Big pharmaceutical groups growing more slowly

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  • Analysis by EY has found big pharmaceutical groups are growing too slowly
  • Profits up again – margin now at 27%
  • Market as a whole developing more rapidly – companies relying on takeovers
  • Roche and Novartis top the research spending rankings
  • Anti-cancer drugs still advancing – Swiss firms coming under heavy pressure

ZURICH, 15 MAY 2017 – The big pharmaceutical companies are making only sluggish headway: sales and research spending at the 21 biggest pharmaceutical groups in the world is growing less rapidly, according to an evaluation by EY. The analysis of the pharmaceutical companies’ key figures by audit and advisory firm EY shows that they have been working on their profitability: following 6.1% growth in 2015, they have increased their operating income (EBIT, including non-pharma) by 6.3% over the past year, to EUR 156.7 billion. At the same time, their profitability (EBIT margin, ratio of earnings before interest and tax to net revenue earned, including non-pharma) has risen to 27.0%. In 2016, the biggest firms’ sales – adjusted for currency effects – climbed 3.1% to EUR 445.4 billion, having increased by as much as 4.6% in 2015.

The slowdown in growth is even more marked with regard to spending on research and development, on which, taken as a whole, the companies spent EUR 80.7 billion. Adjusted for currency effects, this is 3.9% more than in 2015, when the companies’ investments increased by 8.6% compared with 2014. Last year, Swiss big players Roche and Novartis spent EUR 7.88 billion and EUR 6.43 billion respectively on research, making them the leaders in terms of absolute figures.

Poor growth despite more new active ingredients
Thanks to the large amounts spent on research in previous years, there is still double-digit growth in the product pipeline: 4,606 products are currently in clinical development, at the approval stage, or have already been launched – again about 12% more than in 2015. In particular, the number of active ingredients filed and hence soon to be put on the market went up by one-quarter to 120.

“The big pharmaceutical groups are currently unable to put enough new active ingredients on the market to boost growth significantly,” is how Gerd Stürz, Partner and Life Sciences Leader at EY Switzerland, interprets the figures. While currency effects had an influence on growth in 2015, they virtually ceased to do so in 2016. “It’s now becoming even clearer that the major pharmaceutical companies have a growth problem. But this isn’t the case for entire sector: some companies are growing significantly, while others are casting a shadow over the big picture. Although most of them were able to increase their sales in 2016, 6 of the 21 companies saw sales decline.”

Dominant US companies
Most recently, US companies have been outperforming their European and Japanese competitors. The top ten in terms of average annual sales growth between 2014 and 2016 are entirely American, the number one being Abbvie with an increase of 13.3%. “US companies are leading the field not only in terms of sales performance but also margins. The two Swiss companies’ growth has been clearly below average over the past two years. And while Roche’s margin is just over the average for the sector, that of Novartis is below it. However, both are investing more than the average in research and therefore in the future. Biotech companies’ dominance in terms of growth has been less pronounced in 2016 than it was in 2015, and the big biotech players have also seen smaller increases in profit than they did in the previous year,” says EY Life Sciences Partner Michael Dalla Torre.

On the margin front, the leaders are biotech firms Gilead and Biogen, both in the US, with margins in excess of 50%. Gilead, though, saw a marked decline in its margin from one year to the next, as it experienced declining sales of its hepatitis C products. The third-highest margin was also achieved by a biotech company: Danish firm Novo Nordisk.

Companies still concentrating on anti-cancer drugs
Where the development of new products is concerned, companies are still putting their trust in established big sellers: looking at the drugs currently in clinical development, 1,776 – or 39% of the total – are potential cancer treatments. Anti-inflammatories and drugs for conditions affecting the central nervous system are well behind in second and third place, with 513 and 489 respectively at the development stage.

Anti-cancer drugs already account for just over 29% of all drugs sold by the top 21 companies. Sales of these again rose sharply by 10% to EUR 127.9 billion from 2015 to 2016. “Cancer research has made further major advances, developing active ingredients whose effects are more precisely targeted at the cellular level being developed. Treatments have fewer adverse effects and are more effective. In view of the great potential there still is here, more and more companies are getting into oncology. That puts a lot of pressure on the two Swiss firms, which are very strong in that field,” says Michael Dalla Torre. At present, a good 30% of cancer drug sales go to push up Roche’s revenues, while Novartis has around a 12% share of the global market.

Despite the many new active ingredients, the big pharmaceutical companies are not managing to keep their sales growth in line with the development of the market as a whole. “Research involves spending a lot of money, and at the end of the day the payoff often isn’t enough. The pharmaceuticals market is highly regulated and there are limits on how much companies can charge. Health insurers won’t reimburse the purchase of some drugs and many companies can’t provide them at the prices people are looking for,” says Michael Dalla Torre, although he recognizes that the authorities have recently been speeding up their approval procedures a little. In the medium term, he says, firms need to invest more in innovative payment models and work more closely with health insurers and service providers.

Growth pressure prompts record M&A activity
To be able to keep up with the market as a whole, the big pharmaceutical companies would need a USD 100 billion boost to sales in the current year. “This growth pressure is firing up the takeover market,” explains Gerd Stürz. “The reason for this is that the big pharmaceutical companies can’t achieve the growth figures they need on their own. That’s why there will also continue to be a lively takeover market in the years to come. The USD 200 billion threshold is going to be the new normal.”

In recent years, according to EY’s latest Firepower report, more than USD 200 billion was already being spent on acquisitions across the sector as a whole. The figure rose from USD 227 billion in 2014 to USD 230 billion in 2015, and then took yet another sizeable upward leap to a new record of USD 258 billion in 2016. The biotech industry, in particular, recently virtually doubled its spending on M&A from USD 22 billion to USD 40 billion.

“That there is a lot of action on the takeover market is down not only to weak sales growth but also to the ongoing reorganization in the sector. Companies are getting rid of divisions that no longer fit well in their portfolios. And they’re not just buying random new sources of revenue, but very consciously and carefully adjusting their focus,” says Gerd Stürz. They also, he adds, have enough liquidity available and are able to secure funding for acquisitions at reasonable terms on the market.


About the study:

Top21 analyzes the listed pharmaceutical companies with the strongest sales as well as Boehringer Ingelheim, the world’s biggest family-owned pharmaceutical firm. The balance sheets for 2014, 2015 and 2016 were examined. Profits for all companies were calculated on the basis of adjusted EBITDA. All EBIT values relate to the relevant firms’ overall business operations and not specifically to pharmaceuticals. This also applies to the calculation of EBIT margins. The companies’ annual reports, news releases and SEC filings (capital market reports) were used as sources. Other sources are noted in the presentation.

About EY

EY* is one of Switzerland’s largest audit and advisory firms. EY employs about 2,700 people across 11 offices in Switzerland and Liechtenstein, and generated revenue of approx. CHF 661 million in the 2015/2016 financial year. Together with the 231,000 employees of the global EY organization, EY serves clients all over the world. EY offers an extensive portfolio of services to large as well as small and medium-sized businesses: integrated transformation advisory from strategy to IT architecture, assurance, transaction, tax, legal and people advisory services. Our highly trained staff, strong teams and local base in a globally integrated organization allow us to overcome the challenges our clients face. We are committed to “Building a better working world” – for our people, for our clients and for our communities.

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*The name EY refers here to Ernst & Young Ltd, the Swiss member firm of Ernst & Young Global Limited (EYG), a UK company limited by guarantee. Each EYG member firm is a separate legal entity and has no liability for another such entity’s acts or omissions.