Pharma Trends Drug advances boost health, not company profits

Pharmaceutical innovation is booming, but the industry as a whole is stagnant, with little organic growth. Continued consolidation seems inevitable.

It is a golden age for pharmaceuticals research, but not for the pharmaceuticals industry. In terms of powerful new treatments, the global drug business is stronger than ever, but that wave of innovation is proving slow to feed through to the bottom line.

In the United States in 2017, there were more than 50 new approvals – a record – for active substances, vaccines and drug therapies. But growth in the global pharma business continues to be sluggish, with the industry facing intense price pressure and the expiration of lucrative patents.

All told, the industry saw about 2 percent total revenue growth last year. In the first nine months of the year, the 20 leading pharma firms were collectively stagnant, with growth of less than 1 percent, if acquisition effects are discounted.

Headline figures conceal substantial differences across the industry. The big winners of 2017 include the American firms Abbvie, Bristol-Myers Squibb (BMS) and Eli Lilly, each of which managed more than 10 percent revenue growth. Some German firms also did well, with Boehringer expecting 8 percent to 9 percent growth and Bayer 5 percent. In September, the Merck Group announced revenues up almost 6 percent, along with two approvals arising from in-house research.

The increase in approvals could indicate that pharma companies are tending to focus on highly-specialized therapies for rare conditions.

But there are plenty of losers too. Among the big players, Pfizer, Novartis, Merck & Co, Amgen and Sanofi are all struggling to grow, with expiring patents leaving them vulnerable to generic replacement. Some of these firms may look to make acquisitions in 2018 – a step made easier for American companies by the Trump tax reform, which should allow repatriation of profits stockpiled overseas.

The wave of takeovers is already well under way: Last year the US biotech firm Gilead shelled out almost $12 billion for Kite Pharma. An innovative hepatitis medicine launched in 2015 had swelled Gilead’s coffers, boosting it into the top 10. But it too is under threat from generic manufacturers, as is British firm Astra Zeneca, whose cash-cow heart medicine Crestor lost its patent protection two years ago.

Ironically, generics manufacturers themselves face even bigger trouble. With US insurers joining forces to put pressure on generic drug prices, their years of healthy profits may be coming rapidly to an end. In a striking example of this, the generic market leader, Israel-based Teva Pharmaceuticals, saw revenues plummet 15 percent last year, contributing to losses of $4.5 billion.

Tough market conditions contrast with the industry’s impressive R&D performance. For the first time last year, US authorities approved gene and cell therapies against cancer, in which patients’ immune cells are modified and then reinjected into their bodies to fight tumors. New immunotherapy drugs of this kind include Bavencio, jointly developed by Germany’s Merck Group with Pfizer.

Other innovations include what is known as a “digital pill” developed by the Japanese firm Otsuka for use against schizophrenia: the tablet includes a tiny electronic sensor which tracks absorption of the drug.

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However, some skeptical observers suggest that the increase in approvals could indicate that pharma companies are tending to focus on highly-specialized therapies for rare conditions, rather than finding breakthroughs in more pervasive conditions, like diabetes and high blood pressure.

Still, there have been some more wide-ranging recent advances of this kind, including new treatments for multiple sclerosis and hemophilia from Roche, Astra Zeneca’s cancer drugs Imfinzi and Ingrezza and Sanofi’s Dupixent, which treats some eczema symptoms. But it can be difficult to predict how these products will impact revenue and profits. In the past, many promising medical innovations have proved financially disappointing, including anti-cholesterol drugs made by Sanofi and Amgen, and Entresto, a heart-failure medication from Novartis.

Analysts from industry consultants Evaluate Pharma suggest the strong wave of 2017 innovations could translate to $32 billion in extra industry revenue by 2022, a higher figure than for the 2016 crop of new treatments. Predicting revenues from new drugs is uncertain, however: only time will tell if these hopes are fulfilled.

Predicting revenues from new drugs is uncertain, however: only time will tell if these hopes are fulfilled.

All in all, experts predict moderate growth for the pharma industry in 2018: For the industry’s 10-largest firms, Bloomberg anticipates average revenue increases of 2.5 percent, with operating profits up 3 percent.

Abbvie is expected to continue to lead the field, with a 10 percent rise in revenue and 17 percent profit growth. Although the US firm will have to absorb losses from patent expiration on its flu treatment Humira, several new cancer drugs should take up the slack. Analysts predict low-single-figure growth for other large players, and for Gilead a further revenue fall, possibly of 14 percent.

Rating agency Moody’s agrees that growth will be weak across the sector. In particular, it says, heightened attention to US drug prices present “an elevated political risk for the industry in the United States.” For generics firms, prices will continue to fall, they say, as “mergers strengthen the negotiating position of important drug buyers.”

Siegfried Hofmann is Handelsblatt's chemical and pharmaceutical industries correspondent. To contact the author: [email protected]