June 2023

GlobalPharmaceuticals
Outlook
CONTENTS

Pharmaceuticals shows signs of continued
strength despite weaker global economy

Our Trade Sector Experts
The Americas: Patrick Scardina, Atradius’ Manager,
Regional Underwriting in Irvine, California, USA
Patrick started his career as a Risk Services’ intern for Atradius in Baltimore, Maryland,in 2008 before becoming Associate Underwriter, CTC Underwriter, and Sector Underwriter.
In January 2014 he relocated to California to manage Atradius’ West Coast Regional
Underwriting. In April 2022, Patrick was promoted to Manager, Regional Underwriting andnow looks after the Regional Underwriting Team across the United States. Pharmaceuticals
is one of his areas of sector expertise, where he acts as a strategic thinker, priding himself
on finding innovative solutions.
Asia Pacific: Judy Ji, Atradius Senior Underwriterin Shanghai, China
Judy has been working with Atradius for 15 years, following her time as an auditor with
PwC. Her work has always been as a mainstream risk underwriter, with currently a special

Outside of the spikes of the Covid years, the pharmaceuticals
industry tends to follow a steadier path through economic
ups and downs than other industries. However, now thatvaccine demand is slowing, and the global economy isfacing record levels of high inflation, what is the outlook forpharmaceuticals? We asked three of our dedicated Trade
Sector Experts to share their knowledge and expertise on the
key issues affecting the pharmaceuticals industry in theirmarkets covering: the Americas, Asia Pacific and Europe.

focus on pharmaceuticals and metals. In addition, she has also worked closely with

What is the global outlook for the pharmaceutical industry?
Many areas of the pharmaceuticals industry experienced rapid growth during 2020
and 2021, largely thanks to the Covid-driven demand for vaccines and personal
protective equipment. 2021 saw industry output growth of an astonishing 14%.

the ICT, machines and food sectors in the past. Judy is based in Shanghai in China.
One of her strengths is in identifying risks and completing robust financial analysis.
Europe: Rubén del Río Hernández, Team Leader
Large Buyer Unit at Atradius CyC, Madrid, Spain

Although growth has now slowed significantly, this is not a case of boom then bustfor the industry as we still expect global growth to remain above 3% over the next
few years. Global high inflation is impacting consumer spending, however, and islikely to create the biggest dent areas such as personal hygiene and over the counter
medicines.

Rubén has worked with Atradius CyC since 2005 and is currently the Team Leader ofAtradius’ Large Buyer Unit, where he had previously worked as Senior Analyst. He is basedin Madrid, Spain. The Large Buyer Unit team combines a range of expertise and includes
Pharma, Chemistry, Oil & Gas, Plastic, Cosmetics, Textiles and Hospitality among areasof specialist knowledge. In addition to the expertise Rubén developed on these sectors,

The ending of China’s zero-Covid policy at the beginning of 2023 has provided
a boost for pharmaceuticals globally. The reopening of the Chinese economy ishelping to reduce strains on global supply chains and, in particular, global accessto the active pharmaceutical ingredients (APIs) produced in China.

he is experienced in the assessment of liquidity and solvency of companies.

Global pharmaceuticals key figures
2022

Contents
Pharmaceuticals performance: global and regional outlook

4

What is the financial strength of pharmaceuticals producers?

6

To what extent do government health policies and regulations impact the industry? 9

2

2023*

2024*
11.3

4.8

5.4

4.7

2.3

3.1

Do pharmaceuticals businesses have good access to external financing?

9

What impact will ageing populations have on healthcare systems?

10

Will reshoring secure domestic pharmaceuticals provision?

11

Does the next patent cliff pose a risk to the industry?

12

What opportunities do pharmaceuticals present to emerging markets?

12

What are the environmental issues facing the pharmaceuticals industry?

14

PRODUCTION

Pharmaceuticals | Top three opportunities and challenges over the next five years

15

Year-on-year, % change. (* Forecast) Source: Oxford Economics.

