More specialty drug innovation, greater patient access to medicines, and reduced impact from patent expiries will be the primary drivers behind increase in global medicine spending through 2018.

The global pharmaceutical market is showing signs of recovery with several positive factors projected for the next five years. Overall, global spending on medicines is expected to increase at a compound annual growth rate (CAGR) of between 4% and 7% between 2014–2018, with the global pharmaceutical market reaching $1.3 trillion by 2018, according to a recent analysis by the IMS Institute of Healthcare Informatics. Moderation of generic-drug incursion in developed markets, strong growth in emerging markets, increased innovation, notably in specialty medicines, and a resurgence in the US market, particularly for 2014, are some key highlights. So what is in store for the global pharmaceutical market? DCAT Value Chain Insights (VCI) examines the data and the key factors influencing the current and future market.

Crunching the numbers: overall view
IMS projects that global spending on medicines will increase at a CAGR of 4-7% (on a constant currency basis) to 2018, when global spending on medicines is expected to reach nearly $1.3 trillion. This growth rate will be slightly higher than the 5.2% recorded during the past five years (2009-2013). The uptick is due to the introduction of new specialty medicines, increased accessibility for patients, and reduced impact from patient expiries in developed markets.

On an absolute spending basis, absolute growth in global medicine spending will increase 30% by 2018. The increase in annual spending will spike in 2014 when absolute growth will be about $70 billion, up from $44 billion in 2013 and $26 billion in 2012, according to IMS. During the five-year forecast period of

2014-2018, global spending on medicines is expected to increase on an absolute basis between $290 billion and $320 billion (based on actual and forecast exchange rates) and between $305 billion and $335 billion using constant exchange rates. In contrast, absolute global spend for pharmaceuticals increased $194 billion during the period of 2009-2013, based on using actual and forecast exchange rates. Using constant exchange rates, absolute spending growth for the period of 2009-2013 was $219 billion. The IMS projections for global spending are based on best available pricing information and measured at the ex-manufacturer level; they do not factor in a range of rebates, discounts, taxes, and other adjustments that affect the net amount received by manufacturers. These discounts are expected to increase over time and reduce the level of overall global growth, which IMS estimates would reduce growth by $60 billion to $80 billion or approximately 25% of total growth over the next five years (2014-2018) and reduce the net price growth rate by approximately one-half percentage point.

US and Japan lead resurgence in developed markets
Although growth in annual spending will moderate after 2014, it will still be higher than the levels seen in the past five years. The developed markets—led by the United States, the major five European markets (France, Germany, Italy, Spain, and the United Kingdom), and Japan—are the primary drives of this increased growth while the 21 “pharmerging” countries, a term used by IMS to describe emerging pharmaceutical markets, will increase their contribution to growth over the next five years and account for nearly 50% of absolute growth in 2018. The greater contribution to growth from developed countries through 2018 is being led by the US and Japan, with France, Germany, Spain, UK, and Italy maintaining relatively low growth levels. While these markets will moderate as cost-containment measures further limit price levels, rising volumes will continue to contribute to overall market growth. Only France and Spain will see a contraction of pharmaceutical spend per capita in 2018, due to policies intended to control spending growth.

Overall, global growth in medicines spending will peak at 7% in 2014, the highest growth since 2004 when it was 7.7%. The US market is the primary driver for the peak performance in 2014. The US pharmaceutical market is forecast to increase at 11-13% in 2014 and moderate to the 5-8% range thereafter through 2018, which is still significantly higher than the 3.6% growth over the past five years (2009-2013). This increase in growth is in part due to the reduced impact of generic-drug incursion and the launch of new products, producing what IMS calls a shift in the balance of the “innovation cycle” or the differential in the value of the amount of new medicines being launched and used compared to the value of branded medicines facing new generic completion.

Price increases, mostly in the US, contributed to growth in 2014, driven by some specific products and therapy areas where list price increases were above historic norms and are expected to moderate through the rest of the forecast period (2014-2018) back to historic levels and be offset by off-invoice discounts and rebates, which are not reflected in the IMS projections. The US will remain the largest market, representing more than one-third of the global total. Overall, demographic trends will act as a significant driver of global demand for pharmaceuticals during the next five years. An increase in diagnosis and treatment of chronic conditions and an aging population will drive growth in developed markets while population growth, combined with improved access to healthcare, will drive growth in emerging markets, according to IMS.

“The higher level of spending growth we’re projecting over the next five years reflects an unusual combination of higher spending on the surge of innovative medicines for patients and lower savings from patent expiries,” said Murray Aitken, IMS Health senior vice president and executive director of the IMS Institute for Healthcare Informatics, in a company release. “This is particularly evident this year and next in developed countries—and especially in the US, which accounts for more than a third of the global market.”   

