Pharmaceutical Market Forecast Downgraded

BMI View: Medicine price reductions and a slowing economy will continue to place downside pressures on pharmaceutical firms in Australia. Contributing to this, the government is looking to provide affordable and sustainable pharmaceutical subsidies for the population. However, the listing of new drugs, coupled with rising demand for pharmaceuticals due to the ageing population, will continue to provide both generic and innovative drugmakers with opportunities.

BMI has reassessed its forecast for Australia's pharmaceutical market, as a result of the government's decision to add new drugs to the Pharmaceutical Benefits Scheme (PBS) between August and October 2013, and its progress in the PBS price disclosure.

We now forecast that pharmaceutical sales will reach AUD13.6bn in 2013, a 2.9% year-on-year (y-o-y) increase in local currency terms - and a fall from the previously forecast 3.6%. Between 2012 and 2022, we project local compound annual growth rate to stand at 3.5% (0.2% in US dollars terms due to fluctuations in currency exchange). By 2022, we forecast that pharmaceutical sales in Australia will reach AUD18.7bn (US$14.0bn).

Forecast Reassessed
Australia Pharmaceutical Sales (AUDbn)

Price Disclosure

Under the memorandum of understanding (MoU) signed in September 2010 between the PBS and Medicines Australia, the Expanded and Accelerated Price Disclosure (EAPD) was extended to all drugs listed in the F2 formulary from December 2010. The first price reduction was applied in April 1 2012 and subsequent price reductions occur every April, August and December (depending on disclosure cycles) through to May 2014 when the MoU ends. Under EAPD, there are various price disclosure cycles including three transitional cycles, main disclosure cycles, interim supplementary disclosure cycle, supplementary disclosure cycles A and B, covering different types of drugs.

Price Disclosure Changes
Price Disclosure Prior to Dec 2010 EAPD
Source: Australia Department of Health and Ageing
What is subjected? Part A of F2 formulary All F2 formulary
Data for collection Sales revenue, volume of sales and incentives given Remains unchanged
Reporting periods Quarterly reporting periods Typically six months reporting periods
Submission of data to Department of Health and Ageing Service provider
Submission due dates Two months after the end of the collection period Six weeks after end of reporting period

In the latest round of price cuts in April 2013, the average price cut on 62 drugs was 25.2%, with the lowest being galantamine (10.1%) and highest paclitaxel (86.9%). Prior to this was an average 29.2% cut on 71 drugs in April 2012, an average of 27.5% on 13 drugs in August 2012 and average of 52.7% on two drugs in December 2012. The extent of the price reductions will continue to have a negative impact on the pharmaceutical industry, from producers to distributors. However, given the small number of drugs affected, as well as the predictability of the system, we believe pharmaceutical firms can estimate the impact of the price cuts on their revenues. This is similar to the biennial price cuts seen in Japan and Taiwan.

New Drug Listings

More importantly, the government is consistently adding new drugs to the PBS. In June 2013, Tenya Plibersek, Minister For Health and Medical Research, announced the listing of new drugs and extended listings including cancer treatments: Bristol-Myers Squibb's Yervoy (ipilimumab), Janssen's Zytiga (abiraterone acetate), Pierre Fabre's Navelbine (vinorelbine) and other treatments: Janssen's Xarelto (rivaroxaban), and abortion drugs Linepharma (mifepristone) and GyMiso200 (misoprostol). Most of these listings are for patented pharmaceuticals that are priced significantly higher than generic drugs, therefore resulting in upside risks to patented drug firms and the overall pharmaceutical market.

In addition to the PBS drug cycle, BMI highlights that the ageing population in Australia will boost the demand for pharmaceuticals, especially treatments for non-communicable and often chronic diseases. Consequently, this will bring upside risks to the pharmaceutical market. However, the Australian economy and the sustainability of the PBS system remain downside risks. BMI's Country Risk team forecasts that the Australian economy will slow from 3.7% y-o-y growth in 2012 to 2.1% in 2013. With slowing growth, we believe that sustainability of the PBS system will be an issue, increasing the danger of having fewer drugs listed, the delisting of drugs or wider price reductions to save costs.

BMI Economic View: In line with our expectations for the Australian economy to struggle in 2013, real GDP growth in Q113 slowed to 2.2% quarter-on-quarter in seasonally adjusted annualised terms, compared to 2.3% in Q412. We expect the slowdown in private consumption to be the main drag on growth in the coming quarters, as job losses rise on the back of businesses cutting costs, triggering the beginning of household debt deleveraging. Together with our expectations for tepid export growth, we maintain our expectations for Australia's GDP growth to slow to 2.1% in 2013 compared with consensus expectations of 2.6% and 3.7% growth in 2012.

This article is tagged to:
Sector: Pharmaceuticals & Healthcare
Geography: Australia

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