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Pharmaceutical industry in the US to grow to $615 B by 2022

The US pharmaceutical market is estimated to grow by 4-7% CAGR from USD 489.93 billion in 2018 to USD 585-615 billion in 2022.

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Definition / Scope

Jobs to be done

Drug manufacturing is one of the major industry that deploys scientific and technological advances the most for its jobs to be done. The industry develops novel drugs that result in substantial socioeconomic benefits from improved patient outcomes, reduced mortality, and increased efficiency. In addition, the industry is a generator of high-value, high-wage jobs that fuel local and regional economies around the country.

Drugs (biopharmaceuticals, drugs, medicines) are defined as any substance intended for use in the diagnosis, cure, mitigation, treatment or prevention of disease or any substance (other than food) intended to affect the structure or function of the body. Drugs are produced in forms such as pills, tablets, capsules, etc.

Generic drugs are copies of innovative pharmaceuticals that contain the same active ingredients and are identical in strength, dosage form and route of administration and are comparatively cheaper than the innovative ones. Generic drugs are further divided into two types:

  • Commodity generics are those marketed as a chemical name
  • Branded generics are those marketed by a drug company under its own label and typically command higher prices than non-brand generics

Biologics (biotech drugs, biological drugs, biopharmaceuticals) include a wide range of products such as vaccines, therapeutic proteins, blood and blood components, tissues, etc.

Biosimilars (follow-on biologics) are versions of biologic products that reference the originator product in applications submitted for marketing approval to a regulatory body.

Market Overview

North America accounts for 48.1 % share of the world drugs sales. New medicines launched in the American market held 64.1% of total sales of new medicines worldwide during 2012-17.

Globally, the most sold drugs were manufactured in the USA in 2018. For instance, Darzalex is a cancer treatment drug that is widely sold worldwide in 2018. Darzalex was manufactured in the USA and the sales revenue reached USD 1552.5 million in 2018.

Humira, a pain-relieving drug, made the largest revenue totaling USD 18,354.34 million in 2018. Other drugs that were produced in the USA and sold globally making revenue over USD 4000 million were Keytruda, Reviimid, Opdivo, Stelera.

In the USA alone, Humira, the most valued drug in terms of sales revenue, made USD 12,361 million in revenue in 2018. Likewise, the sales revenue from Darzalex was over USD 1087 million in the same year. Reviimid was the second most grossing drug making sales revenue of USD 5914 million. Other top performers were Keytruda, Opdivo, Imbruvica, Ibrance, and Sterala.

75 orphan drugs were approved in the United States in 2017, compared to a total of 27 in 2016 and 56 in 2015. The 50 highest-selling orphan drugs each averaged approximately USD 637 million in sales.19 While only about 600 treatments are approved, 7,000 conditions are designated as rare in the United States.

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Key Metrics

Metrics Value Explanation
Base Year 2018 Researched through internet


Market Risks

New product failure

The largest portion of the cost is incurred during the research and development (R & D) phase of a new drug and the percentage of the total cost on R & D vary with the type of drug being developed, the chances of failure, and the molecular formulation of the drug being tested for the first time. It is estimated that the development of any new innovative drug costs around USD 800 million and even more than estimated cost.

Likewise, it takes nearly 12 years on average to develop a new drug. Moreover, according to the FDA, the proportion of all news drugs entering phase I trials that ultimately gain approval has fallen to 8 percent from a historical average of about 14 percent.

Therefore, in the case of product failure, the negative payback would likely to oust business from the global competition.

Parallel trading from low-cost generic drug manufacturers

There are two ways of replacing branded drugs. The first one is by generic substitution and the second one is by therapeutic interchange. Generic substitution means the generic drug is the equivalent to a name-brand drug on a molecular level, however, the same in terms of effectiveness and quality. Therapeutic interchange often substitutes with the molecular level, but not exactly the same.

There are a 20 years of patent expiry for the drugs innovated. However, the patent dates from when the drug is invented to take the drug into the market may incur many years, thus shrinking the time frame for the company to recover its investment and any profit. Once the patent expires, and because the formula is already known, other generic drug manufacturing companies can make their own generic versions and charge much less and enjoy long-term cash in, taking the pie from the company that originally invented that drug.

