United States Pharmaceuticals and Healthcare Report Q2 2012

BMI View: Economics and politics are increasingly exerting an influence on the US pharmaceuticalmarket. This is in stark contrast to the late 1990s and early 2000s, when the business environment wasrelatively insulated from external factors and drugmakers consistently recorded double-digit growth. Thegovernment is currently looking to reduce expenditure and excessive healthcare spending and the sectoris being targeted for cuts. We do not, however, expect any fundamental changes to the public-fundedindustry landscape for at least a year.

Headline Expenditure Projections

Pharmaceuticals: US$331.3bn in 2011 to US$335.1bn in 2012; +1.1% growth in local currencyterms. Our forecast is unchanged from Q112.

Healthcare: US$2,443bn in 2011 to US$2,564bn in 2011; +4.9% growth in local currencyterms. Our forecast is unchanged from Q112.

Medical devices: US$133bn in 2010 to US$139bn in 2011; +4.4% growth in local currencyterms. Our forecast is unchanged from Q112.Business Environment Rating: The US Pharmaceutical Risk/Reward Rating (RRR) for Q212 is 79.1 outof 100, which is unchanged from the previous quarter. The only significant downside is low single-digitmarket growth. However this is offset by an extremely large absolute pharmaceutical market size andmany other factors, primarily the free pricing regime.

Key Trends & Developments

In February 2012, it emerged the US Affordable Care Act (ACA) saved 3.6mn enrollees agedover 65, including some disabled people, a total of US$2.1bn in spending, as part of theMedicare programme in 2011. The Department of Health and Human Services (HHS) saidsavings for Medicare enrollees would average US$4,200 per person through to 2021 thanks tonew legislation. In 2011, Medicare offered a 7% discount on covered generic drugs for peoplewho crossed an annual limit under the Medicare prescription drug plan, while more than 2.8mnpeople received US$32.1mn in savings on generics.

In February 2012, the US Centres for Medicare and Medicaid Services (CMS) proposed a newrule that would enable the country to save US$17.7bn over five years on prescription drugsbought through the state and federal Medicaid programme. The new regulation is for theimplementation of sections 2501, 2503, and 3301 of the Affordable Care Act relating toprescription drug supply through Medicaid. The rule is designed to ensure higher transparency inpricing and to guarantee taxpayers and states do not overpay for prescription drugs.

In December 2011, Indian pharmaceutical company Ranbaxy Laboratories was expected topay US$500mn to resolve possible civil and criminal liabilities, following an investigation bythe US Department of Justice. The potential penalties are attributed to compliance problemsdiscovered by the US Food and Drug Administration (FDA) at Ranbaxy's manufacturingfacilities. The firm has also signed a consent decree with the FDA to restart sales of drugsproduced at its facilities in Poanta Sahib and Dewas, which account for around 25% of itsUS$1.9bn annual sales.

In November 2011, the world's bestselling prescription drug, Pfizer's Lipitor (atorvastatin), lostpatent protection in the US. It is BMI’s view US sales of Lipitor will drop by less than expectedfollowing patent expiry. This is due to the many franchise preservation strategies employedby Pfizer, namely direct-to-consumer distribution, lower pricing, negotiation with intermediaries,aggressive competitive positioning, development of fixed-dose combinations and enhancementof the medicine's brand. We accordingly expect other multinational companies to employ someor all of these tactics following the end of intellectual property (IP) protection for their leadingmedicines.

BMI Economic View: We have upgraded our US real GDP growth forecast for 2012 to 2.0% from 1.6%,owing primarily to stronger-than-expected economic activity in Q411, which has inflated the base effect.Our overall outlook for the US economy, however, has not changed: private consumption growth willremain subdued, government deficit reduction will weigh on economic activity, and the European debtcrisis poses downside risks to the export sector.

BMI Political View: Our core view for the 2012 US federal election is that President Barack Obama willwin a second term in office, while the Republican Party will retain the House of Representatives and winenough seats to at least evenly divide the Senate. Mitt Romney is most likely to win the Republican Partynomination, but until the electoral campaign gets going in earnest in Q312, it is difficult assess the degreeto which policy would shift should the Republicans take the White House