A Pharmaceutical Ingredients Outlook

In starting a new year and decade, a critical question affecting the pharmaceutical industry is the extent and sustainability of an economic recovery. Macroeconomic conditions, combined with industry-specific challenges, are important determinants for the industry and its suppliers.

Some green shoots
Recent macroeconomic results show some improvement in the performance of the US economy. Real gross domestic product (GDP), the output of goods and services produced by labor and property located in the United States, increased at an annual rate of 2.2% in the third quarter of 2009, according to an estimate issued Dec. 22, 2009, by the Bureau of Economic Analysis (BEA) of the US Department of Commerce. Third-quarter performance improved compared with the second quarter of 2009, when real GDP declined by 0.7%.

According to BEA, the increase in real GDP in the third quarter primarily reflected positive contributions from personal-consumption expenditures, exports, private-inventory investment, federal-government spending, and residential-fixed investment. Gains in these areas were partly offset by a negative contribution from nonresidential-fixed investment. Imports, which decrease GDP, also increased.

Corporate profits also showed positive gains. Profits from current production (i.e., corporate profits with inventory valuation and capital consumption adjustments) increased $132.4 billion in the third quarter of 2009, compared with an increase of $43.8 billion in the second quarter of 2009, according to BEA. Current-production cash flow (net cash flow with inventory valuation adjustment), meaning the internal funds available to corporations for investment, increased $28.4 billion in the third quarter of 2009, in contrast to a decrease of $30.5 billion in the second quarter.

Pharmaceutical industry growth
Some positive signs in the overall economy are matched by some favorable, although historically lower, expectations for the pharmaceutical industry. The value of the global pharmaceutical market is expected to increase 4–6% on a constant-dollar basis in 2010 and reach $825 billion, according to estimates issued in October 2009 by IMS, the research firm’s latest estimates. IMS projects comparable growth in the near term, with the global pharmaceutical market increasing at a compound annual growth rate of 4–7% through 2013, when the market is expected to reach in excess of $975 billion.

Better growth prospects in the US, the single largest national market, are helping to lift demand. “Overall, market growth is expected to remain at historically low levels, but stronger-than expected demand in the US, is lifting our short- and longer-term forecasts,” said Murray Aitken, senior vice-president of Healthcare Insight at IMS, in an Oct. 7, 2009, press release. “The economic climate will continue to be a dampening influence in more mature markets, particularly in those countries with rising budget deficits and publicly funded healthcare systems.”

The US pharmaceutical market was expected to increase 4.5–5.5% in 2009 and 3.5% in 2010, according to October 2009 estimates by IMS. Although prospects in the US market are better than earlier projected, the global market will continue to be pressured by the patent expiry of innovator drugs and fewer new product introductions over the several years. This imbalance is the primary factor limiting global pharmaceutical market growth to the mid-single digits through 2013, according to IMS. Products now generating $137 billion in value are expected to lose patent protection through 2013.

Despite economic conditions affecting some emerging markets, projected growth in the BRIC (Brazil, Russia, India, and China) countries, Turkey, South Korea, and Mexico is still strong as these markets are expected in aggregate to increase by 12–14% in 2010, and 13–16% through 2013, according to IMS. China’s pharmaceutical market, alone, is expected to increase in excess of 20% per year and contribute 21% of overall global pharmaceutical growth in 2013.

Contract manufacturing
Near-term prospects for pharmaceutical outsourcing are fairly strong, according to a recent analysis by BCC Research, a Wellesley, Massachusetts-based market research firm. The global market for contract pharmaceutical manufacturing, research, and packaging was estimated at $177 billion in 2009, and is expected to increase to $299 billion by 2014, representing a five-year compound annual growth rate (CAGR) of 11.1%, according to BCC Research.

The largest segment of the market, contract manufacturing for over-the-counter (OTC) drugs and nutraceuticals, is projected to increase at a CAGR of 11.4% through 2014. This market segment was valued at $103.1 billion in 2009 and is expected to reach $177 billion by 2014.

Contract manufacture of bulk and dosage-form drugs is the second largest segment. BCC estimates the market at nearly $44 billion in 2009 with projected CAGR of 10.8% to $73.1 billion in 2014.

The market for contract research, the third largest sector, was valued at $24.4 billion in 2009. This segment is projected to increase at a CAGR of 10.7% through 2014, when the market is expected to be $40.6 billion.

Contract packaging is the smallest sector, both in absolute size and in projected growth. The market for contract packaging was valued at $5.5 billion in 2009, according to BCC. It is forecast to increase at a CAGR of 8% and total $8.1 billion in 2014.

Excipients
Excipients represent another element in pharmaceutical ingredient supply, and the outlook for this market is also fairly good. BCC estimates that the global market for pharmaceutical excipients at $5 billion in 2009. The firm projects a CAGR of 6% through 2014, when the market is expected to be $6.6 billion.

Organic excipients represent the largest part of the market, worth an estimated $4 billion in 2009. This sector is expected to increase at a CAGR of 6.4% to $5.5 billion in 2014, according to BCC. Inorganic excipients account for a much smaller piece of the global excipients market both in terms of value and growth. The market for inorganic excipients was valued at $861 million in 2009 and is expected to increase at a CAGR of 3.8% and reach more than $1 billion in 2014.