Top Market Opportunities

Orphan drugs

By 2024, the orphan drugs sector is expected to almost double and account for 20 percent of prescription sales, which will stand USD 828 billion. In particular, gene and cell therapies are accelerating growth. The Chimeric Antigen Receptor T-cell (CAR-T) therapy market is projected to increase at an annualized rate of over 51 percent during the time period, 2018–2030. Cellular and gene therapy-related research and development are advancing rapidly in the United States and China, where hundreds of trials are underway.

Market Drivers

Increasing health spending

Global health spending is increasing at a CAGR of 5.4 percent for the period 2018–2022, compared to just 2.9 percent over 2013–2017. Per-person spending on health in the USA exceeds USD 11. Global pharmaceutical spending is predicted to outpace overall health care spending. Worldwide prescription drug sales are expected to rise from USD 900 billion in 2019 to USD 1.2 trillion by 2024 at a CAGR of 6.4 percent, or six times the 1.2 percent over 2011–2017.

Analytics integration

Data and analytics have underpin transformed the drug manufacturing industry by expanding their use of data, analytics, and technology to make significant improvements in decision making (particularly related to patient care and new product development), back-office operations, regulatory compliance reporting, and drug discovery and development.

Biosimilars

The USA ranks third with 187 biosimilars in development after China and India.

Market Restraints

Governments and insurance companies implement increase in cost sharing and restrictions on access to medicines that potentially cause patients to switch to generic products, delay treatment, skip doses. When the government plays an active role in price control, it leads to negative pricing, which ultimately causes a decrease in prescriptions.

Although, there hasn’t appeared any measure to control drug prices in the US in the last few years, the drug manufacturing companies situated in the USA face pricing restraint in one of its lucrative markets that is Europe. The drug price in the USA is hardly regulated or negotiated by the government.

Export markets where drugs manufactured in the USA like UK, Australia, and Canada have made the decision to regulate the price of drugs to ensure that medical treatment remains affordable for all citizens, regardless of their income.

In the UK, for instance, the Health Service Medical Supplies (Costs) Bill that came into force in 2017 allows the government to step in and quash unreasonable price increases whether the company is part of the voluntary or the statutory scheme. Non-compliance and non-payment could result in penalties of up to USD12,500 daily, or a single penalty of up to USD 1,25,000.

The Pharmaceutical Price Regulation Scheme (PPRS), which is another voluntary scheme to control drug price acts in the agreement between the government and pharmaceutical industry.

Industry Challenges

Patent expiration

In 2019, it is estimated that USD 19 billion in prescription sales is likely to be at risk due to patent expiries, with approximately half resulting in lost sales.

A patent cliff occurs by tumbling the firm's revenues when one or more established products go off-patent since these products can be sold as generic tags at much cheaper prices.

Intellectual Property Rights

The expiration of IPR and licensing rights have and significant effect on the revenue of the major players. Many of the products have multiple patents expiring at the varying time so as to protect patent rights. However, once the patent protection has expired prior to the expiration date as a result of a legal challenge, the companies lose exclusive rights over that product as generic pharmaceutical companies produce the same product at a cheaper rate and sell at a lower price. As a result, the overall revenue that has been favored exclusively to the patent holders is lost.

Laws and policies

The pharmaceutical industry is prone to regulation by regional, state, local, and country agencies around the world that put high pressure on companies in terms of drug safety and surveillance. Of particular importance is the FDA in the United States, which administers requirements covering the testing, approval, safety, effectiveness, manufacturing, labeling, and marketing of prescription pharmaceuticals. In some cases, the FDA requirements and practices have increased the amount of time and resources necessary to develop new products and bring them to market in the United States.

At the same time, the FDA has committed to expediting the development and review of products bearing the breakthrough therapy designation, which has accelerated the regulatory review process for medicines with this designation. The FDA has also undertaken efforts to bring generic competition to market more efficiently and in a more timely manner.

Technology Trends

AI in drug discovery

A growing number of US biopharma companies are using AI to streamline the drug discovery process. AI algorithms can analyze large data sets from clinical trials, health records, genetic profiles, and preclinical studies. Patterns and trends within this big data can help develop hypotheses at a much faster rate than researchers alone and deliver new insights more quickly.

Pricing Trends

Patents are the major determining factor when pricing any drugs. The patent system encourages drug manufacturers to develop new drugs that have high market demand and they enjoy such incentive for 20 years during which the price for any drug is relatively higher than the price after the expiry of the patent.

