Pharmaceuticals industry in peak health as populations age

Medicine production is booming everywhere, especially in emerging markets, but there may be one or two headaches on the horizon for big pharma

The fact that we’re all living longer is good news for everyone, including the drug makers that help to keep us healthy and hearty well into our 80s, 90s and beyond. Ageing populations have given the global pharmaceutical sector a restorative shot in the arm.

Statistics show just how effective that shot is. In 2023 global pharmaceuticals sales amounted to USD 1.5 trillion. Despite continuing cost-of-living pressures in many countries, production is forecast to increase by 3% in 2024, 4% in 2025 and 3.6% in 2026.

Older people take more medicines. Our longer lives are rejuvenating the sector and driving prospects for growth.

But there are other factors behind the pharmaceutical sector’s rude good health, and indeed one or two warning signs that may affect its profitability in future. In the rest of this piece, we’ll give pharmaceuticals a thorough examination, and dig deeper into the outlook for Asia, America and Europe with our regional pharma trade sector experts.

Emerging markets sweeten the pill

There’s no doubt that ageing populations are good for business. Producers of everything from sophisticated heart and cancer medicines to generic tablets for back pain and indigestion are reaping the benefits of our increasing longevity.

And, while many populations are growing older, a significant number are also getting heavier. Weight loss is another lucrative area for pharmaceuticals, with producers of fat-shedding treatments looking at growth forecasts of around USD 80 billion by 2030.

?All this adds to the generally positive feeling around the pharmaceutical sector. Medicine sales are less vulnerable to economic downturns than more cyclical and discretionary purchases, because people tend to prioritise health above anything else.

At a national level, health systems may face continual scrutiny but health spending tends to rise year-on-year anyway. This is particularly true in emerging markets, where improvements in healthcare provision - coupled with rising household income - is fueling a rapid expansion of the pharmaceutical sector.

The fly in the ointment for all pharmaceuticals and biotech businesses is research and development costs. The development of new drugs can be a long and expensive process, with no guarantee of success. According to the American Society for Biochemistry and Molecular Biology, 90% of all drug trials fail. It takes 10 to 15 years and around USD 1 billion to develop one successful medicine.

Still, that single success can be life changing - and highly lucrative. The potential rewards are such that access to external financing is generally good, with investors and banks both supportive of the sector.

Government debt puts pressure on prices

Despite this overarching positivity, one or two pharmaceutical trends may prove more difficult to swallow.

• Government debt. High government debt is affecting health spending in some advanced economies. In particular, governments are pushing back against high drug costs with new pricing policies. In August, the US government negotiated lower prices for ten commonly used drugs for people on Medicare, with cuts of between 38% and 79%. The EU operates its own pharmaceutical strategy that focuses on making medicines more affordable.????
• Production challenges. The rapid growth in demand for some drugs - weight-loss treatments are an obvious example - may exceed production capacity, at least in the short term.
• Patent expiry. The top 15 blockbuster patents will expire over the next decade, potentially hitting profits and forcing manufacturers into higher R&D spend as they seek replacements.
• Environmental concerns. Pharmaceutical residues can be a factor in water and soil contamination. Like other industries, pharmaceuticals are coming under increasing pressure to clean up its act.

Regional outlook: a clean bill of health (mostly)

USA: shorter supply chains to meet growing demand

The condition of the US pharmaceutical sector broadly mirrors the global situation. Output is expected to increase by 2.9% in 2024 and 2.5% in 2025, and after a 17.3% surge in 2023, investments are forecast to increase by 15.8% this year. Margins are expected to grow by about 5% annually until at least 2026.

The usual positives apply. The population is getting older and 40% of US adults are obese, driving the uptake of a new generation of medicines.

In addition, in the face of global tensions, the US government has proactively supported domestic pharmaceutical supply.

“The government has taken measures to strengthen supply chains, reshore production and reduce reliance on imports of active pharmaceutical ingredients (API),” says Brady McKinney, Atradius underwriter and sector expert for the Americas. “This, together with supply chain bottlenecks in recent years and increased transportation costs, has increasingly led US pharmaceuticals manufacturers to re- and nearshore production.”

