines will continue to be of increasing importance for growth in developed markets and will also begin to have greater impact in Pharmerging markets. On a therapeutic basis, oncology is expected to remain the largest area of spend in developed markets and is of rising importance in Pharmerging markets, moving to the number four therapy area (see Tables IV and V).  

Oncology also continues to dominate the late-stage pipeline (Phase III to registered) with 137 drugs under development, far surpassing other therapy areas, according to IMS. Following oncology, the next leading therapy area for drugs in late-stage development is pain (40 drug candidates) followed by other central nervous system drugs (30 drug candidates), vaccines (29 product candidates), dermatologics (23), antibacterial drugs (22), 19 each for ophthalmology, diabetes, and gastrointestinal classes, and 18 each for blood coagulants and respiratory products.

The greater importance of specialty drugs is further reflected in recent product sales. IMS defines specialty products as medicines that treat specific, complex chronic diseases with four or more of the following attributes: (1) initiated only by a specialist that require special handling and administration; (2) unique distribution; (3) high costs; (4) warrants intensive patient care; and (5) might require reimbursement assistance. Using that as a criteria, in 2014, specialty drugs accounted for 25% of global sales (at list price, excludes rebates and discounts) compared to only 15% in 2004. Moreover, biologics’ share of the global pharmaceutical market also has increased, from 13% in 2004 to 21% in 2014, according to IMS. In looking at absolute pharmaceutical growth from 2013 to 2018, growth in specialty drugs will surpass growth of traditional medicines in developed markets, particularly in Europe while traditional medicines will dominate growth in Pharmerging and other markets in the rest of the world (see Table VI).

To further illustrate the importance of specialty products in companies’ product portfolios, Lewis pointed to specialty products that have achieved blockbuster status (defined as achieving sales of $1 billion or more) that were launched in the five-year period of 2008 to 2013. These include: Bayer’s/J&J’s anticoagulant Xarelto (rivaroxiban); Bayer’s/Regeneron Pharmaceuticals’ Eylea (afibercept), a drug to treat wet age-related macular degeneration; J&J’s Invega Sustenna (paliperidone palmitate), a drug to treat schizophrenia; Novo Nordisk’s Victoza (liraglutide injection) for treating Type II diabetes; J&J’s Zytiga (abiraterone) for treating prostate cancer; Amgen’s Prolia (denosumab) for treating osteoporosis, bone cancer, bone loss, and other bone-related problems in cancer patients; Novartis’ Gilenya (fingolimod) for treating relapsing forms of multiple sclerosis; J&J’s Stelera (ustekinumab) for treating psoriasis and psoriatic arthritis; Vertex Pharmaceuticals’/J&J’s Incivek (telaprevir) for treating hepatitis C; and Gilead Sciences’ Sovaldi (sofosbuvir) for treating hepatitis C virus (HCV) infection.  

A changing market order
The confluence of increased growth in Pharmerging markets, the continued rise of generics in these markets, and the greater importance of specialty medicines in pharmaceutical industry growth will reduce the share of the top 20 pharmaceutical companies in the global pharmaceutical market. “Despite spending more than $700 billion on mergers & acquisitions since 2005, the top 20 companies’ total and protected market share in the global market has declined,” said Lewis. In 2004, the top 20 pharma companies held a combined 64% of the global market, and this share fell to 57% in 2014, according to data from IMS. By 2020, the global top 20 pharma companies are forecast to have their share of the global market decline to 47%. In looking at protected sales only, the global top 20 pharmaceutical companies held 81% of all protected sales value in 2014, but this too has declined, noted Lewis.

One of the results, noted Lewis, is the rise of mid-sized companies, with certain mid-sized companies being among the fastest-growing companies over the past decade. In looking at the period of 2004 to 2014, Cubist Pharmaceuticals (which was acquired by Merck & Co. in 2015) was one of the fastest growing mid-sized pharmaceutical companies, jumping from a ranking of 118 in 2004 to number 49 in 2014. Other mid-sized players with noteworthy gains in the last decade are Salix Pharmaceuticals (which was acquired by Valeant Pharmaceuticals in 2015), Reckitt Benckiser, Celgene, Actelion Pharmaceuticals, Gilead Sciences (led by Sovaldi, it jumped from 37 in global rankings in 2004 to number 10 in 2014), Hospira (pending acquisition by Pfizer), Biogen, Shire, and Chiesi.

Lewis noted that this increased specialization, both on a product basis and geographic basis, has led the major pharmaceuticals to focus on targeted therapy areas and markets. This focus is reflected in several recent moves of the large pharmaceutical companies. For example, in 2014, AstraZeneca increased its focus in diabetes through the acquisitions of its diabetes alliance with Bristol-Myers Squibb and strengthened its respiratory portfolio with the acquisitions of Actavis'[later renamed to Allergan following the close of the Allergan and Actavis combination in 2015] North American branded respiratory products in 2015 and of the respiratory products portfolio of Almirall in 2014. Novartis strengthened its position in oncology through its recent acquisition of GSK’s oncology portfolio, and GSK enhanced its positions in vaccines and over-the-counter (OTC) medicines as part of the same deal with Novartis, which was completed in 2015, by acquiring Novartis’ vaccines portfolio (excluding flu) and forming an OTC joint venture with Novartis. Also, Bayer’s $14.2 billion acquisition of Merck & Co.’s OTC business in 2014 further strengthened its position in this area.

Lewis also pointed out that pharmaceutical industry growth will also be driven what he termed as the “third sector,” an area falling between NME development and generic drugs with a strategic focus on medicines with improved dosage or formulation. “This sector offers more differentiation and potentially more protection than generics and is an area of investment by both generic-drug companies seeking to diversify their portfolios with specialty products and smaller, regional players,” said Lewis. It is also an area in which innovative companies can succeed. He offered as examples Celgene’s Abraxane (nanoparticle albumin-bound paclitaxel), an improved formulation of the anticancer therapy, and Mundi Pharma’s Norspan (buprenorphine), a pain medication administered by a transdermal patch for greater convenience and reduced abuse potential.

Looking ahead
Innovative products are the drivers in pharmaceutical industry growth, but payer requirements and reimbursement levels will determine the extent to which product innovation will be rewarded. One issue that payers face, particularly for national healthcare budgets, is the reduced level of savings from generics as the number of new patient expiries declines from recent highs. “As a result, in the next five years, there will be a dramatically reduced level of savings from shifting usage to generics,” said Lewis, “and innovation spend is under pressure.” He pointed out that payers can take different approaches in how they determine access and pricing to respond to this challenge, but that “manufacturers can expect new mechanisms to limit spending growth and innovation may suffer, ” concluded Lewis.