ATRADIUS SECTOR EXPERTS FOR PHARMACEUTICALS

2025*

4.3

4.5

4.2

4.5

7.0

-5.6

INVESTMENT (REAL, USD)GROSS OPERATING SURPLUS - PROFITS (NOMINAL)

3
ATRADIUS SECTOR EXPERTS FOR PHARMACEUTICALSAsia-Pacific drives
growth momentum

Americas experiences modest growthin the coming two years

Judy Ji is Atradius Senior Underwriterin Shanghai, China. Her work involves
a strong view of Asia-Pacific and she is
the Atradius pharmaceuticals expert for Asia.
She noted: “The greatest rates of growth in
the global pharmaceuticals industry will beseen in Asia-Pacific over the next few years.”
Pharmaceutical production and sales
will grow by more than 5% year-on-year in
2023 and more than 6% in the years 2024
and 2025 respectively.

Patrick Scardina is Atradius Manager
Regional Underwriting in Irvine, USAand has specialist insight into thepharmaceuticals industry in the Americas.
He explained: “Pharmaceuticals growthin the Americas is forecasted to be in the
low single digits in the coming two years.
This follows the double-digit growth we saw
in 2021 and early 2022 which was largely
driven by Covid demand, namely vaccines,
therapeutics, medicines, testing, and PPE.
This segment is now declining in the double
digits off the 2020 to early-2022 highs, while
offset by strong performance of medicines
geared towards fighting cancer, diabetes,and other life-threatening diseases.”

Much of this growth will be driven by increased demand in
emerging economies, as healthcare systems improve andhousehold incomes expand. Producers of generics and overthe counter medicines will be the first to benefit, especiallyin China, India and Southeast Asia. In addition, Asia-Pacific’s
share of global pharma production will increase from 36%
in 2022, to 42% in 2030. China’s share of global production
will grow from 25% in 2022, to 30% in 2030.

Asia-Pacific’s share of global
pharma production will increase
to more than 40% in 2030.
Judi Ji

2023*

15.4

2024*

-0.3

2025*
6.2

5.5 5.1
4.8
4.7 3.8

4.8

6.9

3.1
2.2

2.5

2.8

4.2
2.7
2.1

0.0

-1.5

-9.1

WORLD

4

AMERICAS

ASIA-PACIFICEUROPEThe long-term outlook for the sector in Europe is good. Pharmaceuticals firms
will benefit from the region’s ageing population and the resulting demand forpharmaceutical products to support both chronic illnesses and conditions associatedwith ageing. Strongest growth is likely to be seen in the major economies of the EU.

MIDDLE EAST AND AFRICA

Year-on-year, % change. (* Forecast) Source: Oxford Economics.

ATRADIUS SECTOR EXPERTS FOR PHARMACEUTICALSEurope growth cools amid
high energy prices
As the Team Leader Large Buyer Unit at Atradius CyC, Madrid,
Spain Rubén del Río Hernández has a special insight into thepharmaceuticals industry in Europe. He said: “Although largely
remaining on a solid footing, pharmaceuticals output growthin Europe is slowing amid high energy price headwinds. These
are affecting the industry directly through the cost of fuel andindirectly through the increased cost of producing feedstocks andAPIs.” High levels of inflation across the region are also impacting
high street spending and annual production growth is forecast to slow
to about 4% in 2023 and 2% in 2024, after growing by 15% last year.

Pharmaceuticals output growth per region2022

He added: “The moderating sales growth expectations arelikely to be a short-term dip. The long-term outlook is morepositive, buoyed by ongoing demand driven by the ageing
population and hopes for a combo Covid/seasonal flu vaccine,which has been delayed by the FDA until at least 2024.”

CONTENTS

ATRADIUS SECTOR EXPERTS FOR PHARMACEUTICALS

5

What is the financial strength ofpharmaceuticals producers?
Asia-Pacific
China’s dominant position as the world’s major drug
production centre will help underpin the financial strengthof pharmaceuticals industry in Asia-Pacific. In addition,
most pharmaceuticals businesses in Japan and India havestrong balance sheets and good access to bank financing.
Ageing populations and expanding middle-classes in
the region will support growth and the financial strengthof pharma producers in the region.
Judy Ji noted: “In China, we expect the number of householdswith incomes over US$35,000 to rise to 152 million in 2026,
from an estimated 65 million in 2020. This will contributeto spending on high value-added pharmaceuticals.
At the same time, the Chinese population is beginning toage, which will boost demand for pharmaceuticals related
to chronic illnesses such as diabetes.”

Emerging markets and ageing populations
present greatest opportunities for growth
Improvements to healthcare systems in emerging
markets present an increasing opportunity for growth.
Although emerging markets will gain a rising shareof global pharma output, this will not eclipse demand
from advanced markets. Here ageing populations
are driving growth, especially for chronic disease
treatments and value-added speciality products.

