MARKET RESEARCH FOR THE
PHARMACEUTICAL INDUSTRY
PREPARED FOR THE C&W LIFE SCIENCES SECTOR GROUP
JUNE 2015
A Cushman & Wakefield Briefing Note
Emerging economies expected to amount to nearly 1/3 of the global pharmaceutical market by 2016
A record number of M&A’s in the pharmaceuticals sector during 2014 accounting for approximately
37%
$300 billion, Thomson Reuters
of pharmaceuticals and life sciences CEOs expect China to be their main non-domestic growth market in the coming year
The cost of researching and developing a new chemical or biological entity was estimated at
(PWC 17th annual global CEO survey)
€1,172 million
(Booz&Co)
(Booz&Co)
SECTOR OVERVIEW Pharmaceutical
The Global Pharmaceutical market could be worth $1.6 trillion by 2018
$1.23 triillion 1.61 trillion by 2018
(Ibid)
(Ibid)
Biotechnology
$289 billion 445 billion by 2019
More pharmaceuticals and life sciences CEOs are taking on staff than letting them go
44%
(Ibid)
Medical Technology
$364 billion
31% 25%
say headcount will increase (50% overall)
say headcount will stay the same (29% overall)
514 billion by 2020
(Ibid)
(PWC 17th annual global CEO survey)
say headcount will decrease (20% overall)
FOUR MAJOR CHALLENGES FACING THE PHARMACEUTICAL INDUSTRY (KPMG FUTURE PHARMA REPORT)
1
Delivering shareholder/ stakeholder value
2
GROWTH DRIVERS Healthcare spending
5.2%
annual spending increase on health expected globally over next five years
(Economist Intelligence Unit (EIU))
Low growth business environment
3
R&D productivity
Demographics
4
Rising risks and loss of trust
10%
Increasing life expectancy projected to increase global population above 65 years of age to c, 580 million, or over 10% of the total global population by 2018. (Economist Intelligence Unit (EIU))
PHARMACEUTICAL INDUSTRY
EXECUTIVE SUMMARY
The Pharmaceutical sector remains in a state of transition. Cost pressures and technological advancements are driving a global shift pressurising organisations into reviewing core business strategies. Operators are tapping into a sprawling global market determined to improve services and facilities. This is presenting both challenges and opportunities for aligning real estate portfolios effectively. At a time when increased expenditure on research and development (R&D) is required to produce new or improved products the challenging market place is also pushing biopharmaceutical companies to become increasingly innovative in their operations. To thrive in this changing landscape, there is a drive for even greater productivity on a cost efficient basis without compromising the integrity of systems and facilities. As a result greater focus is also being placed on core business functions narrowing the range of specialist’s within the industry. This continues to deliver substantial consolidation through mergers and acquisitions (M&A) and joint ventures resulting in ongoing structural changes for real estate strategies. After R&D, real estate costs are among the most significant expenses for life sciences companies, including offices, laboratories, and sophisticated facilities necessary for producing products which comply with complex quality and safety regulations. Therefore unlocking potential within corporate real estate and its management is fundamental to maximising exposure to consumer markets while incorporating an efficient supply chain on a cost efficient basis.
AN INCREASINGLY GLOBAL MARKET PLACE
As the healthcare sector consolidates the rise in targeted M&A and joint ventures is anticipated to escalate. This is also enabling exit strategies for those lacking the ability to compete effectively across certain products, pooling resources in areas of strength in search of fresh growth. Consolidation has delivered a record number of M&A’s in the pharmaceuticals sector during 2014 accounting for approximately $300 billion. Co-promotion, licensing and co-development are moving up the agenda as market leaders strive to secure deals and advance their future drug development pipelines. New healthcare reform initiatives are transforming the industry while pressures are also emerging from the shift to value-based product pricing. Increasingly vulnerability to price competitiveness and the threat of continued high raw material prices are broadening the market in which pharmaceutical organisations are both locating and operating in. The intense competition comes at a time when not all are fully prepared for change. Developing countries are becoming large scale manufacturers and entering world markets especially for base chemicals. Given the narrow profit windows many suppliers and manufacturers are looking to new markets, the challenge lies in balancing real estate costs in a particular location against the potential advantages of gaining vital access to multidisciplinary research talent, new market opportunities, potential business partners, natural resources and production facilities. This continues to result in pharmaceutical operators looking further afield to establish a foothold in areas primed for growth.
BREAKING AWAY FROM “HERD MENTALITY” A select group of Big Pharma organisations, already exposed to severely over-stretched budgets, are now seeking to break away from the “Herd Mentality” of “MegaMergers” and are also moving away from the stagnation of mainstream markets. As an alternative to large scale mergers Big Pharma companies are also acquiring smaller biotech firms, especially if their products are in late-stage development or provide innovative technological solutions. Such a transaction can also be a win for biotech firms because large pharma companies typically possess the manufacturing facilities needed to commercialise drugs, which biotechs often lack. In contrast some drug manufacturers and distributors are acquiring healthcare service providers, tapping into growth opportunities across the entire healthcare value chain as a two tier market takes shape. By focussing on the non-drug side of consumer healthcare pharmaceutical operators are capitalising on the fast moving market while sustaining a lower risk, more cost conscious strategy cutting out the price premiums of selling into an overly competitive market place.
