Strong growth for major pharmaceutical companies in 2015 – Big Biotech is driving growth and putting Big Pharma under pressure

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In 2015, the 21 largest pharmaceutical and biotech companies worldwide generated revenue of EUR 429 billion from treatments and medicines, representing an increase of 3.7% over the previous year. According to a recent EY analysis, profitability has also continued to grow, with the average margin rising by one percentage point to reach 26%. While the two major Swiss companies made strong gains in terms of sales and income, currency effects also had a key role to play. Roche and Novartis lead the field in terms of research spending. Drugs for the treatment of cancer remained the greatest source of revenue and continued to show significant increases, with Roche clearly leading the world market. Portfolio restructuring has continued this year: big pharmaceutical companies have few other options for keeping up with industry growth and competing with the rapid development of large biotech firms.

Zurich, 30 May 2016 – The pharmaceutical industry has pulled out of its slump and is growing strongly: a comprehensive analysis by the advisory firm EY shows that, in 2015, the 21 largest pharmaceutical and biotech companies in the world once again significantly increased their revenue and operating income. Without adjusting for currency effects, the companies' pharmaceuticals sales increased by 3.7% (previous year: 4.2%) to reach a record EUR 429 billion. As recently as 2013, the industry had been stagnating. At the same time, the companies have become more profitable. The total earnings before interest and tax (EBIT) increased significantly, by 6.8%, with the EBIT margin (ratio of earnings before interest and tax to net revenue earned) also climbing from 24.9% to 26.0%. In total, the companies in the analysis generated income of over EUR 147 billion from medicines and treatments last year.

Research and development (R&D) expenditure rose considerably, pointing to further growth in the future. Even without adjusting for currency effects, it increased by 3.1% to EUR 79.8 billion. Mergers and acquisitions expenditure also remained at a high level in 2015, with companies spending a total of USD 168 billion on M&A activities (excluding Pfizer's terminated acquisition of Allergan). This was the second-highest figure on record, beaten only by that for 2014.

Industry growth on all fronts
“Last year was dominated by growth for the largest pharmaceutical and biotech firms. A general upward trend was seen in revenue, profit and investments,” said Jürg Zürcher, Life Sciences Leader at EY Switzerland, commenting on the figures. “Overall, the industry seems to be experiencing a definite upswing. However, growth remains unevenly distributed. For one thing, large biotech companies are the main growth drivers. Their innovative products and successful treatments have been authorized worldwide, resulting in sustainable decreases in healthcare costs. On the other hand, large pharmaceutical companies have primarily focused on restructuring their own portfolios. This also continues to be necessary, as their revenue growth is not sufficient to close the growth gap relative to the global pharmaceutical market. Meanwhile, part of this growth is due to currency effects.”

The big biotech companies dominated revenue growth: without adjusting for currency effects, Gilead Sciences saw annual growth averaging 70.7% from 2013 to 2015, with growth of 24.6% for Biogen and 13.6% for Novo Nordisk. Bayer, in fourth place, was the leading major pharmaceutical company, with an average annual growth rate of 10.8%. Roche recorded slight growth, while Novartis and the industry giants Pfizer and GlaxoSmithKline experienced shrinking revenue at constant exchange rates.

Basel-based pharmaceutical companies among top five profit-earners
In terms of realized profit (EBIT), the two Basel-based companies finished in third (Roche) and fifth (Novartis) place in absolute figures, but recorded an EBIT decline without adjusting for currency effects. Roche experienced a decline of 7.3%, and Novartis of 9.1%. The industry as a whole achieved an EBIT margin of 26.1% for 2015. This was driven by the major biotech companies, which all posted margins of over 40%. Roche was clearly above average (31.1%), while Novartis was significantly below (20.0%). Both companies recorded a decline in their EBIT margin.

“Although other industries can only dream of such margins, these companies must continually work on their profitability. That's why they are placing greater emphasis on their core competences and investing in research and development. However, the portfolios still need to be further refined,” said Zürcher. The US biotech company Gilead Sciences is currently showing the way: Gilead is the market leader for drugs to treat HIV and hepatitis C. With its focus on these product groups, the company jumped from number nine to number four in the ranking of firms with the highest sales in 2015.

No other company has matched Gilead in achieving so much of its revenue from blockbuster drugs (over USD 1 billion annually). The share of total revenue was 92.2%. Nearly the same high proportion was reached by two other major biotech companies, Novo Nordisk (90.7%) and Amgen (88.0%). At 60% overall, the proportion of revenue from blockbuster drugs was two percentage points higher than in 2014.

Dominant drugs for treating cancer and immunological disorders
Pharmaceutical companies have particularly increased sales in the most important indications, drugs for the treatment of cancer and immunological disorders. In this segment, they generated EUR 115.8 billion altogether (previous year: 94.1 billion). Roche is the clear leader for cancer drugs, earning revenue of EUR 27.0 billion. With revenue of 14.1 billion, Novartis came in third place, just behind AbbVie. The industry has also refocused attention on drugs to treat cardiovascular and metabolic disorders, with sales in this area increasing from EUR 74.1 billion to 84.8 billion.

3,770 products in the pipeline
Companies can also hope for further growth in coming years thanks to new products in the pipeline. Industry-wide, a total of 3,770 drugs were in company pipelines last year (+12%). The number of drugs in late development phases also increased again, following a decline in the previous year.

For Jürg Zürcher, this pipeline growth is a good sign for the industry: “The drugs in these late development phases are of very high quality. Thanks to new methods such as biomarkers and diagnostic tools, it is now easier to identify and discontinue projects with poor chances of success. That has enabled companies to study many more active agents in the last two years. The increase in late-phase drugs means that we can anticipate high-quality products that offer real benefits to patients.”

 

EY Grafik Bilanzanalyse

 

Details of the study
The 21 publicly listed companies in the pharmaceuticals and biotech industries with the highest sales were analyzed for the study. The German family business Boehringer Ingelheim was also included in the analysis, which led to adjustment of the previous year's figures. Business activities outside these industries were excluded from the analysis. The sources are the business reports and press releases of the various companies as well as documents made publicly available by the U.S. Securities and Exchange Commission. The figures relate to the 2013, 2014 and 2015 financial years.


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EY’s organization is represented in Switzerland by Ernst & Young Ltd, Basel, with ten offices across Switzerland, and in Liechtenstein by Ernst & Young AG, Vaduz. In this publication, “EY” and “we” refer to Ernst & Young Ltd, Basel, a member firm of Ernst & Young Global Limited.