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Pharma in Focus Whitepaper| Australian Pharmaceutical Industry Trends: 2017 Forecast March 2017

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PHARMA IN FOCUS WHITEPAPER

AUSTRALIAN PHARMACEUTICAL INDUSTRY TRENDS: 2017 FORECAST

Part 1: The Index

For the fifth consecutive year, Pharma in Focus has tracked sentiment in the Australian

pharmaceutical industry using three key performance indicators. The result is the Australian

Pharma Confidence Index (APCI), the only index tracking sentiment within Australia’s

medicines industry.

At 107, sentiment at the end of 2016 was found to once again be positive (100 being neutral).

While sales revenue and jobs growth both put upward pressure on the index, decidedly poor

perceived business conditions for the industry continued to depress the index, resulting in it

being marginally above neutral.

Historically, the index has hovered around neutral. Beginning at 92 in 2012, it climbed to 111

in 2013 to remain at 111 in 2014 before falling back to 105 in 2015. Therefore, 107 represents a

slight improvement in the index for 2016/17.

This graph illustrates the actual (2016) and predicted (2017) experience of the Australian pharmaceutical

industry in the three index elements of sales revenue, employment and business conditions where 1.0 is absolute positive and 0.0 is absolute negative.

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

2012 2013 2014 2015 2016 2017

Sales, jobs and business conditions: Actual (2016) and Predicted (2017)

Sales Revenue (actual) Sales Revenue (predicted)Employment (actual) Employment (predicted)Business Conditions (actual) Business Conditions (predicted)

Predicted sales revenue

Actual sales revenue

Predicted jobs growth

Actual jobs growth

Actual business conditions

Predicted business conditions

Neg

Pos


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The Australian Pharmaceutical Confidence Index

For the past five years, Pharma in Focus has tracked business confidence in the Australian

pharmaceutical industry, calculating the Australian Pharmaceutical Confidence index using

the industry’s experience and expectations in three key areas: sales revenue, jobs growth and

business conditions.

In 2016, better than expected business conditions balanced a worse than anticipated result in

sales revenue and jobs growth to deliver an index of 107 – two points higher than the previous

year. With 100 being neutral, this result keeps the APCI tracking in the low-positive territory

just above neutral, as it has done since 2013.

While the industry indicated business conditions for 2016 were better than anticipated, this

factor continues to have a strongly negative impact on the index. Expectations for business

conditions in Australia continue to lag behind experience, illustrating the low confidence the

industry has in the government to improve operating conditions in the future.

In 2016/17, sales revenue was the best performing of the three contributing APCI factors with

most companies continue to report improved sales revenue. Despite being down on

expectations, companies were also predominantly optimistic that sales revenue would

continue to grow.

Jobs growth was also down on industry predictions 12 months earlier. Despite this, the

industry was again optimistic 2017 would be a better year, although expectations are slightly

depressed following the 2016 experience.

* Business sentiment has tracked just above neutral for the past four years with 2016/17 marginally higher than

the previous year.

92

111 111 105 107

0

50

100

150

200

2012/13 2013/14 2014/15 2015/16 2016/17

APCI 2012/13 - 2016/17


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Historical movements

Beginning in a negative position in 2012/13 due to 90 per cent of the industry experiencing

declining business conditions, the first index was recorded at 92. Improved sales revenue,

jobs growth and an expectation among sections of the industry that business conditions

would improve in 2014 pushed the index into positive territory, moving to 111 in the 2013/14

Industry Trends report. With 2014 delivering as expected, thereby driving a sense of optimism

that 2015 would be even better for both sales revenue and jobs growth, the 2014/15 index

was calculated as the same as the previous year - 111.

0.73

0.5

0.27

0.87

0.66

0.18

Sales Employment BusinessConditions

2016/17 APCI

2016 2017

0.76

0.62

0.09

0.85

0.71

0.11


2015/16 APCI

2015 2016

105

0.77

0.63

0.17

0.87

0.74

0.17


2014/15 APCI

2014 2015

0.90

0.67

0.16

0.75

0.62

0.24


2013/14 APCI

2013 2014

111 0.74

0.57

0.1

0.74

0.5

0.12


2012/13 APCI

2012 2013

92 92 111

107


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Twelve months later, the sense of pessimism in the industry had returned. The federal

government delivered a budget promising massive cuts to pharmaceuticals, price cuts were

about to take effect, sales growth was down and job cuts were again on the agenda. The

result pushed confidence in business conditions back to the low levels of 2012 and caused the

index for 2015/16 to fall six points to 105 (100 being neutral).