<40% are well-prepared of CEO’s say their companies
for change
(Customer services HR, IT departments)
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PHARMACEUTICAL INDUSTRY
CHALLENGES
DELIVERING SHAREHOLDER/ STAKEHOLDER VALUE A drive for new innovation through attracting and retaining the best talent while also addressing cost management.
In this particularly challenging environment, pressure is mounting for market leaders to increase returns on investment after a long period of sluggish growth during which many leading drugs have lost patent protection. As the market reacts and those within the pharmaceutical industry consolidate several challenges present a barrier to growth aspirations. Some of the challenges facing life science businesses include:
LOW GROWTH BUSINESS ENVIRONMENT By the time a medicinal product reaches the market, an average of 12-13 years will have elapsed since the first synthesis of the new active substance. R&D PRODUCTIVITY All new medicines introduced into the market are the result of lengthy, costly and risky R&D process. The pharmaceutical sector has witnessed productivity flat line in terms of product approval rates for the past decade.
PHARMA’S SCIENTIFIC PRODUCTIVITY HAS FLATLINED FOR A FULL DECADE Number of products approved 40 35 30
7 6
8
11
14
25 9
20
10
11
21
18
10
15
10
11
15 10 5 0
27
24
17
21
31
16
21
19
15
24
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 New molecular entities
Biologics
Source: EvaluatePharma, ‘World Preview 2018’ (June 2012)
RISING RISKS AND LOSS OF TRUST Pharmaceutical companies must win back trust; often creating the perception that they put their commercial goals above the interests of governments, prescribers and patients. RISING CUSTOMER EXPECTATIONS The commercial environment is getting tougher, as healthcare payers impose new cost constraints on providers and scrutinise the” value medicines offer” much more carefully. New therapies that are clinically and economically better than the existing alternatives are being demanded, together with hard, real-world outcomes data to back any claims about a medicine’s superiority. As these challenges persist international chemicals companies are seeking new opportunities by expanding their production and marketing outside the traditional areas of high consumption. As a result significant proportions of pharmaceutical manufacturing are being outsourced. The markets to which many capabilities are being outsourced to are increasingly the very same Emerging markets that are driving underlying industry growth. ADAPTING TO AVOID THE SHORT TERM FIX Despite a surge in Merger & Acquisitions (M&A) reflecting increased emphasis on innovation, shareholder value, and product diversification “the next wave” of Big Pharma operators are also keen to avoid the short term fix. With targets often trading at stratospheric prices “Mega Mergers” backed by cheap debt can carry considerable downside risk. On one hand targeting shrinking drug pipelines, looming patent expiries and carving out a niche from the generic manufacturing competition may support the cause for M&A, but in reality aspirations of cost savings and product differentiation often are not met. For those operating in more mature markets, many of the industry’s profits come from selling at premium prices to a small number of consumers. Were this premium to erode, or the cost inflation that supports it to stagnate many of the mergers we have witnessed of late would be left exposed, leaving some twice as big but just as unsuccessful.
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PHARMACEUTICAL INDUSTRY
GROWTH MARKETS
Emerging markets are becoming increasingly attractive to those suffering the stagnation of mature markets. As a result a growing proportion of executives are beginning to realign where management power is distributed. The majority of industry leaders are shifting control away from headquarters towards regional management, a measure that would increase the empowerment of regions and ensure a greater local market focus. There has been rapid growth in the market research environment in growth economies such as Brazil, China and India, leading to a gradual migration of economic and research activities from Europe to these fast-growing environments. In 2013 the Brazilian and Chinese markets grew by 17% and 14% respectively compared to an average market growth of 1% for the five major European markets and 3% for the US market. Looking beyond these more established locations to the “fast-followers” Poland, Venezeula, Indonesia and Mexico are just some of the markets anticipated to witness, significant growth in healthcare spreading between now and 2020.
