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 report. 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 the release of new drugs and treatments. Thus, these industries should weather the global economic downturn relatively well.

The Impact of the Recession

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 time 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 will come under pressure during a severe economic recession. In the UK, for example, the publicly funded National Health Service (NHS) is likely to see its funding cut substantially in the coming years as the government’s finances are ravaged by the recession. The NHS budget rose by 5.5% in the 2008/09 fiscal year, following five years of record rises. However, in March 2009, the BBC quoted “experts” as suggesting that the NHS budget may rise by just 1% in 2009/10, which could equate to a freeze, or even a fall in funding once inflation is taken into account.

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 certainly subject to higher levels of chronic illness than younger people. In Japan, for example, the population is ageing rapidly. 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%. According to the US government, the over-65s accounted for 12.4% of the US population in 2006 (the latest year for which figures are available) but this number will rise to 20% of the population by 2030. 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. China’s official Xinhua news agency reported in March 2009 that the country formally became an aged society in 2000, when the population aged 60 or above accounted for 10% of its 1.3 billion people. By the end of 2008, that proportion had increased to 12% of the whole population, and some analysts forecast that it could exceed 30% by 2050. 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. As the Financial Times (July 3, 2008) pointed out: “Little more than a decade ago, Aids was seen globally as a death sentence. Today, millions of patients, including many even in some of the poorest parts of Africa, can manage it like a chronic disease.” There have also been huge advances in the treatment of cancer. In March 2009, for example, the BBC reported that nanotechnology had been used for the first time to destroy cancer cells with a highly targeted package of “tumor-busting” genes. The BBC said that the technique, which leaves healthy cells unaffected, could potentially offer hope to people with hard-to-treat cancers where surgery is not possible.

These scientific advances are adding to the pressures on health spending. However, other technological advances could help to reduce the costs of delivering healthcare. John Coulthard, UK head of Microsoft’s health business, told the Financial Times (July 3, 2008) that productivity gains could provide a solution to the “twin time bombs” of an ageing population and a shortage of personnel. The newspaper said that Mr Coulthard believes that modern IT can provide dramatic improvements in healthcare, because manual procedures and archaic systems still dominate, even in advanced economies. However, adapting modern IT systems to healthcare systems has proved expensive and difficult. A project to computerize patient records in the UK’s NHS has been dogged by delays and cost overruns. In January 2009, a parliamentary watchdog (the Committee on Public Accounts) cast fresh doubt on a 2015 deadline for the ambitious £12 billion project, and said that, even in areas of the NHS already using parts of the system, staff were unimpressed, and the cost to the NHS was uncertain. The project was originally intended to be completed by 2010, but its complexity has delayed this by up to five years. It’s a similar story in the US. According to a study 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. A report in the Financial Times (May 8, 2008) said that “some of the world’s biggest pharmaceutical companies, including GlaxoSmithKline and AstraZeneca, face their worst crisis in decades, as their future revenues come under threat from shrinking drug pipelines, increased competition from generics and a slew of patent expiries.”

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Market Analysis

Healthcare Spending

Healthcare spending worldwide amounts to around US$4,000 billion, according to a report by the Financial Times (July 3, 2008). The newspaper quoted analysis from McKinsey, the consultancy firm, which showed that healthcare spending across the members of the Organisation for Economic Cooperation and Development (OECD), the “club” of industrialized nations, had outstripped GDP by 2 percentage points each year for the past 50 years. McKinsey said that on current trends, healthcare spending would exceed 50% of GDP in the US and Switzerland by 2080. “Even if the excess growth of healthcare spending over GDP is somehow cut in half, healthcare will, by 2100, be the world’s largest economic sector—and in many countries, the largest economic problem,” it concluded. The rise in spending reflects the ageing of populations in OECD countries, as well as the increasing cost of healthcare, and scientific advances that are producing new drugs and treatments.

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 US 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 (The National Scorecard on US Health System Performance, 2008). The scorecard aimed to measure and monitor healthcare outcomes, quality, access, efficiency, and equity in the US. It ranked the US 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 US. The country has several types of privately and publicly funded insurance plans that provide healthcare services. However, the private sector dominates healthcare and the US is the “only wealthy, industrialized nation that does not ensure that all citizens have coverage” (i.e., some kind of insurance), according to the Institute of Medicine, a non-profit 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 UK, 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 non-profit 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 non-profit 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, 2006. (Source: OECD, www.irdes.fr/EcoSante/DownLoad/OECDHealthData_FrequentlyRequestedData.xls)

(est.): estimate * 2007

Japan spends around 8% of its GDP on healthcare, almost half the amount of the US. 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 communitybased 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.”

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