Interestingly business conditions in 2016 were found to be better than expected for a small

part of the industry, despite both sales and jobs growth being lower than had been

anticipated 12 months earlier. Business conditions improved in 2016 to 27 out of a possible

100 points. While still a negative influence, this was a great improvement on the depressed

conditions of previous years.

Expectations for 2017 continue the more optimistic trend in sales and jobs, with more

companies tipping growth than not. However, the industry is also forecasting deterioration in

business conditions, resulting in the index for 2016/17 being calculated at 107.

While still in positive territory, the index for 2016/17 indicates poor business conditions

brought about by government budget decisions are continuing to depress sentiment, with

successive rises in sales and jobs inadequate in overcoming the downward pressure. The

2017/18 index has little chance of rapid improvement.

Part II: Forecast 2017

Business conditions

Industry sentiment regarding business conditions for Australian pharmaceuticals continued

to be the most negative component of the latest index, despite 2016 supposedly delivering

0.1

0.16

0.17

0.09

0.27

0.12

0.24

0.17

0.11

0.18

0

0.1

0.2

0.3

0.4

0.5

2012 2013 2014 2015 2016 2017

Business conditions - actual and predicted Business Conditions (actual) Business Conditions (predicted)


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the best conditions in five years. Only one in 10 companies predicted business conditions

would improve in 2017.

Price cuts and sustained pressure on the federal government to deliver budget savings in the

PBS has convinced the pharmaceutical industry that there is no end to the pain. While

companies marketing hepatitis C products had a bumper year, recent Pharma in Focus

analysis showed that without the hepatitis C therapies, the PBS was shrinking. Little wonder

the industry sees only dark times ahead.

For most CEOs, 2017 is expected to bring either the same poor conditions as 2016, or slightly

worse. Only three company leaders predicted a significant worsening of business conditions.

All from small originator pharma companies, these leaders had experienced a significant

worsening of conditions in 2016 and, having mostly cut staff and tightened the company belt,

were extremely pessimistic about what the coming year would bring.

A breakdown of company expectations for business conditions in 2017 found negative

sentiment was strongest in the large-sized company sector, with most big prescription

companies (earning more than $400 million annually) predicting a further decline in

33%

18%

46%

11%

20%

23%

38%

57%

56%

50%

40% 53%

16%

27% 11%

33%

7% 6% 14%

11%

11% 17%

2016 2017 2016 2017 2016 2017

Small companies Medium companies Large companies

Business condition expectations: 2016 vs 2017 Decrease >10% Decrease <10% Stable Increase <10% Increase >10%


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conditions. Traditionally the hardest hit by PBS changes and the least flexible in adapting to

new conditions, big pharmacos rarely have a positive outlook.

In contrast, companies dealing with complementary and OTC products were more positive

with a quarter of this sector tipping an improvement in conditions.

Less than half of small pharmacos (earning less than $100 million annually in sales revenue)

predicted a worsening of business conditions in 2017, continuing the trend of the more

nimble companies showing a greater tolerance of bad conditions. However in 2017 this was

the only sector where companies anticipated a significant decline.

What they said

The reasoning behind the pharmaceutical industry’s concerns about business conditions in

Australia was evident in the few comments made, although each represented a different

segment of the pharma sector.

The leader of a large originator company that enjoyed significant increases in profits and

sales in 2016 was possibly best placed to explain why he was anticipating a decline in business

conditions in 2017, despite having enjoyed what appeared to be a prosperous 2016.

“The continued focus on funding new PBS listings by finding savings elsewhere in the health

portfolio is completely at odds with the concept of proving cost effectiveness through the

PBAC,” he said.

“Every dollar spent on medicines funded by the PBS already creates savings elsewhere in the

healthcare system. This approach to double-dipping is making it virtually impossible to list

new medicines at a reasonable return.”

For the leader of another large originator company that experienced declining profits and

sales revenue in 2016, the reasons for predicting further declines was simple: “expectation of

more of the same (i.e. price cuts) in the 2017 budget,” he said.

For a small growing OTC/complementary business, it was not Australia’s business conditions

that were unpredictable but China’s, and in particular its notoriously complicated regulatory

system.

“China Blue Hat and ongoing access difficulties to China market will determine sales growth,”

he said, referring to the system whereby companies have to apply for a “blue hat”

registration with China’s FDA – a process believed to entail up to three years of

administration procedures, rigorous testing and clinical trials.