DEMAND FOR MEDICINES IS RISING RAPIDLY IN THE GROWTH MARKETS US$ billions 200
175.8
175
172.2
150 125 100 75
76.6
66.9
57.3
50 25.6
25 0
China Sales in 2011
Brazil
48.8
45.1 20.7 Russia
15.6 India
Fast followers
Projected sales in 2020
Source: Business Monitor International Notes: (1) All sales are expressed in US dollars at constant exchange rates; (2) The fast followers include Argentina, Egypt, Indonesia, Mexico, Pakistan, Poland, Romania, South Africa,Thailand,Turkey, Ukraine, Venezuela and Vietman
UNDERSTANDING THE RISKS
Despite the attraction, some new areas of growth do carry risks and strategic decisions need to be made on a location by location basis. • Operating margins are peaking and the impact of Emerging Market growth on the current cost base will bring margins down further in certain growth markets • Retaining and recruiting local talent will turn into a decisive driver for success. In particular, companies will have to deal with high local attrition rates as more companies compete for the best resources • Market access remains key. Some countries currently do not offer welldeveloped healthcare infrastructures and thus focus on improving access to healthcare for the general population
• Many countries put in place containment measures to manage the costs of their evolving healthcare systems • Lengthy product registration processes • Lack of reimbursement and public funding • Lack of infrastructure • Lack of affordability • Transparency issues remain with lengthy processes surrounding tendering and contracting, in addition to compliance challenges • Legal and regulatory issues are reflected in the lack of intellectual property (IP) protection While executives share a long list of concerns, the prospects within Growth Markets are not being ignored. Each pharmaceutical company must evaluate associated risks in the context of its own specific portfolio.
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PHARMACEUTICAL INDUSTRY
STRATEGIC CONSIDERATIONS AND IMPLICATIONS FOR REAL ESTATE
With pharmaceutical companies being forced to address business strategies throughout this period of industry transition careful consideration and management is required to maximize growth potential. CHOOSE THE RIGHT SPACES IN THE RIGHT PLACES Strategic site selection and optimal use of resources are crucial for success. Whether a company owns or leases its real estate, the costs of real estate operations can be considerable, especially if facilities are located in high-cost cities. DONâ&#x20AC;&#x2122;T OVERLOOK REAL ESTATE Mergers, acquisitions, business unit spinoffs, and creative joint ventures complicate the real estate picture, which is why a company engaging in these activities should include a knowledgeable corporate real estate team in the decision making process. Although the hope of greater efficiency is a major motivation for M&A, some companies overlook or mismanage a major source of potential value, the corporate real estate portfolio.
ENGAGING THE CORPORATE REAL ESTATE TEAM During the high-risk due diligence phase this enables a better understanding of the value and the risk throughout layers of leases and building valuations. Regulatory restrictions, often mean that a company never has all the advance detail it wants. However, having an external real estate partner can provide quick access to real-time global real estate market intelligence to support property decisions and detailed scenario analysis. INVEST IN REAL ESTATE-COMPLIANCE EXPERTISE Regulatory compliance is ever pressing as companies seek new markets and R&D opportunities in emerging markets such as Southeast Asia, India, and Latin America. As the life sciences industry continues to evolve, organisations must maintain the highest quality standards throughout their facilities to capitalise on growth potential. PRIORITISE A HIGH-PRODUCTIVITY WORK ENVIRONMENT From fostering collaboration, to simply increasing the amount of natural light, the facility itself can be a powerful tool in talent recruitment and retention, which can ultimately deliver greater innovation and productivity. In some cases, uncovering under utilised space and better managing overall use can actually provide the cost-reducing benefit by reducing footprint or employee occupancy ratio.
TRANSITION REAL ESTATE TO SUPPORT BIOLOGICS According to BCC Research, the biologics market totalled $234 billion in 2014 and is anticipated to grow to approximately $387 billion by 2019. With so much of todayâ&#x20AC;&#x2122;s growth coming from biotech medicines, traditional pharmaceutical manufacturing facilities are quickly becoming out of date. In previous eras, production facilities were adaptable to cater from one type of drug production to another. In contrast, re-equipping facilities for modern day production is anything but minor. In some instances, a new facility may be the most cost-effective option. Expert management is now required to deal with the tougher regulations at play. CONCLUSION As life sciences companies continue to focus on efficiency, planned corporate real estate strategies have increasing potential to support shifting business priorities and drive added value. Challenges may be pushing the industry in new directions, but rising pressure is anticipated to deliver further innovation within the sector. Achieving the right strategy is not only important to global corporations, but can also be adopted by middle-market companies facing equally severe cost pressures. Taken together, adopting a successful approach can ensure maximum value is leveraged from real estate portfolios.
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PHARMACEUTICAL INDUSTRY
CONTACTS Neil Gorman Partner, Account Management Corporate Occupier & Investor Services neil.gorman@eur.cushwake.com +44 (0) 207 152 5542
Pascale Newcombe Associate, Account Management Corporate Occupier and Investor Services pascale.newcombe@eur.cushwake.com +44 (0) 207 152 5451
Andrew Heard Channel Researcher Corporate Occupier and Investor Services andrew.heard@eur.cushwake.com +44 (0) 207 152 5835
Cushman & Wakefield advises and represents clients on all aspects of property occupancy and investment. Founded in 1917, it has 248 offices in 58 countries, employing more than 16,000 professionals. It offers a complete range of services to its occupier and investor clients for all property types, including leasing, sales and acquisitions, equity, debt and structured finance, corporate finance and investment banking, appraisal, consulting, corporate services, and property, facilities, project and risk management. Š 2015 Cushman & Wakefield. All rights reserved.
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