Healthcare and Pharmaceuticals Industry

Major Industry Trends

Healthcare and pharmaceuticals are two distinct industries, but they are interdependent and are subject to similar trends, which is why they are covered together in this profile. Both are benefiting from ageing populations in many advanced economies, and various developing countries, such as China. In addition, important medical discoveries, including the decoding of the human genome, are fueling scientific advances, and facilitating the release of new drugs and treatments.

The Impact of the 2008 Recession and Growth through 2011

The investment community generally regards healthcare and pharmaceutical companies as “defensive” stocks, because they tend to be relatively immune to the vagaries of the economic cycle. While consumers may cut back on purchases of many discretionary items during a recession, most people regard their health as a priority. In addition, while individuals may cut back on private healthcare in times of economic hardship, this simply increases demand for healthcare services provided by the public sector. Most healthcare spending in the Western world is funded by governments, and such spending is highly sensitive in political terms. Most democratically elected governments prefer to find savings in areas other than healthcare for fear of losing votes. Clearly, however, even healthcare spending comes under pressure during a severe economic recession.

In both Europe and the United States, spending on health and government support for healthcare for the vulnerable and the elderly is cited, along with state pension commitments, as one of the more intractable drivers behind growing and unsustainable public sector deficits.

Ageing Populations

Ageing populations are driving demand for healthcare services and pharmaceutical products around the globe. Older people tend to require more healthcare and are subject to higher levels of chronic illness than younger people. In 1950, 4.9% of Japanese were over the age of 65. By 2000 that figure had grown to 17.2%, and by 2050 it is expected to reach 32.3%. The latest US Census shows that the median age of the US population has risen from 35.3 in 2000 to 27.2 in 2010. The percentage of the US population now aged between 45 and 64 is 26.4% of the total population, with the rapid growth in this segment being down to the ageing of the Baby Boomer generation (the 77 million Americans born after the war, between 1946 and 1964).

Moreover, one of the ironies of democracy is that as the gray vote grows in numbers, with increased longevity playing an ever-more-important role, the chances of governments being able to rein in spending on health and pensions, both key elements for ageing citizens, dwindles to zero. This is, of course, good news for the healthcare and pharmaceuticals sector, but until and unless old age ceases to be synonymous with the growing impairment of the individual’s ability to be economically active and productive, the growing mismatch in the ratio between young and old poses huge problems for governments everywhere.

The problem even exists in some emerging economies, such as China, which introduced a strict one-child policy in 1979 in an attempt to control its booming population. Family size has dropped dramatically since the 1970s, when the average Chinese woman had five to six children. Today, China’s fertility rate is 1.5 children per woman. Consequently, China’s population will peak at 1.4 billion in 2026 and then start shrinking, according to the US Census Bureau. By the end of this century, China’s population would be cut almost in half to 750 million, In just 10 years, the number of people in China aged 20–24 is expected to be half today’s figure of 124 million, a shift that could hurt China’s economic competitiveness by driving up wages. Over the same period, the proportion of the population over 60 is expected to climb from 12%—or 167 million people—to 17%.

According to a UN report published in March 2009, 22% of people in the more developed countries are aged 60 and over, and that proportion is expected to reach 33% in 2050. Furthermore, while just 9% of the population of developing countries today is aged 60 or over, that proportion will more than double to 20% by 2050.

Scientific and Technological Advances

Enormous progress has been made over the past decade in developing drugs that treat previously incurable illnesses. The BBC reported in April 2010 that scientists at the University of Leeds had found that viruses can be modified to find and destroy cancer cells. Their research found that proteins could be added to a virus to allow it to recognize unique markers that appear on the surface of cancer cells, and the virus can then deliver gene therapy to the cells. During the same month, researchers at Strathclyde University in Glasgow said that they may have made a “breakthrough” in using gene therapy to treat cancer tumors. They said that they had identified a technique for delivering genes to hard-to-reach tumors without harming healthy tissue.

Advances such as these are taking place all around the world, and are adding to the pressures on health spending, since many new drugs are very costly. For example, a drug to treat kidney cancer called Sunitinib was approved for use in the United Kingdom in 2009. But the average daily cost of Sunitinib is about £75, with an average six-week cycle costing in excess of £3,000. Health services around the world are seeking to contain costs with the use of information technology, and by advanced screening of patients.

In the latter case, it is believed that identifying illnesses early means that the patient is more likely to make a recovery, and cost savings will also occur. In April 2010, for example, scientists in the United Kingdom published research that said that a five-minute, one-off screening test could prevent thousands of people dying from bowel cancer every year in the country.

However, adapting modern IT systems to healthcare systems has proved expensive and difficult. A project to computerize patient records in the United Kingdom’s NHS has been dogged by delays and cost overruns. Originally planned to be completed in 2006, 2015 is the latest estimate for full implementation. In December 2009, the government said that it planned to scale back the project. The electronic patient record system is thought to have cost about £12 billion (US$16 billion) so far.

It’s a similar story in the United States. According to a study published in the New England Journal of Medicine, only 4% of US physicians have a fully functional electronic health-records system. Yet the coordinators of a federal government healthcare IT initiative have said developing a national health IT network would be extremely difficult.

