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Key drivers for the industry in 2015

27 January 2015 Gustav Ando

Having shaken off the impact of the patent cliff over the past three years, the pharmaceutical industry has been riding on upward momentum, with increased R&D productivity reflected in higher valuations and greater innovation reaching the market. The two are not entirely unrelated, as the savings that governments have been able to generate from the patent cliff have allowed them to at least partly invest in innovation. However, there continues to be a simultaneous payer clampdown on both market access and pricing of newer treatments - and hence there is more and more pressure to prove innovation. As we close the doors on 2014 and reflect on a year where fully 41 new medications were approved in the US, IHS takes this opportunity to look ahead to some of the key market drivers and catalysts in 2015.

  1. Will the 2014 pricing debate trickle into 2015?
    One of the dominant themes of 2014 was the extensive discussions in media, politics and within the industry over the pricing of modern pharmaceuticals, most notably in hepatitis C, where dramatic breakthroughs and innovation in therapy was accompanied by higher price tags. Whilst there isn't much from this price debate which differs from previous controversies over price, there have been fears that it could lead to a rise in use of pharmaco-economic benefit as part of new drug assessments in the United States. Certainly there are pockets of both biotech and pharmaceuticals which are more susceptible to pricing risks here, and we will continue to monitor the relationship between Gilead and Express Scripts, which could lead to broader rebates and a backlash on pricing. Ultimately we feel these risks are overstated and not likely to break out in 2015.
  1. Will there be strategic repositioning in 2015?
    Another key theme in 2014 was the surge in M&A and licensing activity, which then significantly backtracked following Pfizer's failed acquisition attempt of AstraZeneca, and the US Treasury's intervention on tax inversion strategies. Still, it was clear that pharma was bullish in its approach to M&A after many years of relative caution, and companies such as Pfizer and Takeda have made it explicitly clear that they are in the market for further acquisitions. With a surge in promising drugs moving in the pipeline of several biotechs and indeed larger pharmaceutical companies, it appears inevitable that significant M&A activity is on the way, although they will be more strategic in nature.
  1. Where will the innovation come from in 2015?
    If 2013 was clearly the year for Hepatitis C innovation, and 2014 the year for PD-1 inhibitors in melanoma and lung cancer, then 2015 looks like a year that could be dominated by the PCSK9 space - both in terms of regulation and litigation. Sanofi and Regeneron look to have secured a potential first-mover advantage with a July PDUFA date, followed a month later by Amgen as well as late-stage data from Pfizer. Amgen has filed a patent infringement lawsuit against Sanofi and Regeneron, but it looks inevitable that we will see at least one of the candidates reach the market in 2015 - the first in a new biotech class of molecules for cholesterol management. In the aftermath of the hepatitis C pricing debate, watch out for the pricing of these treatments.
  1. Where will the P&R hotspots be in 2015?
    Whilst 2014 was a record year for the number of new drug approvals, there is an accompanying concern among payers that there are too many incentives in place to achieve early approvals based on limited clinical data and evidence. And payers are pushing back on both price and access in many of these areas. In Europe, the focus will be on France, where price cuts of over EUR500 million have been announced for 2015. Italy is also aiming for cuts in the general healthcare sector of EUR1.5 billion, and it is as yet not clear precisely how this will impact pharmaceuticals. Spain is also implementing its new "jumbo" groups, and Germany, despite the extension of its price freeze, could consider further AMNOG-related measures following a rise in pharma spend in 2014. Elsewhere, 2014 was a turning point in many countries, but perhaps most significantly in the GCC region, where the first stage of price harmonisation was applied on the import of 2,500 drugs in October - based primarily on Saudi Arabia's prices. Further harmonisation is expected here in 2015.
  1. How will parallel trading evolve in 2015?
    2014 was a watershed year for parallel trade, with parallel exports led to severe drug shortages in several Eastern European countries, including the Czech Republic, Greece, Hungary, Poland, Romania and Slovakia, and in turn led to an unprecedented government backlash. Notably, several governments issued several restrictions on parallel trade to counteract these shortages. With prices cuts and low price levels continuing in many of these markets it looks inevitable that new shortages will appear and leading to further, ad hoc restrictions on parallel trade.
  1. How will health insurance and price controls evolve in emerging markets in 2015?
    2014 was also a watershed year for health insurance expansion, as several countries in emerging markets announced dramatic investments in expanding the health cover for its populations. Most notably, Indonesia committed to a large-scale investment to its fragmented health infrastructure, and large parts of this look set to be implemented in 2015. The Philippines, Nigeria, UAE and Qatar are also continuing to expand healthcare cover. However, this is often accompanied by price controls, and indeed countries such as the Philippines and Malaysia look set to implement stricter price regulations in 2015. After severe deficits, it looks like South Korea will also be revising its already strict price regulations.
  1. Question-marks remain over China in 2015
    One of the big question marks in 2015 remains over the Chinese market, where the broader economy continues to be impacted by a weaker domestic economy brought on by a real estate bust, and inconsistent government stimulus. In the healthcare sector, price caps on pharmaceuticals look like they could be removed in 2015 and further price reforms are expected. The Chinese market continues to be troubled by the clampdown on marketing practices among multinational pharma, which has led to several firms completely reorganising its positioning in the market - but the underlying indicators remain positive and pricing reform could conversely increase access to the population.
  1. Big year for biosimilars
    With a relative lag in the number of expected biotech patent expiries in 2016 and 2017, this year is a major year for the launch potential of biosimilars. Globally, medicines such as Lantus and Neulasta lose their patent protection, and in the US the biosimilar rituximab market is also potentially opening up (having already seen its ex-US patent expire). We expect to see increased price pressure here, including in the anti-TNF space where existing biosimilars continue to see significant uptake.
  1. Expansion of non-covered medicines?
    The US continues to see an expansion of medicines which are explicitly not being recommended on formularies - Express Scripts and CVS Health have 70-100 drugs each included in their non-covered formulary lists, focusing particularly on diabetes, cardiovascular, multiple sclerosis and respiratory therapeutic areas. They include some of the newest medicines on the market, including Victoza, Xeljanz and Tradjenta.
  1. Reputational risks to recede?
    Whilst the industry's pricing, marketing and inversion-related M&A activity dominated the headlines in 2014, there is a strong likelihood that this will recede in 2015 as the key drivers of this negative media disappear. The industry's response to the Ebola crisis in 2014 was generally criticised as slow, but R&D progress here is progressing very rapidly and could play a significant role in defeating a highly volatile disease outbreak. Similarly, following on from the high number of new approvals in 2014, significant advances in several critical disease areas and areas of high unmet clinical need could play a significant role in reducing negative sentiment of the industry.

Gustav Ando is the Director of the Life Science practice at IHS
Posted January 27, 2015

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