Pharmaceutical Manufacturing
Description
Companies in this industry manufacture and process pharmaceutical products. Major companies include Bristol Myers Squibb, Eli Lilly, Johnson & Johnson, Merck, and Pfizer (all based in the US), as well as AstraZeneca and GlaxoSmithKline (both based in the UK), Bayer (Germany), Novartis and Roche (both based in Switzerland), and Sanofi (France).
Annual worldwide revenue from pharmaceutical manufacturing is expected to reach about $550 billion by 2026 and about $900 billion by 2031, according to Mordor Intelligence. Worldwide spending on medicines is increasing due to economic growth in developing nations and the rising cost of specialty drugs. Ireland, Germany, and Switzerland are the largest importers of pharmaceuticals, but manufacturers are targeting emerging economies for growth.
The US pharmaceutical manufacturing industry includes about 2,400 establishments (single-location companies and units of multi-location companies) with combined annual revenue of about $210 billion.
COMPETITIVE LANDSCAPE
Pharmaceutical manufacturers compete to discover and commercialize ever-more effective medicines. Companies focus on the most profitable markets, where demand for treatment is high. Key areas of development include cardiovascular, cancer, and diabetes medications, as increases in the number of elderly and obese patients fuel disease growth in these categories. Companies may also focus on rare disease categories, where available treatments are limited or nonexistent and opportunities exist for expedited approvals and profitable pricing.
The traditional drug manufacturing industry increasingly overlaps with the biotechnology industry, which is a source of many new medical treatments. Biopharmaceutical research is increasingly focused on specialized and personalized treatments. Pharmaceutical manufacturers also face competition from medical device manufacturers, over-the-counter product makers, and others offering alternative medical treatments.
Operating costs create high barriers to entry, and large companies tend to dominate due to economies of scale in research, manufacturing, and marketing. Small companies can compete effectively by specializing in drugs that target one or two specific ailments and by partnering with larger drug makers. The US industry is highly concentrated: the 50 largest companies account for about 80% of revenue.
The US is the largest global market for pharmaceuticals. Exports total about 30% of US production. Major export markets for US pharmaceuticals include Germany, the Netherlands, Japan, Belgium, and Canada. Imports of drugs to the US, partly from foreign manufacturing plants of US companies and partly from foreign drug companies, account for more than 40% of the US market. Imports of pharmaceuticals to the US come primarily from Ireland, Germany, Switzerland, the UK, and India.
Drug prices in many countries are controlled by the government and are typically much lower than prices in the US. Consequently, some US buyers travel to Canada or buy from foreign internet pharmacies. Although these practices are illegal, they have been encouraged by some state and local authorities, and restrictions are not always strictly enforced.
Competitive Advantages
Effective Pricing Strategies - Pressure to control medical costs from government and commercial payers is squeezing companies' ability to charge high prices for medications. Companies recoup high R&D expenses through pricing, but they must be able to justify prices to avoid regulatory scrutiny and public backlash, especially for breakthrough medicines. Most companies provide access-to-care programs such as rebates for patients struggling to afford medications.
Strong Development Pipeline - Pharmaceutical companies must have a strong pipeline of drug candidates to ward against the greatest financial risk: patent expiration. The loss of market exclusivity for a key product can cause a significant dip in revenues as generics erode market share, leaving manufacturers dependent on newer offerings. Defending patent rights against legal challenges is a major expense.
Broad Geographic Presence - Although developed markets account for the bulk of global pharmaceutical revenue, emerging markets are major sources of sales growth. The ability to offer new products in established markets and expand existing brands or low-cost generic offerings into developing countries provides a diversified revenue base.
Companies to Watch
Pfizer has fought tenaciously to hang on to the No. 1 pharmaceutical manufacturing spot, mainly through aggressive acquisitions and licensing deals. In addition to traditional prescriptions, it has vaccine, biotech, generic, and over-the-counter drug operations. Half of revenues come from non-US markets. Top sellers include breast cancer drug Ibrance, pain medication Lyrica, and blood thinner Eliquis.
Merck has global operations and a diversified product portfolio. Like most major drug firms, Merck has struggled to maintain growth, but the company reported strong revenue increases in 2018 and 2019. The company is investing heavily in R&D and is optimistic about its pipeline and broad offerings. The company is experiencing growth in sales of top sellers including HPV vaccine Gardasil and cancer drug Keytruda.
GlaxoSmithKline offers respiratory, cardiovascular, and central nervous system medications, along with vaccines, HIV drugs, antivirals, and OTC medicines.
PRODUCTS, OPERATIONS & TECHNOLOGY
Pharmaceutical preparations that affect the central nervous system account for about 20% of the industry revenue, followed by preparations that affect neoplasm (about 13% of industry revenue). Other products include vitamin, nutrient, and hematinic preparations (about 8%), respiratory system pharmaceutical preparation (about 8%), and parasitic and infective diseases (about 6%).
