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Selling more, spending less – the sunny outlook for the pharma industry

Date June 24, 2013

As if the near-record highs on the Nasdaq biotechnology index were not a big enough signal of enthusiasm for pharma, now there are signs of growing optimism about future research and development productivity. While analysts believe that prescription drug sales will grow at 3.8% a year between 2012 and 2018, R&D spending is forecast to increase at just 1.4%, well below the growth seen in the preceding decade, EvaluatePharma’s World Preview  reveals.

As the industry emerges from the patent cliff of 2011-12, in which it saw worldwide sales fall year-on-year, the latest analysis provides new evidence that productivity has begun to pick up again. With US regulators approving drugs at a speed not seen in years, there is reason to be confident that big pharma’s labs and business development units could produce more products at a lower cost; however, another Vioxx or Avandia could dash those hopes (Friendly FDA ups number of NMEs, January 10, 2013).

More for your money

By 2018, worldwide pharma R&D spending is forecast to reach $149.4bn, or 16.7% of sales. The sales-to-spending share will have dropped from 18.9% in 2013, the second consecutive year of actual R&D spending shrinkage as the industry absorbed the impact of the patent cliff.

What is interesting about the R&D spending growth analysis is that this will represent a decline in real terms. By comparison, in the middle of the last decade R&D spending growth actually hit double digits. As sales growth did not match up with the spending in the laboratories, though, big pharma succumbed to investor pressure to trim its outlays; this coincided with a period in which investors attributed almost no value to pharma pipelines.

Pharma R&D analysis ($bn) 
  2004  2005  2006  2007  2008  2009  2010  2011  2012  2013  2014  2015  2016  2017  2018 
Pharma R&D spend  87.9  96.4  108.1  120.2  131.2  129.4  131.3  137.8  137.4  135.3  137.5  140.0  142.8  146.2  149.4 
Growth per year    +9.6%  +12.2%  +11.1%  +9.2%  -1.4%  +1.5%  +5.0%  -0.3%  -1.5%  +1.6%  +1.8%  +2.0%  +2.3%  +2.2% 
WW prescription (Rx) sales  455  495  542  599  649  663  685  725  714  717  744  781  820  858  895 
R&D as % of WW Rx sales  19.3%  19.5%  20.0%  20.1%  20.2%  19.5%  19.2%  19.0%  19.2%  18.9%  18.5%  17.9%  17.4%  17.0%  16.7% 

An easing of the patent cliff, combined with a US regulator that has pledged to be more communicative with drug sponsors, has renewed optimism about the industry’s ability to get products to market. From creation of the “breakthrough therapy” category to a spate of early approvals – prostate cancer treatment Xofigo got the agency nod three months early, for example – the FDA has signalled a more friendly stance (Asco – FDA charms industry with talk of faster approvals, June 3, 2013).

Patent cliff II a yawn

This sunny view of the industry persists in spite of a second patent cliff awaiting in 2015 in which a whopping $66bn is at risk from expiries, according to the preview (No rest for the weary as patent cliff II approaches, January 31, 2013). The big difference: revenues are shifting to not-easily-genericised biotechnology products, so that by 2018 51% of sales in the 100 biggest-selling drugs will be from biotech drugs – up from 29% in 2012.

Indeed, three of the top five products losing market exclusivity in 2015 are agents that may not be easily duplicated by generics makers; just $16bn of sales are expected to be lost in 2015. With the biosimilar outlook not fully clear in the US, biological drugs will have better protection as they reach the end of their patent lives (FDA punts on interchangeability in biosimilar rule, February 10, 2012).

Likewise, a shift in focus to orphan and niche indications from broad primary care drugs – 2011 was marked by the loss of exclusivity for $13bn-a-year Lipitor – has helped to make pharma more resilient. The biggest pharma company in 2018, Novartis, will also be the biggest marketer of orphan drugs, with $12.2bn of its $52.3bn attributable to orphan drugs (Beyond the biggest drug maker others are topping the tables in 2018, June 20, 2012). Its three biggest growth drivers are Afinitor, Tasigna and Gilenya, all of which have at least one orphan designation.

While pharma and biotech stocks might be hitting the top of the market, the rally since late 2011 is a sign that investors believe that the industry has turned a corner. Based on recent history, however, it could be a difficult task for sales to grow so much faster than R&D spending; it would not take too many setbacks to see a revision in that view.

All data sourced to EvaluatePharma

To contact the writer of this story email Jonathan Gardner in London at jonathang@epvantage.com or follow @JonEPVantage on Twitter

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