The result is that sector businesses are generally strong with robust cash flows and good credit ratings. But potential constraints on the sector exist. They include the government’s anti-inflationary price controls and the industry’s challenges with product liability risk, as highlighted by recent opioid settlements. For example, drugmaker Allergan will pay USD 2.2 billion over seven years to resolve opioid litigation.

Asia Pacific: strong growth despite geopolitical pressures

Major Asia Pacific economies will register strong growth in pharmaceutical production over the next two years. Output in China will grow by 7.7% in 2024 and by 6.1% in 2025. In India, the figures are 3.8% and 10.4%. The credit risk of pharmaceutical companies is generally low.

China is facing some pushback from Western countries intent on reducing their reliance on Chinese imports, but lower production costs are likely to support continuing production increases in the next few years. In addition, the Chinese government is supporting the industry as it shifts from producing generic drugs towards more innovative products. For example, authorities are reducing wait times for new drug approvals, speeding the R&D process.

“On top of that, China′s pharmaceutical sector is increasingly integrating with global markets,” says Judy Ji, Atradius senior underwriter in Shanghai and sector expert for Asia Pacific. “Many new drug licensing deals have been agreed between Chinese and multinational pharmaceutical companies.”

Like elsewhere, the Chinese population is becoming both wealthier and older. A growing middle class is spending a greater proportion of its income on health and wellbeing.

This is also true in India, and the Indian government has recognised the sector’s huge promise. It has announced a large incentive scheme to boost local API production, in part to benefit from growing trade tensions between China and the West.

All of which could drive a significant expansion of Indian pharmaceuticals by 2030, if the sector can get on top of quality issues.

“The US Food and Drug administration has increased the number of inspections at Indian drug manufacturing units in 2024 amid growing concerns over quality,” says Ji. “Quality standard issues and incidents of alleged drug contamination remain downside risks.”

Europe: well established and well funded, but Asian competition could be an issue

European pharmaceuticals are benefitting from an ageing population and the current rebound in household incomes. After a flat 2024, we expect pharmaceuticals output and sales in the EU and the UK to grow by more than 3% annually in 2024 and 2025.

“Local production will benefit from announcements by both Novo-Nordisk and Eli Lilly to make large investments in several European countries in order to increase production of their weight-loss drugs,” says Rubén del Río Hernández, team leader in the Large Buyer Unit at Atradius CyC in Spain and sector expert for Europe.

In general, credit risk is low in the European pharmaceuticals sector, though some smaller firms could face challenges because of high R&D costs, elevated interest rates and increasing competition from Asia. Europe is a highly regulated market, making R&D more expensive. At the same time, there are continuous pressures from public health systems to reduce drug costs.

“For instance, due to budget constraints the French government is looking to revise subsidies for medical products, currently worth EUR 16 billion a year,” says del Río Hernández.

As in the US, efforts are being made to guarantee supply through stockpiling and reshoring, though this could lead to higher prices. All in all, European pharmaceuticals benefit from well established manufacturing facilities, quality standards and supply chains, creating a solid outlook. Business performance is generally strong and access to credit is good.

Fit for the future

Asia Pacific will provide the biggest feelgood factor for global pharmaceuticals over the next two years, though the sector is strong around the world. Ageing populations and an increasing focus on health and wellbeing means the industry is likely to enjoy robust equity, solvency and liquidity for the foreseeable future.

Take a deeper dive into the latest trends shaping the future of the pharmaceuticals industry in our latest report, Industry Trends Pharmaceuticals, September 2024

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Contributors

Silvia Ungaro - Senior Writer

Brady McKinney - Underwriter, sector expert Pharmaceuticals, US

Judy Ji - Senior Underwriter, sector expert Pharmaceuticals, Asia-Pacific

Rubén Del Río Hernández - Team Leader, sector expert Pharmaceuticals, Spain