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Sales

The health of company sales revenue continues to have a positive influence on sentiment

within the Australian pharmaceutical industry, yet despite many industry players

experiencing strong growth in sales revenue in recent years, this positivity has failed to lift

industry perceptions regarding the harsh conditions for doing business in Australia.

The Australian pharmaceutical industry was slightly more optimistic at the end of 2016 than it

was 12 months earlier, with 81 per cent of the industry anticipating improved sales revenue

results in 2017 – up 15 percentage points on expectations 12 months previous.

Compared with the end of 2015, many companies had moved from expecting stable sales

revenue (25 per cent down to six per cent), to anticipating an increase in revenue of less than

10 per cent (22 per cent to 37 per cent) by the end of 2016. One in 10 companies was

expecting a fall in revenue.

Large pharma companies were expecting to be hardest hit by falling revenues in 2017, several

predicting successive drops in sales after several years of actual falling revenues. Sales

pessimism was much stronger among larger pharmacos at the end of last year than it was 12

months earlier when all large pharmacos tipped either stable or improved sales revenue for

2016.

Medium sized pharmacos (earning between $100-$400 million annually) were found to be

more optimistic about 2017 than they had been 12 months earlier. Most of this sector tipped

a rise in sales revenue for 2017 with none predicting a fall.

In the small company sector, again optimism reigned with only one company predicting a fall

in revenue of more than 10 per cent, attributing this directly to price cuts.

0.74

0.90

0.77

0.76 0.73 0.74 0.75

0.87 0.85 0.87

0.5

0.6

0.7

0.8

0.9

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2012 2013 2014 2015 2016 2017

Sales revenue- actual and predicted Sales Revenue (actual) Sales Revenue (predicted)


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What they said

Two smaller company leaders predicting increases in sales revenue indicated this was due to

new product launches, not an increase in volume.

“This increase will rely mainly on new products that will be launched in 2017,” said one

company leader. “Sales increase due to new product launches,” said another.

In the medium company sector, a company leader who had falling sales revenue in 2016 and

was tipping even greater reductions in 2017 was more vocal.

“Major impact of price decrease (fix dose combination) and new price disclosure

methodology,” the leader said.

In the large company sector, a complementary company leader indicated the future was not

a bed of roses, even for a sector which had experienced unprecedented growth in recent

years due to Chinese demand for Australian vitamins and other complementary products.

“Changing channel for sales to Chinese consumers,” the leader said, predicting a small

downturn in sales revenue.

7% 5% 8%

7% 9%

50% 20%

6%

33%

12% 22%

7%

28%

25%

63% 45%

33% 60% 61%

25% 25% 33%

17%

2016 2017 2016 2017 2016 2017


Sales expectations: 2016 vs 2017 Decrease >10% Decrease <10% Stable Increase <10% Increase >10%


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Pre-tax profit

Pharmaceutical sector pre-tax profit forecasts for 2017 were less optimistic for large and

small companies operating in Australia and more optimistic for mid-sized companies.

In regard to profit, at the end of 2016 the pharma industry was found to have performed

better than it had anticipated, with more companies enjoying increases and fewer suffering

profit falls than had been predicted at the end of 2015. This improved result sparked an even

more optimistic outlook for 2017 with 61 per cent of companies predicting a rise in profits this

year and 29 per cent anticipating a fall.

Traditionally, few companies anticipate stable profit results year-on-year, hence only one in

10 indicated they expected their profit to remain stable – a figure which is likely to change.

Large pharmacos were found to be less optimistic about the coming year than they were for

2016, with half predicting a fall in profits of less than five per cent and only a third anticipating

a small rise in profit. The remaining 17 per cent anticipate the same as the previous year.

Mid-sized pharmacos earning between $100 million and $400 million annually were more

optimistic. More than half had expected profit cuts in 2016 but 12 months later three in four

14% 24% 27%

21% 6%

27%

12% 25%

50%

7% 6%

18%

12%

17%

14% 18%

9%

50% 38%

33% 43% 47%

18% 25%

37%

2016 2017 2016 2017 2016 2017


Profit expectations: 2016 vs 2017 Decrease >5% Decrease <5% Stable Increase <5% Increase >5%


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companies had experienced a rise in profits. This fuelled further optimism for 2017 with the

same proportion predicting their good fortune would continue throughout this year.

Smaller companies also largely performed as they expected in 2016, yet 30 per cent

anticipate profits would fall in 2017. Most are expecting profit growth but with so many

anticipating a cut in pre-tax profit, it is unlikely to lead to overall growth in small Australian

pharmaceuticals this year.

Employment

Unlike sales revenue and profit, the largest proportion of company leaders anticipates

stability when it comes to employment year-on year, with this trend strengthening in 2017.

