A Five-Year Forecast: Clear Seas Ahead?

October 1, 2001
David Lipson

David Lipson is group director of marketing science for IMS Health Consulting in Plymouth Meeting, Pennsylvania

Pharmaceutical Executive

Pharmaceutical Executive, Pharmaceutical Executive-10-01-2001, Volume 0, Issue 0

During the next few years of economic and political turbulence, the pharmaceutical industry should cut through the waves like a sturdy ship, creating very little disturbance to its occupants. Some rough water- a prescription drug benefit and generic competition for blockbuster products-is expected, but the industry's ability to expand its markets in a steadily aging population will drive continued growth.

During the next few years of economic and political turbulence, the pharmaceutical industry should cut through the waves like a sturdy ship, creating very little disturbance to its occupants. Some rough water- a prescription drug benefit and generic competition for blockbuster products-is expected, but the industry's ability to expand its markets in a steadily aging population will drive continued growth.

That five-year forecast is based on analysis of IMS Health's expansive database, modeling exercises, collective experience, and two assumptions: the future will be much like the past and the future will be different from the past. In other words, future performance must be viewed in context with past performance.

Much of the predicted expansion will be in US markets, in which sales of prescription medicines are expected to grow at a compound annual rate of 12-14 percent through 2006. In contrast, data for the ten leading global pharma markets forecast an aggregate growth rate of 9.1 percent. Compared with 2001's worldwide economic growth of 3.2 percent, according to the International Monetary Fund, the US pharma industry will enjoy robust performance for the near future.

US Leads the Way

The growth rate for US prescription sales during the past five years has ranged from a low of 12.9 percent in 1997 to a high of 19.5 percent in 1999. The growth spike in 1998 and 1999 followed a dramatic peak in the number of new drugs that FDA approved in 1996 and 1997. The exceptionally high growth in 1999 is also attributed to a bad flu season, Y2K stockpiling, and the record-breaking introductions of Pharmacia's Celebrex (celecoxib) and Merck's Vioxx (rofecoxib). Those two anti-arthritics alone added almost 2 percent to that year's industry revenue growth. An estimated 14 percent future growth is, therefore, consistent with the recent past, but it also reflects likely differences in the market environment. (See "Continued Curve.")

US pharma sales should continue to grow at an average of 14 percent a year.

It's a given that US pharmaceutical sales will increase as the population expands and people live longer. The US Census Bureau projects that the country's population will climb to 320 million by 2020 and that, by the year 2005, nearly 40 percent of the population will be 50 or older. Seniors will, inevitably, consume a huge amount of healthcare resources. Last year, 34 percent of all drug mentions during physician office visits came from patients over 60. The aging population's therapy needs will be in predictable disease categories-hypertension, diabetes, lipid disorders, osteoarthritis, high cholesterol, and chronic obstructive pulmonary disease-most of which require continuing care.

A Growing Market

It seems likely that sometime during the next five years, Congress will legislate a Medicare prescription drug benefit. Despite industry's initial concern about the effects of such a program, the consensus now is that coverage for the elderly will expand the market. More than half of Medicare beneficiaries now have some form of prescription coverage through managed care, Medigap, or retiree benefits.

According to the March/April 2001 issue of Health Affairs, patients with coverage filled an average of 24 prescriptions a year, compared with 17 a year for patients without coverage. And the average retail value of prescriptions for patients with coverage is substantially higher, suggesting that they're more likely to take branded medicines. Even if the Medicare program involved a federal purchasing arrangement that reduced the profit per prescription, the revenue loss would be offset in the long run by at least a 20 percent increase in volume.

Even though the rate of US drug approvals has slowed, the industry's pipeline continues to be robust.

Meanwhile, companies continue to prove that they can create markets by advertising directly to consumers. Pharmacia's direct-to-consumer campaign for Detrol (tolterodine)-a significant but not record-breaking investment-doubled the number of office visits for urinary incontinence in just two calendar quarters. DTC advertising works, and it should continue to contribute to market growth well into the future. It seems likely that a series of new medicines will be marketed directly to the rapidly growing senior population and that both manufacturers and patients will benefit.

The surest driver of growth has been, and will continue to be, the development of products that serve unmet needs. New products drive growth on several levels:

The Power of Innovation

Create entirely new markets. The "build it and they will come" mentality has served many companies well. The industry has been adept at creating markets where none existed before. Detrol, which helped establish a urinary incontinence market, is one example. And Pfizer's impotence product Viagra (sildenafil) created such a demand that several other companies are pushing similar products through the pipeline.

Expand demand in existing markets. A new drug can bring incremental growth to a category even if similar therapies exist. Glucophage (metformin) from Bristol-Myers Squibb, for instance, was responsible for significantly expanding what had been a flat market. The number of new prescriptions for oral anti-diabetic drugs doubled in the first four years after Glucophage's launch.

Similarly, in the year following Merck's introduction of Fosamax (alendronate), a bone density regulator, the number of patient visits for osteoporosis doubled. And Celebrex and Vioxx more than doubled the dollar volume of the anti-arthritics market within a year of their launches.

Continue to contribute. Even after the first few years, new products can keep on contributing. In 1999, when AstraZeneca's Prilosec (omeprazole) was ten years old, its revenues grew 21 percent. In the same year, another ten-year-old drug, Amgen's Epogen (epoetin alfa), grew 26 percent and added almost half a billion dollars in revenue.

