Despite heightened regulatory scrutiny, continued pricing pressures and another year of impacts from health care reform in many countries, the global life sciences sector is exhibiting resilience and reinvention as it employs new research and development (R&D) and business models to cost-effectively deliver innovation, value, and improved patient outcomes.
This 2014 global life sciences outlook examines the current state of the sector, describes the top issues facing stakeholders, provides a snapshot of activity in a number of geographic markets, and suggests considerations for companies as they seek to grow revenue and market share in 2014 and beyond. For those readers who are familiar with prior reports, we draw your attention to increased sector emphasis on innovation and the impacts of reform. Finally, the report includes Deloitte contact information for readers who are interested in discussing its contents in greater detail.
Sector overview
The life sciences sector — comprised of the pharmaceutical, biotechnology, and medical technology segments — remained less impacted by the recent global economic uncertainty in certain parts of the world; however, it is facing reimbursement pressure from escalating costs and overwhelmed health systems across the world. Still, an overview of recent sector performance shows that it is favorably positioned to achieve success in 2014 and beyond. Among drivers for growth are an aging population, rising incidence of chronic diseases, technological advancements and product innovation, and certain anticipated impacts from health care reform provisions including increases in government funding and insurance coverage. Opportunities in emerging markets could continue to be a driver, although many companies are looking more cautiously at these markets due to slowing growth and other pressures.
Pharmaceuticals generated total revenue of $959.0 billion in 2012, growing 2.4 per cent from 2011 (considerably below the 5.3 per cent increase posted the year prior).Oncology is the leading therapeutic class;other focus areas include pain management, hypertension, diabetes, mental health, and respiratory.
The Americas region accounted for the largest share of the 2012 global pharma market, at $ 417.6 billion, followed by Europe (European Union and non-EU countries) at $224.3 billion, Asia/Af rica/Australia at $168.1 billion, and Japan at 110.5 billion.2 2012 growth rates by region were Americas, 9.9 percent (-1.0 percent NA, 10.9 per cent LATAM); Asia/Africa/Australia, 12.8 per cent; Europe, -.08 per cent, and Japan, flat.
The biotechnology segment had total revenue of $232.5 billion in 2012, representing an increase of 9.6 per cent over the previous year. Focus therapeutic areas include oncology, autoimmune disorders, and infectious diseases.
The vast majority of biotech revenue is generated in the U.S. and Europe, where the segment has shown growth over the past five years; however, major players have reported recent slower growth rates for U.S. sales compared with other regions. This trend is expected to continue over the next five years as standards of living and health care access improve in emerging nations, such as India, China, and Brazil.
R&D is essential to biotech segment growth. Global R&D funding is expected to increase in 2013, representing an opportunity for the segment. Note, however, that biotech is heavily regulated, and some of its research areas generate ongoing political debate. Regulation has been increasing during 2013, posing another challenge.
The global medical technology (medtech) market revenue grew seven percent annually between 2005 and 2012, driven by favorable demographics, disease trends, and technological advancements. A recent trend in the medtech industry is increased company specialization — via divestitures or pharma/medtech company splits — to help organizations become smaller and nimbler, and to leverage R&D investment and improve shareholder return.
In vitro diagnostics is the largest segment within medtech, as well as one of the fastest growing, at a rate of 5.1 per cent. In contrast, the cardiology, imaging and orthopedic sectors are all growing more slowly than the industry average, perhaps because U.S. patients may be deferring these more costly/elective surgeries in tough economic times. Diagnostic testing is an essential part of the health care industry, providing essential information to help providers and patients make the right clinical decisions. Indeed, in the U.K., some 75 per cent of clinical decisions are based on a diagnostic test, with demand for access to quicker, more accurate diagnosis rising at a rate of ten percent per year, increasing costs and putting pressure on the capacity and capability of diagnostic providers to deliver services effectively.
Regulations for medical device approvals are tightening in both the US and Europe. Proposed changes to the comparative effectiveness (CE) marking process in the EU could require device makers to meet higher standards to sell their products, although the changes are not anticipated to take effect until at least 2015.
In the US, the Food & Drug Administration’s (FDA) overall requirements have been getting stricter and the agency is considering bringing laboratory-developed tests, currently sold without requiring direct regulatory oversight, under its control. Of note, the FDA had permitted just 14 new pre-market approvals (PMAs) as of August 2013 — a 42 per cent decline from the same time last year. The medical devices tax provisions of the U.S. Affordable Care Act (ACA) are also negatively impacting the segment.
Outlook
The fundamentals driving health care demand, combined with the advent of new and often more expensive treatments, will continue to push up global pharmaceutical sales by an annual average of 5.3 percent between 2012 and 2017.
Sales growth will continue to come from the US, UK and the BRIC countries. Among emerging markets, strong growth is forecast for China and India, where pharmaceutical sales are expected to more than double in US -dollar terms by 2016. Brazil and Russia also are expected to see positive growth.
Global biotechnology segment revenue is projected to reach $262 billion in 2013, having increased at an average annual rate of 11 per cent over the past five years. Growth in 2013 is expected to continue, with revenue expected to jump 12.7 per cent.