Global pharma output: rising share of Emerging
Markets

2015

2023*

6

63.1

57.5

35.9

36.9

42.5

EMERGING MARKETS% of global production. (* Forecast). Source: Oxford Economics.

ATRADIUS SECTOR EXPERTS FOR PHARMACEUTICALS

Rubén del Río Hernández

EuropeRubén del Río Hernández highlighted the different
challenges facing different sizes of pharmaceuticals
companies in Europe. He said: In Europe, large
pharmaceuticals companies often have substantial financial
resources due to their global operations, diversified productportfolios and extensive marketing networks. These
companies invest significantly in R&D but also tend to haverobust revenue streams from the sales of both patented
drugs and generic versions.”
He continued: “On the other hand, smaller pharmaceuticalcompanies and specialist biotech firms may have more
focused operations and smaller financial capacities. They
often rely on venture capital funding or partnerships
with larger companies to support their R&D efforts. These
companies may be more susceptible to market volatility andmay suffer from the consequences of higher financing costs.”
He concluded: “So, for the most part, the pharma financial
indicators are strong but some medium and small
companies could face financing challenges due to the highR&D investment required, the competition from companies
based on India and China, and difficult access to financing
at competitive interest rates.”

2030*

64.1

ADVANCED MARKETS

Some smaller pharma companies in
Europe could face financing challenges
due to high R&D investments needed.

Americas
The US pharmaceuticals sector is still susceptible
to headwinds from inflationary pressures, as well labour
shortages, product liability ligation and governmentpressures to reduce drug costs for consumers. However,despite this the sector is extremely resilient, with ongoing
demand driven by an ageing population that will continue
to fuel sector growth.
Patrick Scardina said: “Although pharma in the Americas
tends to be dominated by a few players, the margins forbranded pharmaceuticals are robust leading to strong cash
flow, excellent credit profiles.”CONTENTS

7ATRADIUS SECTOR EXPERTS FOR PHARMACEUTICALSTo what extent do government health policies
and regulations impact the industry?
Government regulations and policies affect pharmaceuticals businesses
throughout the world.

Pharmaceuticals enjoy goodaccess to external financefrom banks and investors.

Americas
In the US the recently passed Inflation Reduction Act
included a number of provisions that will change thepharmaceutical industry in both the short and long-term.
These include a cap on monthly insulin costs for Medicare
patients and the ability for the government to negotiate
drug prices.

Businesses in the UK additionally have to negotiate theadditional red-tape presented post-Brexit. Border checks
and regulatory burdens have raised costs and delayeddelivery of goods. While some businesses have relocatedto Europe, many are already multinationals with a presencein Europe. However, a significant level of unknowns still
remain for the industry in the UK.

Looking the changes in the US, Patrick Scardina said: “These
provisions will take some time to phase in and will not havea material impact on the creditworthiness of pharmaceuticaldrugs companies in light of their earnings power. However,
the healthcare system, particularly hospitals and insurancecompanies with heavy government payers, may feel thepain on their already thin margins resulting from the intensepressures of labour inflation.”

Looking at Europe more broadly Rubén del Río Hernández
said: “There are some EU policies that may positively
impact the sector´s performance and growth in Europe
in the coming years. For example, the EU Commission is
proposing to revise the EU’s pharmaceutical legislation,
which includes the strategic importance of API productionin Europe.”

Asia-PacificAsia is also seeing changes to the regulatory landscape.
With the Volume-based Procurement (VBP) policy and
the National Reimbursement Drug List (NRDL), China hasoverhauled its health-care system. Global and domestic
drug producers have to compete to sell their products inbulk to public hospitals. China has conducted seven roundsof centralized drug procurement since November 2018,
the price decline has stabilized at around 50%.
In India, the government has announced a large incentive
scheme to boost local API production and compete with
China. Government healthcare policies in Japan arecomplex with a drug pricing system that is hard to predict(presenting a downside risk). Currently generics sales
amount to 47% in volume terms, but the government aims
to increase this share to 80%.

EuropeMost of the individual domestic markets in Europe arehighly regulated and some feature constraints that can
impact profits. For example, the businesses supplying France,
Spain, Italy and the UK face pressure from health authorities
to lower the prices of drugs and medicines. In Italy thisincludes a 3% margin cap for sales of prescription drugs.