Across the major markets in Europe, economic austerity has led to efforts to constrain growth in healthcare spending, and especially medicines, which in turn, is projected to result in spending declines or very low growth, which will continue through 2018. Japan is forecast to see growth in the 1-4% range  benefitting from increased demand as its population over the age of 65 exceeds 27%, 5% higher than other developed countries, but also facing price constraints.

Emerging-market growth
The 21 pharmerging countries that now account for 25% of global spending on medicines will continue to broaden access to treatments as their economies expand and governments advance efforts to provide universal health coverage. Spending on medicines in pharmerging markets will rise more than 50% over the next five years as these markets broaden access to treatments as a result of expanding economies and increased access to healthcare through government-supported efforts to provide universal health coverage. More than 80% of the forecasted growth in drug spending in pharmerging markets will be for non-branded medicines, including greater use of biologic therapies. China, already the world’s second largest pharmaceutical market, will reach spending levels of $155 billion to $185 billion in 2018. Implementation of healthcare reforms is increasing demand for medicines while pricing regulations are being used more frequently to manage overall growth levels. Per capita spending on medicines in China is anticipated to grow by more than 70% in the next five years. China is the second largest pharmaceutical market in the world behind the US, but its per-capita spending on pharmaceuticals is expected to be just 9% per capita of that in the US.

Overall, China is projected to have 75% total growth in the next five years, driven by both brands (70% growth) and non-brands (75% growth). In China, spending level increases are tied to recently expanded access, with 95% of the population now covered by public health insurance plans. Improvements to the healthcare infrastructure and community health services are expected under the current Five-Year Plan (2011-2015) and will further grow the market through 2018. Reform of the hospital sector will continue to impact prescribing as cost-containment measures limit drug budgets to a fixed percentage of total budgets and reduce profits obtained by hospitals for dispensing medicines. Policy changes in 2014 will bring more drugs under the remit of the National Development and Reform Commission, including those to treat serious diseases, exposing them to price ceilings and in-market price cuts that will continue to exert downward pressure on prices, according to the IMS analysis.  

While some pharmerging markets have robust domestic generic industries, other typically smaller countries rely more on the import of medicines and tend to have higher branded medicine spending as a share of their total spend. As a percentage of total growth in pharmerging markets, brand growth remains steady at 30% growth while non-brand growth sharply increases at 61%. Brand growth comprises 23% of total growth of Tier 3 pharmerging markets primarily due to significant importation of medicines and pricing policies that promote competition. Tier 3 pharmerging markets are: Algeria, Argentina, Colombia, Egypt, Indonesia, Mexico, Nigeria, Pakistan, Poland, Romania, Saudi Arabia, South Africa, Thailand, Turkey, Ukraine, Venezuela, and Vietnam. 

Outlook for generics
In the last five years, the value of small-molecule products facing loss of exclusivity in developed markets totaled $154 billion, according to IMS. The patent cliff peaked in 2011-2012 when Lipitor, Plavix, Singulair, and Seroquel faced generic competition in the US for the first time. Global brands such as Nexium, Celebrex, Symbicort, Abilify, Gleevec, Crestor, Zytiga, and Cialis face patent expiry in the next five years. While a further $48 billion of spending for biologic medicines will lose exclusivity in the next five years, gradual evolution of biosimilar regulations and competition will result in less impact on brands than is typically seen with small molecules.

Specialty medicines and drug innovation
Specialty medicines will contribute a projected 40% of total global spending growth through 2018. Higher spending on specialty medicines is expected over the next five years, particularly in developed markets. Much of this growth is from medicines bringing new treatment options to patients, including breakthrough therapies or even cures that often reduce complications or hospitalizations while improving outcomes. Advances will be particularly notable in the oncology, autoimmune, respiratory, anti-virals and immunosuppressants therapy areas. The surge in cancer drug innovation in recent years will continue and contribute to global spending on all oncology drugs—reaching about $100 billion in 2018, up from $65 billion last year, according to IMS. The introduction and uptake of potent new medicines for treating hepatitis C are expected to result in about $100 billion in total spending over the five-year period ending in 2018. 

Nearly 200 new drugs are forecast to be launched in the next five years. A high number of new molecular entities are expected to be launched annually, continuing a second wave of innovation similar to levels seen in the mid-2000s, according to IMS. More than 2,000 products are currently in late-stage clinical development, of which oncology therapies make up fully one-fourth of that total. The growing number of medicines receiving the US Food & Drug Administration’s Breakthrough Therapy Designation is contributing to an acceleration of approvals, notes IMS. The availability of new medicines to patients around the world, however, varies significantly by country and disease: on average, fewer than half of the medicines initially launched over the prior five years are available across the major developed markets.