Market Insight

What does the global economic downturn mean for the pharma industry?

Frost & Sullivan’s Sylvia Miriyam Findlay analyses the impact the recession is likely to have on the global pharma industry and its business partners.

As the economic crisis hit various industries across the globe, a short analysis on the level of impact on the pharma industry has unveiled some interesting trends.

The pharmaceutical industry is currently being pressurised by two major factors – pricing pressure and regulatory pressure. In addition, another factor impacting on the industry is the reduced supply of late stage drugs to replace drugs going off patent. Drugs going off patent at this period are estimated to be worth $30 billion. As businesses shrink, expenditures are falling fast to maintain profitability.

Impact on innovation

Thinning pipelines are considered to be the real issue. New products are essential to reduce the impact of the economic downturn. The number of new drug approvals has recently declined, thereby pushing companies to tighten their R&D budgets. As revenues shrink, companies are forced to reduce their R&D spending, amongst others, in order to preserve profitability ratios. Early stage R&D projects have been halted. There are very few drugs in the late stage of the drug development process.

Impact on other sectors

The global recession is likely to adversely affect the pharmaceutical industry and its impact is expected to linger for a long time. The ripples of the impact are sure to be witnessed in adjoining sectors like the outsourcing markets. As reduction on R&D spending continues, the landscape turns dull for contract research organisations. While big pharmaceutical companies may just reduce the amount of work outsourced, small pharmaceutical and biotech companies may actually halt all outsourcing.

In addition, the much sought after outsourcing hubs like India and China are losing their attractiveness to other emerging geographies like Philippines, Eastern Europe, Central and South America and other South Asian countries. These countries are expected to offer financial buffers to the pharmaceutical industry and big pharma companies are expected to choose such areas to maintain their standing in the global crisis.

Other sectors offering administration services and backend services to the pharmaceutical industry are also expected to recede.

Impact on investments

The biotech industry has suffered during the financial crisis. Since most biotech start-ups are being funded by private equity or venture capitalists, the current economic climate is not quite conducive for such investments. Investors are not ready to invest in high-risk projects and hence this is indirectly impacting the birth of innovation. Low valuations of biotech companies are preventing new investments as investors are unsure of the technology and return of investments. In addition, the huge losses shouldered by the investors in this financial meltdown have led biotech investments to a grinding halt.

Investments are more likely to turn towards medical devices and diagnostics. Diagnostics offers much potential for revenue generation and hence seems to attract investors.

Impact on patients

The recent recession has had its impact on the medical community as well. Patients are forced to delay their refills and also to resort to generics. Patients are even postponing their doses due to tight financial situations.

Impact on generics

Price cuts have encouraged the use of generics and the generics industry has seen good growth. In order to cut healthcare costs, governments are encouraging the use of generics.

Impact on organisational structure

Thriving in such a crisis requires the efficient steam lining of operations. Pharmaceutical companies have resorted to realigning their sales and marketing strategies – reducing the number of employees and lay-offs are some of the usual tactics undertaken by the companies. This has enabled some organisations to reduce over-head expenditures and to maintain profitability. In certain extreme cases, some sales force operations have been halted altogether. In addition, innovative sales and marketing techniques are being sought to remain competitive during the financial crisis.

Conclusion

With such an economic crisis pressurising the drug industry, the onus lies in the hands of the government to step in and take adequate measures to mitigate the impact. If this situation continues, it can be expected that five to six years from now, the global healthcare markets will suffer from a dearth of innovative drugs. The government has to increase liquidity by pumping in fresh monetary resources and thereby supporting drug research. Tax benefits and rate cuts have to be provided for private equity firms and venture capitalists thereby encouraging investments in biotech firms. Such measures can, to some extent, help sustain liquidity of funds and alleviate the impact of the current financial crisis.