While a third of industry leaders anticipated and experienced stable employment in 2016, 44

per cent have tipped their company employment will remain stable in 2017.

Despite almost a third of companies downsizing in 2016, fewer than one in five expects to

downsize in 2017. Twice as many (38 per cent) expect to employ additional staff in 2017,

although most of this growth will be in the small and medium sized company sectors.

The proportion of large companies looking to cut staff in 2017 is triple that of 2016, indicative

of the pain continuing to be felt at the big pharma end and the continued pressure on large

pharmacos to find additional cost savings. While one in two large companies is expecting to

maintain their 2016 staffing levels, fewer than one in six is anticipating growth.

In contrast, the mid-sized company sector is expecting greater stability in 2017 than it

anticipated for 2016. While the same proportion has tipped jobs growth in 2017 as did in 2016

(38 per cent) and half have tipped stable employment, at 12 per cent the proportion

0.57

0.67 0.63

0.62 0.5 0.5

0.62

0.74 0.71 0.66

2012 2013 2014 2015 2016 2017

Jobs growth - actual and predicted Employment (actual) Employment (predicted)


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anticipating having to let staff go in 2017 is significantly lower than the 31 per cent

anticipating a drop in their staff numbers for 2016.

Small pharma companies have enjoyed several years of growth in the Australian

pharmaceutical market, but this began to flatten out in 2016. Two years previously, 85 per

cent of the small pharma sector was anticipating jobs growth; for 2017 this had almost halved

to 44 per cent. While many of these companies moved to anticipating stable staff numbers,

the fact that one in three small companies cut staff in 2016 after anticipating jobs growth has

made this sector far less optimistic when it comes to 2017.

Clinical trials

Most companies involved in clinical trials for new drugs or new indications for existing drugs

experienced either stable or increasing trial activity in 2016, with only one company reporting

their trial activity had fallen during the year. Overall, trial activity was flatter than expected

with 61 per cent of companies involved in trials reporting no change between 2015 and 2016

and 35 per cent experiencing a jump in trial activity.

In 2017, three in four companies were planning to continue their existing trial activity with

only one in four planning to increase trial activity. When broken down by company size,

11% 23%

13%

6%

8%

12% 11%

33%

34% 39%

31%

50% 45%

50% 33% 11%

31% 38%

11%

17% 20% 33%

7%

33%

2016 2017 2016 2017 2016 2017


Jobs growth expectations: 2016 vs 2017 Decrease >10% Decrease <10% Stable Increase <10% Increase >10%


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growth will predominantly be in larger pharma and complementary companies; half the

leaders of large companies engaged in trial activity were anticipating an increase in trial

activity in 2017 with the remainder expecting to maintain their existing trial activity.

Small and medium sized pharmacos involved in trials were predominantly planning to

continue existing trials with only a small proportion planning new trials.

Part III: 2017 Forecast by Sector

Originators

Companies dealing with originator products had a tougher year than companies dealing with

complementary or OTC products last year and were therefore less optimistic about 2017.

More than half tipped business conditions in Australia would decline this year with only eight

per cent of originator company leaders anticipating an improvement in business conditions.

This continued and sustained pessimism in the originator pharmaceutical sector is largely

driven by poor profit results. While 81 per cent of originators expected sales revenue to grow

in 2017, only 58 per cent expected to convert higher revenue into increased profit. Almost one

in three originator company leaders was anticipating a fall in their pre-tax profit in 2017.

8% 22%

14%

50%

82%

56%

83%

29% 50%

42%

18% 22% 17%

57% 50%

2016 2017 2016 2017 2016 2017


Expectations in clinical trials: 2016 vs 2017 Decrease Stable Increase


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The impact of continual profit downgrades was expected to be felt in a number of areas

across this sector, with further cost cutting anticipated. The survey found 23 per cent of

originators were planning staff cuts this year in a bid to find further cost savings.

Generics

Companies dealing either exclusively or in part with generic prescription products had a worse

year in 2016 than the sector was expecting. Whereas only one in four companies tipped

business conditions would decline in 2016, at the end of the year almost three in four noted

conditions had deteriorated.

Price cuts were blamed for the deteriorating profitability of the sector. While all generic

companies expected to increase their sales revenue in 2017, only 55 per cent were anticipating

higher pre-tax profits.

