Industry Trend Analysis - Pharmaceutical Cost Containment To Challenge Drugmakers Despite Improving Healthcare Coverage - DEC 2017

BMI View: The Asia Pacific (APAC) market will remain a key commercial opportunity for multinational drugmakers. A n ageing population and rising burden of chronic diseases will play a part in the heightening of medicine demand in the region, along with the expansion of access to healthcare that will be the primary driver of robust growth. However, cost containment measures such as greater pricing pressures including value-based medicine pricing and generic substitution policies employed by the government to control expenditure , will create a challenging business environment for pharmaceutical companies.

With the rapidly rising demand for and consumption of drugs, governments across the Asia Pacific (APAC) region will face challenges in ensuring the populations' access to medicines in a cost-effective manner. Initiatives to boost domestic drug production, increasingly forceful pricing pressures, a focus on cost-effectiveness and generic substitution are trends that are likely to continue over the coming years. These will in turn pose revenue earning challenges for innovative drugmakers. Nonetheless, despite the heavy focus on cost containment in both the developed and developing APAC markets, the increasing affordability of medicines will allow for greater access to medicines and in turn, boost sales growth in the region. In 2016, APAC's pharmaceutical market was valued at USD303.9bn which is forecasted to expand to USD375.1bn with a 6.0% CAGR at constant exchange rates through to 2021.

High Growth Prospects In Asia Pacific
Asia Pacific: Pharmaceutical Sales (USDbn)
f = BMI Forecast. Source: National Sources, BMI

Pharmaceutical Industry Will Remain A Focus Of Cost Containment

Growing demand for medical services in tandem with the epidemiological transition towards more chronic diseases and the rising dependency ratio in both developed and less-developed APAC markets will continue to boost demand for innovative medicines. As is evident from the chart below, Japan has the longest life expectancy in the region (82.6 years) and the largest pensionable population. Singapore and New Zealand will experience an expanding and rapidly ageing population, with Singapore's pensionable population rising at a faster rate from the year 2026 onwards.

Ageing Population Boosts Demand For Chronic Disease Medicines
Pensionable Population As A % Of Working Age Population
f = BMI Forecast. Source: UN, BMI

In addition, several markets have implemented or intend to roll out universal healthcare, which will alleviate financial barriers to medical services and increase utilisation rates. For example, Indonesia introduced its Universal Healthcare Program in 2014, aiming to provide comprehensive health care for the entire population by 2019, with government subsidised coverage for low income groups. Myanmar is set to achieve its universal health coverage status by 2030, providing a comprehensive national health insurance scheme to improve access to healthcare facilities. While the roll out of universal healthcare across the emerging markets is expected to present substantial revenue-earning opportunities for pharmaceutical companies as financial burdens are alleviated and patients gain access to risk pooling, a threat to this outlook stems from the use of cost containment measures as governments seek to rationalise healthcare spending.

Low-Cost Drugs To Meet Rising Healthcare Demand

Underpinning the prospects for generic pharmaceuticals in the region will be the confluence of the aforementioned factors such as growing demand for medical treatments and cost constraints among payers in the APAC region.

  • In the budget for FY2017/18, the Australian government stated that it will promote the consumption of lower-value generic medicines in place of patented medicines as a means to reduce pharmaceutical expenditure.

  • Similarly, the Japanese government, in May 2017, stated its plans of boosting the use of generic drugs from 56% to more than 80% by September 2020.

  • The proactive role taken by the Indian government to encourage physicians to prescribe drugs using their international non-proprietary names will also create commercial opportunities that will encourage drugmakers to invest aggressively into the generic drug market.

  • Furthermore, in June 2017, the Philippine Chamber of the Pharmaceutical Industry and the Philippine Food and Drug Administration expressed support for the formation of an Inter-Agency Committee on Generic Drugs Development to encourage investments in generics drugs manufacturing, as well as to provide greater access to generic medicines that are of higher quality and are more affordable.

The generic substitution policies enable healthcare payers to supply a far higher volume of medicines at similar expenditure levels. Although the high growth potential of medicine demand in the region represents an attractive proposition for drugmakers, multinational investment into the region by innovative pharmaceutical manufacturers will remain restrained due to generic substitution, attributable to the widespread need to make medicines affordable for the population and healthcare providers.

Price Controls To Provide Further Downside Risks

The healthcare payers across the developed and less-developed countries have sought to control expenditure in order to balance the needs of the population with the available funds. As such, increasingly aggressive pricing controls have been implemented. These policies include value-based pricing, annual price revisions and capping of medicine prices. Japan, for example, introduced a 50% price reduction to Opdivo (nivolumab) a novel immunotherapy sold by Ono Pharmaceutical in February 2017, as an 'emergency step' to curtail rising drug spending. Similarly, several agreements were framed between drugmakers and China's National Health and Family Planning Commission in 2017 for innovative treatments, whereby GlaxoSmithKline's breast cancer drug Tykerb (lapatinib) received a 42% reduction in exchange for reimbursement under the country's national health insurance scheme.

Pharmaceutical price cuts will not be the only tool employed in the region. Other tools such as health technology assessments will also be employed by authorities. The decision by Taiwan's National Health Insurance Administration to reimburse only 8,000 patients using new hepatitis C treatments - Daklinza (daclatasvir) and Sunvepra (asunaprevir) from Bristol-Myers Squibb and Exviera (dasabuvir) and Viekirax (ombitasvir, paritaprevir and ritonavir) from AbbVie - in 2017 exemplify the measures adopted by the authorities to contain spending. In early July 2017, the Japanese Ministry of Health, Labor and Welfare proposed creating a more structured cost-effectiveness assessment scheme and introduce a larger role for value-based medicines.