Pharma's revenue growth in the past decade has resulted from a combination of price increases, new products, and a shift to more expensive products.

New products will play a large part in future growth as well. In 2000, the US pharma industry spent $22.48 billion on R&D, up from $1.6 billion in 1980. Consequently, the number of new products in the pipeline continues to swell. In 2000, there were 8,191 products in development throughout the world, compared with 5,492 in 1995. (See "Bulging Pipeline.")

The age of blockbusters isn't over yet, but for a product to achieve that status, conditions must be just right. Celebrex and Vioxx-blockbusters in anyone's book-entered a huge, well developed market of perennially unsatisfied but motivated patients with a non-life-threatening disease. And the therapies offered significant perceived advantages over older products. There may be other markets with those characteristics, but not many. Last year, the industry expected big things from GlaxoSmithKline's irritable bowel treatment Lotronex (alosetron) and Bristol-Myers Squibb's hypertension drug Vanlev (omapatrilat). But Lotronex was withdrawn soon after launch, and Vanlev's application for marketing was delayed. Clearly, there will be fewer blockbusters in the future.

Blockbusters? Maybe

There are exceptions, of course. Nexium (esomeprazole), AstraZeneca's new "purple pill" for acid reflux disease seems destined for stardom. And there are strong candidates in such rapidly growing markets as cholesterol reducers-Astra Zeneca's Crestor (a statin)-and antidepressants-candidates at Lilly, Merck, and Novartis.

Many products continue to grow and deliver strong performance throughout their life cycles, and the industry will continue to reap the benefits of recent introductions for several years. Among the current ten top-selling products, the two newest, Pharmacia's Celebrex and Pfizer's Lipitor, have been on the market for just a few years. The remaining eight heavy revenue producers are five or more years old, and four-Prilosec, Prozac (fluoxetine), Epogen, and Procrit-have been marketed for more than ten years.

But even the exceptional blockbuster may soon cease to exist. Genomics will surely change the nature of the market from selling one product to millions of patients to selling "designer" drugs in small volumes to limited patient populations.

As products go off patent, the industry will lose billions to generic competition.

Although pharmaceutical prices are a frequent target of public criticism, for several years industry growth has come from increased use, not price increases. (See "Growth Factors," page 54.) Ten years ago, price increases were greater than 8 percent, but after Clinton's election in 1992, they became more restrained. In 2000, pharmaceutical prices increased 3.9 percent, in line with the Consumer Price Index increase of 3.4 percent. Media, public, and political attention to pricing will likely keep price increases near the rate of inflation, thereby limiting dollar growth from that source. Although product prices will not affect the industry much, other factors will limit its growth:

The Downside

FDA slowdown. The peak of 53 new products approved in a year reached in 1996 fell to 27 in 2000. And, although the number of months needed for an approval was at an all-time low in 1998, it has been creeping back up ever since. In view of recent product withdrawals-Lotronex and Baycol (cerivastatin)-it's likely that both FDA and product developers will approach new drug approvals, particularly for non-life- threatening conditions, with renewed caution, and the slowing trend will continue.

Slow economy. Recent history suggests two things about how an economic slowdown affects the pharmaceutical industry. First, it is affected less than other sectors. Second, the impact is delayed by as much as a year. That may be because the majority of patients have prescription coverage through health insurance. It takes time for work force reductions to leave people without coverage and for employers and their HMOs to take stronger cost- containment measures. Thus, pharma companies won't feel the pinch of 2001's tighter economy until 2002.

Complex regulations. Because the federal move to allow re-importation appears to be a dead issue and the Medicare benefit is still uncertain, some state legislatures have become impatient to ease the financial burden of low income and elderly patients. The real threat to pharma market performance is a hodgepodge of programs at the state level. Maine, Minnesota, Indiana, and Florida are among the states that are considering or have already enacted programs. Complying with a large number of unique systems would be a costly requirement that could cut deeply into companies' bottom lines.

Generic competition. One major difference between the market of the past few years and that of the coming five years will be the number and size of products going off patent. In recent years, relatively few products faced patent expiration, but many more are expected to lose patent protection between now and 2005. And following a generic entry, the bottom almost immediately falls out of a branded product's volume. About $3 billion in brand-name sales will be lost to generics each year during the next decade. The timing of generic entry is hard to anticipate accurately. If all goes according to expectations, the risk will be as little as $5-$7 billion per year. But it is possible that $10 billion worth of brand-name products could lose protection in one devastating 12-month period. (See "Generic Losses.")

Meanwhile, more brand-name pharma companies are employing active strategies to avoid the worst of the generic sting. Before Prozac went off patent this year, Eli Lilly secured a new indication and launched fluoxetine as Sarafem into an entirely new premenstrual syndrome market. The company also developed a once-a-day formulation in hopes of keeping some of its antidepressant patients. AstraZeneca is following a similar tactic by encouraging its Prilosec patients to switch to Nexium before it faces a generic-possibly within a year.

On the whole, the next five years look promising for the US industry because pharmaceutical companies have done a good job of preparing for times and events that they cannot control. Their ability to identify and take advantage of new markets with innovative products, coupled with opportunities presented by a growing and graying population, will more than offset the negative effects of a sluggish economy.

The industry, too, has learned how to prosper even in the face of generic erosion at a time when many major drugs are due to come off patent, with potentially severe damage to the bottom line. A look at the forecast for other markets around the world and for other global industries should convince anyone that US pharmaceutical companies are making the most of a challenging situation.

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