However, drug makers file hundreds of patents manipulating the law that results from the patent period to double than the stated 20 years so as to create a monopoly in the market, block competition, and oust cheaper versions of the same generic drugs. Therefore, there has been a price hike of more than 150% since 2012 offending the patent applications.

Generally, the other factors that determine the pricing of a drug include the impact on the patient, other available treatment, medicine’s ability to reduce other health care costs, and affordability.

The multiple cancer drugs have launched at a price of more than USD 120,000 for one year of treatment; a hepatitis C drug for USD 84,000 for a course of treatment; and a genetic neuromuscular disease drug for USD 750,000 for the first year of treatment alone.

Regulatory Trends

The Office of Pharmaceutical Quality (OPQ) in the Center for Drug Evaluation and Research (CDER) in the U.S. Food and Drug Administration (FDA) monitors the quality of CDER-regulated drugs legally marketed in the U.S.A.

Disclosing of trade secret

The transparency bills mandate information available to the competitors. Some states though in response have curbed their transparency bills, turning them into reporting bills that require companies to report information only to regulators, or to hybrid bills that require regulators to share only very limited information with the public. The first report was released in 2017 and shows that this limitation on disclosure substantially reduced the usefulness of the information released. Under the prevailing legal standard, however, states can make any information available to the public without providing compensation to the owner 1) if it is not a trade secret or 2) if it is a trade secret, but certain fact-intensive determinations indicate that no “taking” has occurred.

Fair pricing bills

It seeks directly to constrain the soaring prices of pharmaceuticals. Several states have proposed and two states have passed legislation requiring drug manufacturers (1) to justify certain price increases or face penalties; or (2) to provide rebates when prices exceed a certain threshold.

As an example of the first approach, a recent bill passed in Maryland prohibits “unconscionable” price increases for essential generic drugs and drug-device combinations used to deliver generic drugs. The Maryland bill requires manufacturers that impose significant price increases to provide a justification for such increases to the Attorney General, specifying an increase of over 50% in one year as a suggested benchmark for a significant increase. The Attorney General, in turn, may petition the Circuit Court to enjoin an “unconscionable” price increase, restore money to patients and third-party payers, and impose a penalty on the manufacturer. Similar bills have been proposed in Massachusetts, Montana, Oregon, Rhode Island, and Tennessee.

A recent bill passed in New York takes the second approach. It sets a Medicaid expenditure cap by directing the state Department of Health to require manufacturer rebates for drugs which would otherwise exceed the Department’s projected spending targets. The bill instructs the state Department of Health to make annual projections for Medicaid drug spending and to assess, on a quarterly basis, whether drug expenditures will exceed these targets. If overall spending is anticipated to exceed these targets, the Department may negotiate additional supplemental Medicaid rebates for specific drugs from drug manufacturers. If an agreement cannot be reached, the drug may be referred to the state’s Drug Utilization Review Board for review, further manufacturer negotiations, and possibly formulary and prior authorization sanctions.

Transparency bills provide the public and policymakers with the information needed to understand how drug prices are set. Their aim is to better inform future policy-making and legislative efforts, as well as help, identify specific instances where action to bring prices down is justified. Transparency legislation has been introduced in many states over the past two years, and Nevada recently passed a significant transparency law focused on insulin.

The Nevada law requires manufacturers of drugs essential for the treatment of diabetes to report annually on information including the costs of producing the drug, the marketing and advertising costs related to the drug, the profit the manufacturer has earned from the drug, information about patient assistance programs, the wholesale acquisition cost of the drug over the last several years, and the aggregate amount of rebates provided. The law directs the Department of Health and Human Services to compile an annual report based on this information. The law also requires manufacturers to submit information to the state about price increases and sales representatives.

Other Key Market Trends

M&A

The Swiss pharmaceuticals company, Actelion was acquired by a US group Johnson & Johnson at a whopping deal worth almost USD 30 billion. The second largest deal was the acquisition of a US medical equipment manufacturer C.R. Bard by the US group Becton Dickinson for USD 24 billion.

Market Size and Forecast

The US pharmaceutical industry was valued USD 466.6 billion in 2017, Growing at a CAGR of 5%, the industry value reached USD 489.93 billion in 2018.

Overall, oncology was the largest segment in value terms while dermatology remained the least segment in terms of market size both globally and in the North American region in 2018. Further, the oncology therapeutic segment is estimated to become the largest growth segment in 2022 while the dermatology segment is likely to hold the least share.