Do pharmaceuticals
businesses have good accessto external financing?
In general, the industry has robust equity, solvency andliquidity. Pharmaceutical producers and biotech businesses
across the world largely enjoy good access to externalfinancing from banks and investors, which helps to sustainhigh R&D expenditures.
Businesses in some markets are highly geared, but eventhese are able to generate healthy margins and attract
investment. In China, for example, it’s common to see
companies with gearing around 100%. For some countries,
such as India, both gearing and dependence on bankfinance are low.
We also expect M&A activity to pick up during 2023
and ‘normalise’ to pre-pandemic levels. This will in part be
driven by the fact that many pharmaceuticals companies
appear to have financial strength or have ample liquidity
sources in the financial markets.

8

9
ATRADIUS SECTOR EXPERTS FOR PHARMACEUTICALSCONTENTS

ATRADIUS SECTOR EXPERTS FOR PHARMACEUTICALSWill reshoring secure domestic
pharmaceuticals provision?
Reshoring has been a hot topic in recent years. In 2020 President Trump
signed an executive order designed to encourage the reshoring ofpharmaceuticals manufacturing to the US. This is a position maintained by the
Biden administration, driven in part by the desire for domestic drug security.
However, moving pharmaceuticals production is not simple. Regulatory
clearance is required at every stage of the process, a time-consuming endeavourthat could erode the earning potential of a drug that may already face deadlines
in the form of patent end of life. In addition, producers in North America andEurope can struggle to compete with lower labour costs in Asia. Patrick Scardina
acknowledged this and said: “The US only makes up an estimated 5% of global
market share in APIs, as domestic facilities have struggled to compete against
large-scale, low-cost factories overseas, predominantly in China and India.
Concerns over intellectual property also favour retaining production in the US
and Europe, rather than shifting the production of value-added pharmaceuticals
to low-cost centres.”In the US, growing
pharma demand
from Baby Boomers
drive mid- andlong-term growth.
Patrick Scardina

10
ATRADIUS SECTOR EXPERTS FOR PHARMACEUTICALSWhat impact will ageing populations
have on healthcare systems?
In advanced economies and developed nations, people are living for longer,
often with several chronic health conditions. While ageing populations
inevitably place additional pressure on healthcare systems and government
expenditure, they also present opportunities for the pharmaceuticals industry.
This will mainly benefit producers of speciality products and medicines
for chronic conditions, but also manufacturers of generic drugs. This is
the case for the majority of Europe and North America, as well as Asia-Pacific,
particularly Japan and China.

Rubén del Río Hernández agreed with this view and added the European
perspective. He said: “The active pharmaceutical ingredient (API) manufacturingmarket has been dominated by India and China for several years. For this reason,
the European Union (EU) is making efforts to reduce dependency on thesecountries and establish its own API manufacturing capabilities. These efforts
will not only contribute to the economic growth of the European pharmaceuticalindustry but will also strengthen Europe’s position as a global leader inhealthcare innovation and production.”

CONTENTS

ATRADIUS SECTOR EXPERTS FOR PHARMACEUTICALS

11

Does the next patent cliff
pose a risk to the industry?
Several major drugs are approaching the end of their
exclusivity rights over the next decade, including AbbVie’s
Humira, Johnson & Johnson’s Stelara this year. While without
question the ending of patent exclusivity will impact income
generation and force the producer into competition oneach drug, the vast majority will have been prepared withplans in place for some time. For some, ongoing R&D will see
new patents take their place, for others marketing and sales
strategies will promote competition. As Patrick Scardina noted:“In total, most branded drugs are set to lose exclusivity by theend of the decade, so near and long-term patent exclusivity
losses will drive continued investment in R&D and M&A.”
The ending of patent exclusivity is an area affecting
pharmaceuticals businesses in the US and Europe. Although
Japanese brand-name producers acknowledge the need for
additional investment in the development of new medicines,
this is not an area that impacts China in the same way.

What opportunities do
pharmaceuticals present
to emerging markets?
While ageing populations present a growth driver for
developed markets, many emerging markets are also finding
growth opportunities in low-cost manufacturing. In particular
the pandemic spurred drug producers in India and China
to substantially increase their R&D spending.

Chinese authorities
have also investigateda significant number ofcounterfeit and inferior
drugs over recent years.

