If you're a biotech or big pharma company, your world is not only growing, it's standing on its head. According to the Institute for Healthcare Informatics, worldwide spending for prescription branded drugs and generic medicines will jump 30% from 2013-2018 -- a compound annual growth rate of over 5% -- leading to a jaw-dropping $1.3 trillion in annual global drug sales.
The market is also radically shifting position, with traditional strongholds, such as Japan and Europe, flipping over, and emerging markets, such as China, becoming the head. The result is that healthcare investors need a new strategy; they need a way to keep an eye on emerging markets so they aren't left in the lurch because they don't understand the true engines for growth in their holdings.
Here's a country-by-country look at what's really happening with global pharmaceuticals, focusing on the five largest markets for pharmaceuticals, based on sales, in 2013. .
No. 5: France: total pharmaceutical sales in 2013: $37.2 billion France has historically been a strong market for brand name drugs. In general, the culture highly values treatment with expensive medications, as seen by the fact that more than 90% of doctor visits in France end with prescriptions, a much higher rate than other countries.
France's market growth has plateaued however, due to restrictions on retail pharmacy margins and regulation of drug prices. IMS World Review Analyst reports that the French market for pharmaceuticals only grew 1% from 2012 to 2013, down from 4% the previous year. For the record, even at 1%, France is one of the few remaining European markets that is not declining. If you look at the breakdown the European Union as a whole, "growth" is -1%.
The shrinking of the EU market is a serious problem for Big Pharma. Not only is the EU an easy market to reach and understand, but Big Pharma's most innovative drugs, particularly pricey biologics, are skewed toward populations who can afford them, such as you find in many EU countries. For instance, expenditures on targeted oncology drugs increased exponentially in Europe over the past decade, making the EU now responsible for 40% of the overall market for these drugs. By contrast, emerging countries like China prioritize much less expensive drugs for public health diseases.
No. 4: Germany, total pharmaceutical sales in 2013: $45.8 billion
Germany is the leading pharmaceutical market in Europe, but its growth has also slowed to a crawl. The German drug sector is expected to expand at a modest 1.7% rate from 2015 to 2020, according to research and consulting firm GlobalData.
While Germany was once considered a "free price" market, that came to an end in 2011. A reform measure known as AMNOG took effect that year. AMNOG requires that pharma companies prove added benefits of their new products, or face very low reimbursement rates.
AMNOG also excludes some new drugs entirely. For instance, Gilead Sciences' blockbuster idelalisib, known also as Zydelig, is approved in the U.S., but Germany's tougher regulators insisted "added benefit of idelalisib is not proven." In addition, some pharmaceutical companies are opting voluntarily not to provide their new products to Germany, in the face of needing to prove not just that a drug is effective but that it improves standard of care.
No. 3: China, total pharmaceutical sales in 2013: $86.8 billion
China accounts for 20% of the world's population. Assuming the country's goal of universal coverage for its 1.35 billion citizens by 2020 stays on track, China should make up 34% of the global growth in medication spending over the next five years. In fact, many believe China is destined to become the world's biggest pharmaceutical market.
Yet for all the excitement, cracking China has proven far more complicated than expected for drugmakers.
Bulldozing in with U.S.-approved drugs and expecting a red carpet has been a ticket to nowhere. China's regulatory environment is byzantine, its regions are highly diverse, and the country's poor intellectual property protection has wreaked havoc.
Adding to the pressure is the current recession. In fact, while sales in China for the eight largest drugmakers in the market, including Pfizer, Merck & Co., and GlaxoSmithKline, climbed 40% in 2011, that growth dwindled to 20% in 2013, according to data compiled by Bloomberg.
China is still the biggest game in town, however. And with billions of dollars behind their efforts, Big Pharma is making unusual alliances. Pfizer produces and markets more than 40 innovative drugs in China, with manufacturing facilities in Dalian, Suzhou, and Wuxi. It also has a stake in one of China's top drug distributors, Shanghai Pharmaceuticals, as well as a joint venture to develop generic drugs with Zhejiang Hisun Pharmaceuticals.
One of the biggest opportunities in China is the diabetes market. According to IMS Health, China's diabetes market is expected to grow 20% to reach $3.2 billion by 2016. Johnson & Johnson is hoping its first diabetes drug, Invokana, will find success in China. As the diabetes market gets ever more crowded in the U.S., Merck's blockbuster Januvia is losing sales, but it may get a break in China, where Merck employs over 2,000 people. Other top U.S.-based drug companies with stakes in China include AbbVie Inc., Abbott Laboratories, Amgen, and Eli Lilly & Co. Many have joint ventures in China, as well as manufacturing facilities.
No. 2: Japan, total pharmaceutical sales in 2013: $94 billion
Driven by the needs of a rapidly aging population, the world's third-largest economy is the world's second-largest drug market. Highly efficient drug reviews facilitate the rapid entry of new products into Japan, as seen by the country's rapid approval of Opdivo from Bristol-Myers Squibb, prior to its approval in the U.S.
Unfortunately, Japan's drug market has been declining rapidly as the economy struggles with stagnation, made worse by the triple disaster (earthquake, tsunami, nuclear leak) of 2011. The good news for Japan is that innovation in large-scale drug development is picking up.
Traditionally, Japanese drug companies keep research in-house, but that has been changing recently. Takeda Pharmaceutical, Japan's largest pharmaceutical company, is set to increase its global footprint with the announcement of incoming CEO Christopher Weber, a former GlaxoSmithKline executive. Weber will become Takeda's CEO in June, which will make him the company's first foreign CEO. Appointing a foreigner to Takeda's top job is an indication in itself that Takeda is looking to international markets.
No. 1: U.S., total pharmaceutical sales in 2013: $339.7 billion
The annual amount spent per-person on prescription drugs in the U.S. averages $1,000 -- more than twice as much as in countries like Canada, Germany, and Australia.
While the Affordable Care Act contains measures to control healthcare costs, it turns out that Americans not only spend more per drug, we also take more drugs. Disease rates are higher because of lifestyle risks such as obesity, physical inactivity, and excessive alcohol use, according to the Centers for Disease Control and Prevention. Accordingly, rates of heart disease, COPD, and diabetes are higher in the U.S. than in most developed countries.
Branded drugs take by far the biggest bite out of the healthcare drug budget, but a recent WSJ article pointed out that the price of a variety of generics -- whether from coincidence or collusion -- has also been sky-rocketing. It's estimated that half of all small-molecule generics sold through retailers have become more expensive in the past 12 months. In some cases, price hikes exceeded 1,000%, and some even topped 17,000%.
Knowing that China's pharmaceutical market is full of pitfalls as well as opportunities doesn't lead directly to finding a great stock pick. Nor does learning about Germany's pricing crackdown pave the way to big investment gains.
But smart investors do their homework. They lay a foundation of basic knowledge before they invest. That can be hard, slow, unglamorous work. But it leads to better investing, based on having realistic expectations for a company's growth in today's unique -- and uniquely challenging -- global marketplace.