In 2018, the oncology segment was valued USD 104.8 billion globally, the US market represented 35% of the global share. The oncology segment in the US is forecasted to reach more than double the market size in 2018. Diabetes drug is the second most lucrative market for US drug manufacturers where the market is projected to reach USD 27 billion by 2022 from USD 22 billion in 2018. Similarly, the rheumatoid segment in the US alone will reach USD 50.9 billion by 2022 from USD 20 billion in 2018.

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Market Outlook

The US pharmaceutical market is estimated to grow by 4-7% CAGR from USD 489.93 billion in 2018 to USD 585-615 billion in 2022. In 2019, the drug manufacturing industry is estimated to reach USD 514.43 billion and USD 540.15 billion in the consequent year.

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Technology Roadmap

3D printing

The impact of 3D printing is broadening, with the first 3D printed pill approved by the FDA in August 2015, and this technology now finding its way into prevention. With this technology in an application, the pharmaceutical industry is at the brink of the 4th industrial revolution in medicine.

As per the research studies, the application of 3D printing for oral dosage like tablets accounts for 63% of the total drug production using such technology. Likewise, capsules account for 11% share. This technology could also be used specifically to produce drugs that are attractive in shape that appeals to children for oral doze who hate to take pills.

Nanotechnology

Companies looking to advance new drug delivery innovations include Medtronic plc, Abbott Laboratories, Zynerba Pharmaceuticals, and Aequus Pharmaceuticals.

Novartis partnered with Proteus, which developed a sensory enabled smart pill, that once swallowed, can gather the information that can be used to diagnose patients.

Predictive analytics

Research shows that innovative Pharma companies can optimize the chances of success for their clinical candidates through effective use of big data mined through recording patient medical conditions. Efficient data storage and analysis of datasets may accelerate drug development processes. For example, collection and aggregation of electronic health records or clinical genomics information, alongside research data, may support the identification of new.

For instance, a number of pharmaceutical companies – AstraZeneca, Bayer, Celgene, Janssen Research and Development, Memorial Sloan Kettering Cancer Center, and Sanofi – recently announcement a new data sharing initiative dubbed Project Data Sphere. The companies have agreed to share historical cancer research data to aid researchers in the fight against the disease today.

The database will be available online globally, with the analytics technology being provided by software vendor SAS. Similarly, Pfizer is combing data from electronic medical records, clinical trial, and genomic data to spot opportunities for drugs for specific patient populations. Using this approach the company was able to identify that a small subset of lung cancer patients had a specific genomic defect; a mutation in their ALK gene.

Using this insight, Pfizer developed Xalkori specifically for lung cancer patients with the ALK gene mutation, which was approved for use by the FDA in 2011.

Distribution Chain Analysis

Pharmaceutical R&D is prone to high failure which means the cost of R & D most of the time could not get materialized as the final drug couldn’t be commercialized. During the drug discovery phase, more than 5000 to 10000 compounds are screened in the process to sort out less than 250 compounds for the approval. It takes 3-6 years depending on the complexity of the molecules and drug to be manufactured. Unfortunately, the efforts for up to 6 years of work often have a success rate of less than 0.01%. This stage incurs roughly 21% of the total R&D budget.

A clinical trial involves three phases sequentially. The phase is divided based on the frequency of trials that take off. In the first phase, 20-100 volunteers are trailed for the drug. There is a range of 100-500 volunteers in the second phase on which trail takes place. Finally, the third phase occurs with 1000-5000 trails. The duration to hold all these phases takes up to 7 years.

The budget for this stage is allocated up to 65% of the total R & D cost. The success rate is likely to be around 50% on an average in this stage. Subsequently, the approval stage involves activities such as regulatory review and market authorization. After the approval, the process is scaled up for manufacturing. This stage is the fastest stage in terms of actions taken within less than 2 years and budget amounting up to 3% of the total investment.

Finally, after post-marketing surveillance, the finished drugs are distributed around the world by multiple logistics operation. The Companies sell their pharmaceutical products primarily to drug wholesalers and retailers, hospitals, government agencies and managed health care providers, such as health maintenance organizations, pharmacy benefit managers and other institutions.

The distributors control 65% of the margin while wholesalers earn 5.7% of the margin on cost. Likewise, the tax rate to be paid to the federal government varies with the type of drug being produced and sometimes state tax is also levied. It is roughly 10% of the final price that remits to the government department. However, the pharmacists have the lucrative return double the amount that goes to tax.

