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Balance sheet analysis of the global top 20 pharmaceutical companies: Big pharma reports falling revenue and profits - Business models under scrutiny

Zürich (ots) - Slight increase in research and development investment / small pharmaceutical manufacturers growing faster, but still lag behind on the profit stakes / service offerings growing in significance - move towards direct patient contact

Times are getting tougher for big pharma. Last year, the world's 10 largest pharma companies in terms of revenue suffered negative revenue growth of 2 percent*, down to a total of EUR 359b. Profits also took a 1 percent dive to EUR 95b. Companies ranked further down the revenue scale had a more favorable figure to offer, namely revenue growth of 3 percent. However, with their aggregate EBIT sliding by 11 percent, companies in the 11 to 20 placings lost more in terms of profit than the top 10.

There are many reasons for the weak revenue development of pharmaceutical groups (total revenue of all companies ranked in the top 20 down 1 percent and EBIT down 3 percent): falling drug prices, stalling demand in developed markets, finite resources of lucrative APIs and increasing competition from cheap generic drugs. In response, the companies have launched sweeping cost-cutting and restructuring programs. They have also upped their investments in research and development - by 1 percent last year to EUR 70m. Ultimately, however, future growth will only be possible if pharma companies explore new markets and align their business models more keenly with patient needs. These are the results of an analysis of financial data of the world's 20 biggest pharma companies prepared by Ernst & Young, a leading audit and advisory firm.**

Anemic growth and margin pressure Of the world's 20 largest pharma companies, 8 recorded lower revenue from their life science operations - partly due to expiring patents for lucrative drugs and the competition from generics, partly on the back of the pressure to save exerted on industrial nations' healthcare sectors. While some companies achieved attractive growth in the emerging economies, this failed to atone for the losses suffered in North America and Europe.

The decline in profits reported in spite of massive cost-cutting measures is attributable to restructuring costs and companies' persistently high investment outlays, says Patrick Flochel, Ernst & Young's Global Pharmaceutical Leader. Last year, the aggregate R&D ratio, i.e., research and development expenditure as a percentage of revenue rose slightly from 14.5 to 14.8 percent. The EBIT margin lost ground in the same period, down from 26.2 to 25.5 percent.

The years ahead are not expected to bring any improvement to the profit situation - on the contrary: «The margins of pharmaceutical groups will stay under pressure». While a number of companies have promising new drug candidates in the pipeline, more price risks and volume losses are in store in view of the patent cliff. «Big pharma is facing immense challenges. The industry has to find out where its growth is going to come from going ahead» says Patrick Flochel. In principle, an aging population is going to need more drugs - however, according to Patrick Flochel, this growth will be weighed down by substantial price pressure exerted by health insurance funds and government policies. For this reason, the industrial nations are unlikely to see any spectacular revenue increases. In the emerging markets, demand for medical products is rising in step with economic prosperity. However, a company looking to enter these markets must be prepared to take on high risk as well. «The markets in these countries play by their own rules, which means that we can't just transfer the business models used in the developed markets to the emerging markets», explains Patrick Flochel. A strong presence in the emerging markets has become indispensable. «But the low prices should not be underestimated - they are bound to reflect on margins.»

Fewer mergers and acquisitions A further way to close the growth gap would be to seek growth through transactions. However, M&A investment by the pharmaceutical giants has quietened off in recent years. In 2009, big pharma invested USD 101b in acquisitions; in 2011, the figure was just USD 64b. And in 2012, a mere USD 28b changed hands in M&A transactions. «The companies' firepower has diminished», Patrick Flochel points to the reason for this decrease. This is due to a lack of funds, increased borrowing in the face of dwindling cash flows, costly acquisitions in the past, stock repurchases and dividends. What is more, «big biotech», specialty pharma and generics manufacturers are also looking to address growth through M&A, which is likely to push up the price of transactions.

Business model revamp on agenda: Service offerings in demand «Pharma companies' business models have barely changed over the last few decades», says Patrick Flochel. «The focus has always been on the development and sale of drugs through medical practitioners and hospitals, either with or without intermediary wholesalers. There was virtually no contact between patients and pharmaceutical manufacturers. This is going to change in the future. Pharmaceutical suppliers will be assessed in terms of the actual effectiveness of their substances, both in practical applications as well as in clinical studies». To achieve this, the companies will be increasingly seeking direct contact with patients and will try to influence their behavior with related service offerings, for example, apps to help diagnose illnesses and monitor therapies. «They can even monitor whether patients are taking their medication», explains Patrick Flochel. «Promoting a healthy lifestyle, including a balanced diet, weight control and correct drug intake will become more important. Pharma companies will abandon their closed-door mentality and enter into cooperations with players not previously involved in the industry, from IT, telecommunications to the food industry.»

*All percentages relate to the development at steady exchange rates. **This study included an analysis of the companies' annual and quarterly reports for calendar year 2012 compared with the prior year. Only healthcare figures were included. Activities unrelated to the pharma industry were not taken into account.


Nadine Geissbühler
Ernst & Young
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