Over the next five years, the industry is anticipated to continue to prosper; revenue is forecast to reach $407.3 billion in 2018, with average annual growth over the next five years projected at 9.2 per cent. With some notable exceptions, such as the recent Amgen purchase of fellow biotech company Onyx Pharmaceuticals, larger players are expected to continue pursuing low-risk strategies, including buying out smaller firms to access successful research for commercial-ready technologies, and partnering with academic institutions. From a geographic standpoint, the Asia-Pacific region is investing significant capital to gain a strong foothold in the segment.
The medical technology market is expected to grow at 4.5 per cent per year between 2012 and 2018, reaching global sales of $455 billion. In vitro diagnostics is anticipated to be the industry’s largest segment, with predicted worldwide sales of $58.8 billion in 2018, followed by cardiology.
The fastest-growing segment is neurology, which is projected to grow at 6.9 percent per year between 2012 and 2018, to reach $8 billion.Diabetic care and orthopedics are expected to be the slowest growing segments, expanding 3.4 percent per year between 2012 and 2018.
Global medtech R&D spending is expected to grow by 3.9 percent to $26.7 billion in 2018. The overall R&D investment rate is expected to be around 5.9 percent of sales in 2018, slightly down from 6.1 percent in 2012.
Growth drivers:Health care spending, demographics
Life sciences market growth correlates highly with global gross domestic product (GDP) growth, population growth, an aging population, and government spending. After total health care spending rose by just an estimated 1.9 percent in 2012, it is expected to pick up again, with global spending rising by 4.2 percent in nominal terms in 2013, and by an annual average of 5.3 percent from 2013-2017.
Population growth and government initiatives in emerging markets are expected to drive sector expansion for the next several years. India, China, Indonesia, Mexico, and Russia are pegged as main growth engines; companies are likely to continue expanding their presence in these and other emerging markets to compensate for North American spending growth that will be slightly below the global average, and even slower growth in Western Europe. An aging population also may act as a long-term growth driver. Increase in life expectancy is projected to lead to an increase of around 10 percent in the global population above 65 years of age.
In some regions, population growth and rising wealth will also drive life sciences spending growth. The number of high-income households (those earning over $25,000 a year) is expected to increase globally by about 10 per cent, to over 500 million, with over one-half of that growth coming from Asia.
Economic and demographic trends in the Americas remain favorable for the life sciences sector. For example, according to Economist Intelligence (EIU) estimates, the US GDP is expected to grow at least 2.1 per cent in 2013 — slightly lower than 2.2 per cent growth in 2012 — mainly backed by positive consumer confidence and an increase in housing investments,although ongoing uncertainty about U.S. debt ceiling limits could have an impact on the sector.
The region’s share of the aging population is expected to grow at a higher rate than the overall global level during 2011-16, average life expectancy is lengthening, and there is a rising incidence of chronic diseases, thus increasing the demand for life sciences products. US pharmaceutical sales are expected to improve in the coming years, riding on an increase in employment levels and the nation’s continued economic recovery. The presence of a large number of unknown and chronic diseases has been creating considerable need for innovative treatments, thereby boosting the medical biotechnology segment. In contrast, continued policies by the nations of Western Europe to reduce budget deficits are expected to slow down annual average growth in health care spending to only 2.3 percent for the five-year period ending in 2017.
Although economic conditions within the EU appear more stable, the pressing need for continuing debt reduction in southern European nations is likely to lead to further reductions in public spending in these markets. However, an aging population should increase demand for health care services and for pharma and biotech products. The U.N.’s World Population Prospects report projects that the proportion of Europeans age 65 years and older will grow from 16 percent in 2000 to 24 percent by 2030.
The European share of the aging population will be much higher than the global average through 2011-16. Also, the life expectancy of the European population is projected to remain well above the global level of 73.7 years at the end of 2017, especially in Western Europe, where the life expectancy is forecast to reach 81.3 years by 2017.
The outlook for the life sciences sector in the Asia region is favorable, as economic and demographic trends continue to boost demand. The region’s health care spending is expected to keep growing at a steady average rate of 7.6 percent through 2013-2017. For example, India has expanded its primary care policy priority and spending and is expected to increase spending at an average rate of 16.1 percent for the five years ending in 2017. About three-fourths of the country’s health budget goes into addressing primary health care (PHC) through the National Rural Health Mission (NRHM). India spent close to $3.9 billion (Rs.21,000 crores) in 2012-13 alone.
Indonesia and the Philippines are set to grow in double digits with expansion in their insurance systems. The goal of China’s health care reform is to “provide safe, effective, convenient, and affordable health care,” including universal access to basic medical and health services by 2020. Health care expenditures in China are expected to expand at an average rate of 15.6 percent for the period 2012 to 2017, reaching 5.9 per cent of its GDP by the end of 2017. The growth in health care spending in China is driven by an increase in pharmaceutical spending of almost 19 percent per year, reaching $166 billion by the end of 2017; as well as changing lifestyles leading to new ailments (e.g. hypertension) that require more health care spending.
Despite encouraging economic and demographic trends, life sciences companies’ growth prospects are being tempered by a number of challenging marketplace and enterprise issues: navigating health care reform; delivering innovation and value; complying with regulatory changes; and operating in a smaller and connected world.
(Courtesy:Deloitte 2014 Global life sciences outlook)