R&D is the major activity of most drug companies. While some drugs can now be designed from the ground up to fulfill a specific biological function, drug development in most cases still involves testing a large number of chemicals "in vitro" (in a test tube) to see if they have biological activity. Many of these chemicals are derived from natural sources, especially plants. A company may test thousands of chemicals before finding a few that have the desired effect. Successful candidates are then moved on to preclinical "in vivo" animal testing and human clinical trials phases. Results of trials must meet rigorous regulatory standards before a drug is approved for sale. The global pharmaceutical industry has about 8,000 compounds in various stages of development, according to Pharmaceutical Research and Manufacturers of America (PhRMA). About 75% of compounds are first-in-class (unique) medicines, while the remaining compounds are based on existing drug formulations.
The entire drug development process may take many years (while patent protection is running down), with only a small percentage of candidate drugs surviving the testing and approval process. On average, discovering and developing a new drug takes more than 10 years and costs about $2.6 billion. The US biopharmaceutical industry invests about $100 billion on R&D per year.
Major areas of research include the cardiovascular system (high blood pressure, high cholesterol, heart disease); cancer; the endocrine system (diabetes, osteoporosis); HIV/AIDS; neurological disorders (Alzheimer's and Parkinson's disease); infections; immunological disorders; and psychological disorders.
The actual manufacture of drugs involves one of three major methods: synthesis (using well-known chemical reactions to build a drug from simpler components); extraction (using solvents to remove and purify a drug from a natural source); or biotechnology (such as gene-splicing to produce large quantities of drugs from bacterial fermentation, or the production of monoclonal antibodies using mouse or human cells). Small companies may use a contract manufacturer to produce their products. Manufacturing environments must be sterile, with proper hazardous material controls. Facilities use highly automated equipment for ingredient weighing and mixing, granulation, encapsulation, tablet compression, packaging, and other processes.
Raw materials include binding agents (such as corn starch), fillers, lubricants (vegetable oil or magnesium stearate), and active ingredients. Some products include additional ingredients for coating (cellulose), flavoring (sugars), and coloring.
Because large research budgets don't guarantee new products, many large companies supplement their own efforts by buying or licensing products from other companies. Companies often buy smaller ones that have a promising research program, to ensure a future stream of products. Some large companies manufacture over-the-counter (OTC) medications, dietary supplements, or personal care products in addition to patent drugs. Offering a more diverse product line can often mitigate potential cash flow issues that can stem from patent drug development costs. Joint research is also becoming more common as the cost of research increases.
Annual worldwide revenue from pharmaceutical manufacturing is expected to reach about $550 billion by 2026 and about $900 billion by 2031, according to Mordor Intelligence. Worldwide spending on medicines is increasing due to economic growth in developing nations and the rising cost of specialty drugs. Ireland, Germany, and Switzerland are the largest importers of pharmaceuticals, but manufacturers are targeting emerging economies for growth.
The US pharmaceutical manufacturing industry includes about 2,400 establishments (single-location companies and units of multi-location companies) with combined annual revenue of about $210 billion.
COMPETITIVE LANDSCAPE
Pharmaceutical manufacturers compete to discover and commercialize ever-more effective medicines. Companies focus on the most profitable markets, where demand for treatment is high. Key areas of development include cardiovascular, cancer, and diabetes medications, as increases in the number of elderly and obese patients fuel disease growth in these categories. Companies may also focus on rare disease categories, where available treatments are limited or nonexistent and opportunities exist for expedited approvals and profitable pricing.
The traditional drug manufacturing industry increasingly overlaps with the biotechnology industry, which is a source of many new medical treatments. Biopharmaceutical research is increasingly focused on specialized and personalized treatments. Pharmaceutical manufacturers also face competition from medical device manufacturers, over-the-counter product makers, and others offering alternative medical treatments.
Operating costs create high barriers to entry, and large companies tend to dominate due to economies of scale in research, manufacturing, and marketing. Small companies can compete effectively by specializing in drugs that target one or two specific ailments and by partnering with larger drug makers. The US industry is highly concentrated: the 50 largest companies account for about 80% of revenue.
The US is the largest global market for pharmaceuticals. Exports total about 30% of US production. Major export markets for US pharmaceuticals include Germany, the Netherlands, Japan, Belgium, and Canada. Imports of drugs to the US, partly from foreign manufacturing plants of US companies and partly from foreign drug companies, account for more than 40% of the US market. Imports of pharmaceuticals to the US come primarily from Ireland, Germany, Switzerland, the UK, and India.
Drug prices in many countries are controlled by the government and are typically much lower than prices in the US. Consequently, some US buyers travel to Canada or buy from foreign internet pharmacies. Although these practices are illegal, they have been encouraged by some state and local authorities, and restrictions are not always strictly enforced.
