ERNST & YOUNG SRL

  |  2013-02-14

Prescriptions: Closing the gap?

As big pharma companies drew inexorably closer to the patent cliff — and grew increasingly aware that their existing pipelines were insufficient to fill the ensuing revenue gaps — it became imperative to find additional ways to boost shareholder value to meet investors’ expectations.

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In particular, these firms needed to find new sources of growth beyond their current drug portfolios.

 

In recent years, big pharma companies have undertaken numerous measures to drive shareholder value. In addition to fervent cost-cutting, they have downsized operations, spun off assets, restructured R&D, repurchased stock and increased dividends. These efforts will continue, but they are not, by themselves, a sustainable long-run solution. At some point, companies run out of fat to trim — and risk cutting into muscle and bone instead. Stock repurchases and raising dividends work in the short run — the 16 largest big pharma companies delivered total shareholder returns of more than 17% in 2012 — but ultimately require increasing operating cash flow. In the long run, therefore, big pharma inevitably needs revenue growth to create shareholder value in a sustainable way.

 

Growth, of course, hasn’t been easy to come by. With anemic sales growth in developed markets, companies have looked to emerging markets as a key part of the solution. However, this strategy presents its own challenges. Emerging markets have slowed in recent quarters, exacerbating the growth gap. Stagnation in the Eurozone has hurt even more.

 

Just how big is pharma’s growth gap? Prior to 2010, big pharma (defi ned as the 16 largest US, European and Japanese companies — see Appendix for details) generally kept pace with the global drug market. That changed in 2011, when the overall drug market grew faster than big pharma — a difference of about US$20 billion — and 2012, when we expect the gap to widen further to US$50 billion primarily due to the patent cliff. We expect big pharma to fall even further behind in the years ahead. The gap between IMS Health’s global drug market forecast (4% CAGR) and analysts’ estimates of big pharma sales widens steadily over the next several years. As shown in the chart on page 3, this gap is projected to reach US$100 billion by 2015.

 

This inevitably leads to two questions:

• Where will growth come from?

• What else can pharma companies do to boost shareholder returns?

 

Let’s examine these questions and explore the challenges companies face in developing sustainable answers.

 

 

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