Pharmaceutical Industry Under Pressure from Price Caps and Generic Drugs

The pharmaceutical industry regularly tops surveys of the most profitable corporate sectors. Certainly, many of the companies involved in the industry are highly profitable. Ageing populations and scientific advances that are creating new drugs (and new demand) are propelling revenues and profits. However, according to the Association of the British Pharmaceutical Industry (ABPI), prescription medicines “are the subject of government controls and intensive competition.” The ABPI adds that pharmaceutical prices have grown at a slower rate than consumer prices as a whole and, in real terms, are 21% lower than they were 10 years ago. Similar trends can be seen in other parts of the world, where governments cap price rises for drugs. In Japan, for example, healthcare providers, are currently reimbursed using a points system, determined by a government-sponsored committee. Points are given for every type of medical procedure or service. Yet year-by-year the authorities have reduced the number of points awarded in the case of every procedure, as medical costs have risen along with the ageing population. So while a healthcare provider in the United States would reimburse a patient requiring an MRI examination at a rate of around US$4,000, a provider of the same service in Japan would receive the equivalent of just US$500.

Back to top

Market Analysis

Healthcare Spending

The total global expenditure for health is now more than US$4.7 trillion a year, according to the World Health Organization, and health expenditure as a percentage of GDP has been increasing among all major economies.

Spending on healthcare varies widely from country to country, as do outcomes. Nor is there necessarily a correlation between the amount of money spent and the effectiveness of the healthcare system. The United States spends more on healthcare than any other country, in both relative and absolute terms, yet its healthcare system scores poorly in terms of its overall performance, according to the Commonwealth Fund Commission, a US private foundation that supports independent research on healthcare issues. The Fund produced a report on the performance of the US health system in 2008 (“National scorecard on US health system performance”). The scorecard aimed to measure and monitor healthcare outcomes, quality, access, efficiency, and equity in the United States. It ranked the United States last out of 19 countries on a measure of mortality amenable to medical care.

This poor performance may reflect the nature of healthcare provision in the United States. The country has several types of privately and publicly funded insurance plans that provide healthcare services. However, the private sector dominates healthcare and the United States is the “only wealthy, industrialized nation that does not ensure that all citizens have coverage” (that is, some kind of insurance), according to the Institute of Medicine, a nonprofit organization for science-based advice on matters of biomedical science, medicine, and health.

By contrast, a publicly funded healthcare system, the NHS, dominates healthcare in the United Kingdom, accounting for more than 80% of healthcare spending in the country. Founded in 1948, it aims to provide a free, comprehensive healthcare service, with delivery at the point of need, regardless of the ability to pay. It is the world’s largest publicly funded health service, and claims it is also “one of the most efficient, most egalitarian, and most comprehensive.” Yet it has many critics, who argue that it is inefficient and overly bureaucratic.

Other countries fund their health services in a variety of ways. According to Key Note Ltd, a UK-based market-research company, the Netherlands operates a national insurance market for its 16 million residents. Plans may operate on a for-profit or nonprofit basis. The insurance market is highly concentrated, with the top five plans accounting for 82% of enrolment. Plans typically offer coverage in all areas of the country and include all providers, although selective contracting is allowed. Children are covered in full through public funds. Premiums charged for adults represent 50% of the expected annual costs. By contrast, according to Key Note, the Swiss insurance system, which covers 7.5 million people, is highly decentralized. Only nonprofit insurers may participate in the scheme, and Swiss premiums vary widely according to the health risks of insured pools across the country, and within regions.

Table 1. Total healthcare spending as a percentage of GDP, 2007. (Source: OECD, www.irdes.fr/EcoSante/DownLoad/OECDHealthData_FrequentlyRequestedData.xls)

* 2006 data; est.: estimate

Japan spends around 8.1% of its GDP on healthcare, almost half the amount of the United States. Yet the Japanese have the longest healthy life expectancy on the planet. Diet and lifestyle clearly play a key role, but the country’s universal healthcare system may also be an important factor. Everyone in Japan is required to take out a health-insurance policy, either at work or through a community-based insurer, according to Key Note. The firm adds: “The government pays for those who are too poor. However, 80% of Japan’s hospitals are privately owned—more than in the US—and almost every doctor’s office is a private business. The Japanese Health Ministry tightly controls the price of healthcare, down to the smallest detail. Every two years, the healthcare industry and the health ministry negotiate a fixed price for every procedure and every drug.”

The US-based National Bureau of Economic Research conducted a study of ten OECD countries and it points out that healthcare expenditure has been growing at a faster rate, often considerably faster, than per-capita income. In the United States, healthcare expenditure has tripled as a share of GDP since 1950, from 5% to 15% of GDP. The NBER’s study found that the primary cause of the continued ramping up of healthcare costs was the provision of increased healthcare benefits. It points out that pushing up health benefits faster than per capita tax and income growth is clearly unsustainable, but that major economies, the United States in particular, currently show little sign of reining in the upward march of benefits, despite huge cost increases. If this keeps up the United States will see a doubling in healthcare costs as a percentage of GDP within the next 20 years, and a tripling in the next 40 years. No country could afford that, it points out, so the dilemma of what level of healthcare is appropriate remains to be resolved.

Back to top