Generic Drug Sales To Outpace Other Sub-Sectors

BMI View: The pharmaceutical sector and the wider healthcare industry offer stable returns for investors. This is due to the underlying fundamentals of ageing populations and the associated increase in chronic diseases, such as cancer, diabetes and cardiovascular conditions. A more detailed assessment of the sub-sectors reveals a multitude of trends and varying degrees of profitability. The positive outlook for pharmaceuticals and healthcare entails numerous upcoming investment opportunities. However, as always, there are many risks, such as price controls, health technology assessment and rationalisation of prescribing.

Latest forecasts from BMI reveal that global generic drug sales in US dollar terms will post a compound annual growth rate (CAGR) of 7.5% over the next five years. This rate of expansion exceeds the other key industry sub-sectors for healthcare (+5.0%), over-the-counter (OTC) medicines (+4.1%) and patented drugs (-0.2%). In terms of absolute value in 2012, the leading sub-sector is, by a considerable margin, healthcare (US$7.1trn), followed by patented drugs (US$667bn), generic drugs (US$249bn) and OTC medicines (US$124bn).

Patented Drugs

Positive Outlook But Risks Remain
Growth In Global Expenditure For Patented Drugs, Generic Drugs, OTC Medicines & Healthcare (US$ y-o-y change)

Generic Drug Sales To Outpace Other Sub-Sectors

BMI View: The pharmaceutical sector and the wider healthcare industry offer stable returns for investors. This is due to the underlying fundamentals of ageing populations and the associated increase in chronic diseases, such as cancer, diabetes and cardiovascular conditions. A more detailed assessment of the sub-sectors reveals a multitude of trends and varying degrees of profitability. The positive outlook for pharmaceuticals and healthcare entails numerous upcoming investment opportunities. However, as always, there are many risks, such as price controls, health technology assessment and rationalisation of prescribing.

Latest forecasts from BMI reveal that global generic drug sales in US dollar terms will post a compound annual growth rate (CAGR) of 7.5% over the next five years. This rate of expansion exceeds the other key industry sub-sectors for healthcare (+5.0%), over-the-counter (OTC) medicines (+4.1%) and patented drugs (-0.2%). In terms of absolute value in 2012, the leading sub-sector is, by a considerable margin, healthcare (US$7.1trn), followed by patented drugs (US$667bn), generic drugs (US$249bn) and OTC medicines (US$124bn).

Positive Outlook But Risks Remain
Growth In Global Expenditure For Patented Drugs, Generic Drugs, OTC Medicines & Healthcare (US$ y-o-y change)

Patented Drugs

Patented drug sales have been negatively impacted by a series of leading products losing intellectual property protection over the past few years. This situation will continue in the short term, before the sub-sector returns to growth in 2015. It is, however, important to note that patent expiries are a constant occurrence that limits the size of patented drug markets. Due to the high margins that patented drugs can command, this sub-sector will attract the greatest investor interest.

Generic Drugs

Generic drug markets across the globe are undergoing a period of transition. Despite many blockbusters losing intellectual property protection during the 'patent cliff', generic drug markets in developed states continue to post moderate growth, as increased volume sales are being offset by price cuts. Deflationary pressures are also becoming more common in emerging markets, where the role of governments and regulatory agencies in the generic drug sector is increasing.

OTC Medicines

OTC medicine markets across the globe are expanding steadily. The key drivers of growth are: the liberalisation of sales channels, introduction of new products, prescription-to-OTC switches, increasing consumer purchasing power and enhanced health awareness. Key restrictions on market expansion are a lack of clarity of what constitutes an OTC medicine and government price controls. We regard the sector as a low-risk, low-return opportunity for manufacturers and investors.

Healthcare

Compared with other major industries, healthcare is notably resilient to economic downturns. This is because patients and governments will continue to consume and fund medical services, despite falls in income and revenue from taxation. The considerable absolute size of the global healthcare sub-sector and its healthy growth rate are misleading. The bulk of healthcare spending is directed towards wages, administration and general services - which are not as attractive to investors as the companies that commercialise pharmaceuticals.

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