When it comes to employment, generic companies were the most optimistic about jobs

growth in 2017. Almost half of the companies (45 per cent) indicated they expected to be

employing this year with only 18 per cent looking to reduce staff numbers. Should this

prediction eventuate, it would mean a strong improvement on 2016 when only 27 per cent of

generic prescription companies enjoyed jobs growth and 36 per cent experienced a cut in staff.

OTC/Complementaries

Healthcare companies dealing with over-the-counter and complementary products were

significantly more optimistic about 2017 than were prescription medicine companies, with

many complementary companies in particular having experienced exceptionally strong

business conditions in 2016.

52%

45% 50%

40% 45%

30%

50%

8% 10%

20%

50%

Originators Generics OTCs Complementaries

Business conditions: 2017 sector forecast

Decline Stable Improve


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Four in five complementary companies and one in four OTC companies reported Australian

business conditions improved for them in 2016. For OTC companies, 20 per cent tipped an

even better year in 2017 along with half of complementary companies.

Given three in five OTC companies and four in five complementary companies anticipate

higher sales revenue this year and across both groups three in five anticipate higher profits, it is

little wonder this sector is revelling in better conditions than prescription companies.

Despite this strong growth, the OTC/complementary sector anticipates less jobs growth than

the generic pharma sector. While 40 per cent of company leaders in this sector tipped jobs

growth for 2017, few companies expected their workforce to grow by more than 10 per cent.

Conclusion

Now in its fifth year, Industry Trends Forecast has proven to be an accurate indicator of what is

likely to happen in the Australian pharmaceutical industry and its various sectors in the next 12

months. In 2017, it found that while product sales remain strong, poor profit results and

deteriorating business conditions were continuing to depress industry sentiment.

The result for the index was a slight improvement for 2016/17 when compared with the

previous year but failure to propel the index into more positive territory. The industry remains

cautiously hopeful that conditions for medicines will improve, although companies are

convinced continued government pressure to squeeze the prescription medicines industry

through initiatives such as price disclosure and price cuts have resulted in business conditions

which most company leaders consider highly unlikely to improve in the foreseeable future.

Reliant on an export market rather than Australian government policy, companies producing

complementary products were significantly more optimistic, although few saw this optimism

translating into Australian jobs.

Hence unless government policy changes and the government moves to fund real growth in

the PBS through the addition of new, innovative medicines, the index is unlikely to move

significantly from its current position.


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About the APCI survey:

The Australian Pharma Confidence Index (APCI) © survey has been conducted by Pharma in Focus annually since 2012. The survey used for this whitepaper was distributed in Nov/Dec 2016 with responses from 32 pharma companies.

The 2016 survey consisted of five questions regarding company experiences for 2016 and five regarding company expectations for 2017 followed by five questions which enabled classification of respondents by company size and industry sector. Survey responses are aggregated and no individual responses analysed.

Of the respondents, 81 per cent dealt with originator products either exclusively or in combinations with other products; 34 per cent dealt with generic prescriptions either exclusively or in combination; 37 per cent dealt with OTC/complementary products either exclusively or in combination and 16 per cent dealt with complementary products.

In terms of company size, 19 per cent of companies were classified as large (domestic turnover of greater than $400 million annually); 25 per cent as medium (annual domestic turnover of between $100 million and $400 million) and 56 per cent as small (domestic turnover of less than $100 million annually).

In terms of employment, 47 per cent of companies had less than 100 employees, 41 per cent had between 100 and 400 employees and 12 per cent more than 400 employees.

Seventy-five per cent of respondents who completed the survey identified themselves as being either the managing director, chief executive officer or regional vice president for their company with the remainder being departmental heads or senior manager.

About Pharma in Focus Whitepapers

Pharma in Focus Whitepapers are researched, written and edited by Megan Brodie and published by Lush Media under Managing Editor Nick Lush.

Whitepapers are available free to Pharma in Focus subscribers. For a list of previous Whitepapers or to discuss the benefits of an annual subscription, please contact [email protected].

Disclaimer: Pharma in Focus makes no representation to any other person with regard to the completeness or

accuracy of the data or information contained herein, and it accepts no responsibility and disclaims all liability

(save for liability which cannot be lawfully disclaimed) for loss or damage whatsoever suffered or incurred by any

other person resulting from the use of, or reliance upon, the data or information contained herein. Copyright for

this publication is owned by Lush Media Pty Ltd. In the event that information contained in this Whitepaper is

used or quoted in papers, reports, or opinions prepared for any other person or organisation, it is agreed that it

will be sourced to Pharma in Focus.

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Transcript of PHARMA IN FOCUS WHITEPAPER AUSTRALIAN PHARMACEUTICAL … · pharmaceutical industry using three key...