India is increasingly emerging as a major competitor to China
for the production of Active Pharmaceutical Ingredients (APIs),
supported in large part by government incentives. In fact
India is becoming one of the leading suppliers of genericdrugs to the US. A downside risk to this potential growtharea is US regulation. Judy Ji explained: “Exports could be
impacted by resumption of US Food and Drug Administration(USFDA) inspections of Indian production plants. Failures
to meet required quality standards could lead to lower sales
to the US, and could have a negative effect on margins.”

12

Chinese authorities have also investigated a significant
number of counterfeit and inferior drugs over recent years,
resulting in fines for breaching regulations.
ATRADIUS SECTOR EXPERTS FOR PHARMACEUTICALS

13
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ATRADIUS SECTOR EXPERTS FOR PHARMACEUTICALSPharmaceuticals | Top three opportunities andchallenges over the next five years

What are the environmental issues facing
the pharmaceuticals industry?
The increasing awareness of pharmaceutical residues inour drinking waters and subsequent consumer backlash
are forcing pharmaceutical companies to reduce pollutionof waterways. Patrick Scardina said: “Water samples fromlarge US cities such as Dallas, Las Vegas and New York haverevealed contamination at harmful levels of concentration.
These pose a threat to the UN Sustainable Development
Goal of providing clean drinking water and sanitation for
all by 2030 and is an area the industry needs to address.”
Authorities in the US are releasing funds to help address
this issue and lower the amount of contaminants that arefound in drinking water.

14

In China the “14th Five-Year Plan for the Development of
the Pharma Industry” requires the sector to improve theefficiency of resources, build a green industrial systemand promote the low-carbon and circular development of
the entire industrial chain. Judy Ji said: “At present, many
pharma companies are working hard to build green plants
and develop advanced environmental protection technology.”

Top three opportunities for the Americas

Top three challenges for the Americas

1.	Generic growth as patents come due for a large
percentage of branded drugs over the next decade.
2. 	Drugs derived from living cells or proteins (Biologics)
as the exclusivity period is 12 years, compared to 5 years
as typically granted for small molecule pharmaceuticals.
3. 	Growing demand from Baby Boomers as they
are currently in the ages of 59-77 and will become
more dependent on pharmaceuticals as they age.

1. 	Government pressure to reduce prices, by way of
the Inflation Reduction Act, insulin pricing caps andother similar measures.
2. 	Political change in 2024 that could include the ratificationof the proposed corporate tax rate to 32.2% and dilutecorporate earnings. However, this could only happen if
the Democrats would win the White House and majorities
in Congress. In case of a victory by the Republicans,the IRA-related measures could be scrapped.
3. 	Product liability risk that continues to arise in thenormal course of business for manufacturers, distributors
and retailers, such as the recent opioid settlements.

Top three opportunities for Europe

Top three challenges for Europe

1. 	Growth generation by advancements in
new therapies and treatment technologies,
such as with the new mRNA vaccines.
2. 	Changes in the way clinical trials can be undertaken(including speedier and concurrent testing
which was introduced as a result of COVID-19).
3. 	Embracing AI and big data analytics into
drug development, clinical trials and patient care.

1. 	Regulatory burdens and the threat of licencesuspensions present a risk to domestic market players.
2. 	Patent expiration in coming years will be an advantage
for emerging market competitors.
3. 	Shortages of medicines and the competition in
the procurement of medicines between countries.

Top three opportunities for Asia-Pacific

Top three challenges for Asia-Pacific1. 	Strong demand driven by rising household income
and growing middle class in emerging markets andageing population in developed countries.
2. 	Government initiatives to increase accessto healthcare systems and reduce healthcare costs.
3. 	Digital technology improving efficiency andpromoting industrial transformation, including
AI research and development, intelligent
manufacturing, hospital information, auxiliary
diagnosis, telemedicine, smart warehousing, etc.

1. 	Reform of drug pricing schemes could put pressure
on markets in China and Japan.
2. 	Increased costs of raw materials, labour, energy,transport and R&D costs are a challenge for the region
and add to the costs of innovation transformationin China and expiry of patents in Japan.
3. 	Greater investment is needed to ensure quality
inspections (both domestic in China and internationalsuch as US inspections of production plants in India).

Clean energy transition is also an area of growth for thepharmaceuticals industry. AbbVie has committed tosourcing 100% of their energy from renewable sourcesby 2035. Further industry players will also continue
rolling-out additional ESG initiatives to improve theirenvironmental impacts.
ATRADIUS SECTOR EXPERTS FOR PHARMACEUTICALS

15
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