Competitive Advantages
Effective Pricing Strategies - Pressure to control medical costs from government and commercial payers is squeezing companies' ability to charge high prices for medications. Companies recoup high R&D expenses through pricing, but they must be able to justify prices to avoid regulatory scrutiny and public backlash, especially for breakthrough medicines. Most companies provide access-to-care programs such as rebates for patients struggling to afford medications.
Strong Development Pipeline - Pharmaceutical companies must have a strong pipeline of drug candidates to ward against the greatest financial risk: patent expiration. The loss of market exclusivity for a key product can cause a significant dip in revenues as generics erode market share, leaving manufacturers dependent on newer offerings. Defending patent rights against legal challenges is a major expense.
Broad Geographic Presence - Although developed markets account for the bulk of global pharmaceutical revenue, emerging markets are major sources of sales growth. The ability to offer new products in established markets and expand existing brands or low-cost generic offerings into developing countries provides a diversified revenue base.
Companies to Watch
Pfizer has fought tenaciously to hang on to the No. 1 pharmaceutical manufacturing spot, mainly through aggressive acquisitions and licensing deals. In addition to traditional prescriptions, it has vaccine, biotech, generic, and over-the-counter drug operations. Half of revenues come from non-US markets. Top sellers include breast cancer drug Ibrance, pain medication Lyrica, and blood thinner Eliquis.
Merck has global operations and a diversified product portfolio. Like most major drug firms, Merck has struggled to maintain growth, but the company reported strong revenue increases in 2018 and 2019. The company is investing heavily in R&D and is optimistic about its pipeline and broad offerings. The company is experiencing growth in sales of top sellers including HPV vaccine Gardasil and cancer drug Keytruda.
GlaxoSmithKline offers respiratory, cardiovascular, and central nervous system medications, along with vaccines, HIV drugs, antivirals, and OTC medicines.
PRODUCTS, OPERATIONS & TECHNOLOGY
Pharmaceutical preparations that affect the central nervous system account for about 20% of the industry revenue, followed by preparations that affect neoplasm (about 13% of industry revenue). Other products include vitamin, nutrient, and hematinic preparations (about 8%), respiratory system pharmaceutical preparation (about 8%), and parasitic and infective diseases (about 6%).
R&D is the major activity of most drug companies. While some drugs can now be designed from the ground up to fulfill a specific biological function, drug development in most cases still involves testing a large number of chemicals "in vitro" (in a test tube) to see if they have biological activity. Many of these chemicals are derived from natural sources, especially plants. A company may test thousands of chemicals before finding a few that have the desired effect. Successful candidates are then moved on to preclinical "in vivo" animal testing and human clinical trials phases. Results of trials must meet rigorous regulatory standards before a drug is approved for sale. The global pharmaceutical industry has about 8,000 compounds in various stages of development, according to Pharmaceutical Research and Manufacturers of America (PhRMA). About 75% of compounds are first-in-class (unique) medicines, while the remaining compounds are based on existing drug formulations.
The entire drug development process may take many years (while patent protection is running down), with only a small percentage of candidate drugs surviving the testing and approval process. On average, discovering and developing a new drug takes more than 10 years and costs about $2.6 billion. The US biopharmaceutical industry invests about $100 billion on R&D per year.
Major areas of research include the cardiovascular system (high blood pressure, high cholesterol, heart disease); cancer; the endocrine system (diabetes, osteoporosis); HIV/AIDS; neurological disorders (Alzheimer's and Parkinson's disease); infections; immunological disorders; and psychological disorders.
The actual manufacture of drugs involves one of three major methods: synthesis (using well-known chemical reactions to build a drug from simpler components); extraction (using solvents to remove and purify a drug from a natural source); or biotechnology (such as gene-splicing to produce large quantities of drugs from bacterial fermentation, or the production of monoclonal antibodies using mouse or human cells). Small companies may use a contract manufacturer to produce their products. Manufacturing environments must be sterile, with proper hazardous material controls. Facilities use highly automated equipment for ingredient weighing and mixing, granulation, encapsulation, tablet compression, packaging, and other processes.
Raw materials include binding agents (such as corn starch), fillers, lubricants (vegetable oil or magnesium stearate), and active ingredients. Some products include additional ingredients for coating (cellulose), flavoring (sugars), and coloring.
Because large research budgets don't guarantee new products, many large companies supplement their own efforts by buying or licensing products from other companies. Companies often buy smaller ones that have a promising research program, to ensure a future stream of products. Some large companies manufacture over-the-counter (OTC) medications, dietary supplements, or personal care products in addition to patent drugs. Offering a more diverse product line can often mitigate potential cash flow issues that can stem from patent drug development costs. Joint research is also becoming more common as the cost of research increases.
Table of Contents
- Industry Overview
- Quarterly Industry Update
- Business Challenges
- Business Trends
- Industry Opportunities
- Call Preparation Questions
- Financial Information
- Industry Forecast
- Web Links and Acronyms
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