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Competitive Landscape

Pharmaceutical companies face competition in the form of branded or generic drugs or biosimilars that treat similar diseases. The competitors include worldwide research-based pharmaceutical companies, smaller research companies, and all other drug manufacturers. The pharmaceutical competition involves a rigorous search for technological innovation and the ability to market these innovations rapidly. For example, For example, AbbVie’s HUMIRA competes with anti-TNF products and other competitive products intended to treat a number of disease states.

Competitive Factors

The development of new drugs and protecting intellectual property are the key competing and success factors. The competitive environment is subject to continuous research and development and substantial investment in those research. Other factors that determine company’s value proposition include quality control, meeting customer specifications, and efficient logistics system. The introduction of new products by competitors and changes in medical practices and procedures can result in product obsolescence. Price is also a competitive factor.

Key Market Players

Pfizer

Pfizer’s portfolio includes medicines and vaccines, as well as other health care products. It operates under two business segments mainly Pfizer Innovative Health (PIH) and Pfizer Essential Health (PEH). The majority of its revenue comes from the sale of biopharmaceutical products. The company’s 47% sales revenue was generated within the US in 2018. Pfizer made worldwide revenue of USD 53.65 billion in 2018 were 62% revenue came from PIH segment. Of the total worldwide revenue, 47% was generated in the USA alone. Prevnar 13 and Lyrica were the two highest selling drugs produced by Pfizer. Its market capitalization as of January 2019 stood USD 238.28 billion.

Johnson & Johnson

Johnson & Johnson has three business verticals: Consumer, Pharmaceutical, and medical equipment. The pharmaceutical segment is focused on Immunology, Infectious disease and vaccines, Neuroscience, Oncology, Cardiovascular and Metabolism, and Pulmonary Hypertension. Under medicine, key products include Remicade, Simponi, Stelera, Tremfya, etc. Its business is spread over more than 60 countries. The company’s global combined sales revenue of all the segments reached USD 81.6 billion. Within the pharmaceutical segment, it made USD 40.7 billion in revenue worldwide in 2018. In the USA, its revenue was USD 23.3 billion in 2018. Its market capitalization reached USD367.86 billion as of January 2019.

Merc & Co

Merc & Co is a global pharmaceutical company incorporated in the USA in 1970 that delivers prescription medicines, vaccines, biologic therapies, and animal health products. The pharmaceutical segments include human health drugs and vaccines. Under the pharmaceutical segment, the company made USD 37.69 billion in revenue in 2018. Its top selling drugs include Keytruda, Januvia, Gardasil, and ProQuad. Its market capitalization as of January 2019 totaled USD 212.30 billion.

AbbVie

AbbVie is a global, research-based biopharmaceutical company. AbbVie develops and markets advanced therapies that address some of the world’s most complex and serious diseases. AbbVie’s products are focused on treating conditions such as chronic autoimmune diseases in rheumatology, gastroenterology and dermatology; oncology, including blood cancers; virology, including hepatitis C virus (HCV) and human immunodeficiency virus (HIV); neurological disorders, such as Parkinson’s disease; metabolic diseases, including thyroid disease and complications associated with cystic fibrosis; pain associated with endometriosis; as well as other serious health conditions. AbbVie was incorporated in the USA in 2012. Humira and Imbruvica are its top selling global drugs. In 2018, the company made global revenue of USD32.75 billion of which USD 21.52 billion was generated from the US alone. Its market capitalization held USD 144.47 billion as of January 2019.

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Strategic Conclusion

The pharmaceutical industry is highly competitive where the launch of a new product by a competitor results in others’ products that are similar in doze obsolete from the market. There is stiff competition occurring between each product in the USA and around the world. Sometimes companies play harshly in the market where they weaponize their patents as a single acting force not to let generic products rule over their branded ones.

Furthermore, the industry is under stringent scrutiny under the FDA regulations. In the USA, the patent on a new drug expires in 20 years. Patents are granted in the early years of the product trial. Therefore, the length of the patent grant and its expiration contracts giving the company lesser time to make money from its commercialization. Hence, the monetization of the innovative product launched in the market within a tight schedule happens to be a succeeding factor for any drug producer. Overall, the drug market in the US is a lucrative opportunity for anyone that wants to enter in this global market.

Further Reading

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