EQUITIES ● PHARMACEUTICALS
27 November 2018Re-shape or de-rate 3
US drug prices could be 30%
lower in 2030 than in 2018 5
Second wave of biosimilars to be
well advanced by 2030 8
Chinese Pharma market could
double to USD190bn 11
Demographics could force
Japanese healthcare change 13
Pharma cost bases might have
to be at least 20% lower 15
Around 90% of drug sales by
volume could be generic 18
Consumer Health and Vaccines 20
Tech companies could be
selectively disruptive 22
Disclosure appendix 34
Disclaimer 36
ContentsEQUITIES ● PHARMACEUTICALS
27 November 2018
Conclusions – Pharma in 2030
Shape-shift or de-rate further: with increasingly difficult drug pricing environments in most
major markets, and the need for (but the general lack of) innovative new medicines that
command premium prices, by 2030 the Pharma business models of the past are unlikely to
serve the sector well for the future. As such, in our view, the industry overall is the wrong
shape for the future that is to come.
With continued payor and healthcare provider consolidation (among PBMs and other
healthcare insurers, distributors, and pharmacies), we estimate that US branded drug
prices on average could be 30% lower in 2030 than in 2018 in real terms across a wide
range of therapeutic areas.
We forecast the Chinese Pharma market to almost double in size to USD190bn in
sales by 2030, but mainly due to volume growth, not price; ad hoc drug price cuts and large
cities acting as group purchasing organisations will exert downward pressure on drug
prices, or at least keep drug prices in check.
The Japanese healthcare system will need to be significantly restructured due to
demographic issues, resulting in much larger bi-ennial drug price cuts and/or annual price
cuts, and more emergency price cuts for high-priced drugs; together, the US, Chinese and
Japanese prescription drug markets account for around 40% of global drug sales.
The second wave of biosimilar genericisation (biosimilars of anti-PD1 and anti-PDL1 drugs)
will be well underway by 2030, putting downward pressure on what today is forecast to be
one of the largest product categories globally by the late 2020s.
As a result, the cost bases of large cap Pharma and large cap Biotech companies could
need to be around 20% lower in 2030 than in 2018 to maintain margins, mainly through
cutting costs in the US, but also in other regions where pricing pressure increases.
Around 90% of drugs prescribed in the US, Europe, China and Japan are likely to be
generics by 2030.
Developed Pharma companies are unlikely to benefit significantly from strong growth in EM
economies (as forecast by our economists), as drug prices and profitability in EM are likely
to remain lower than in developed markets and healthcare spending per capita will remain
relatively low versus the US and Europe; however, companies with Vaccines and Consumer
Health businesses could benefit more than Pharma.
Re-shape or de-rate
The sector could face prolonged and severe drug price pressure in
the US, but also China and Japan, in the coming decade
In our view, Pharma cost bases are too high and the sector overall is
the wrong shape for the growth challenges to come
Diversified Pharma, Vaccines, Consumer, small/mid cap Pharma and
biotech are more likely to outperform ex-an industry re-shaping
EQUITIES ● PHARMACEUTICALS
27 November 2018Companies best placed for the long term in the absence of re-
shaping of some business models
Overall, diversified healthcare companies versus pure play Pharma: within our coverage
universe, GlaxoSmithKline, Sanofi, Merck KGaA and Bayer might be better placed
long term (although the latter three have short-term growth issues). Pure play Pharma
companies like AstraZeneca could face stronger headwinds
Companies with Vaccines businesses, which are relatively immune from pricing pressure
but which will benefit from new product leverage and EM growth; in our view, it is only the
Vaccines space that will remain insulated from drug price pressure given the barriers to
entry; within our coverage universe, GlaxoSmithKline and Sanofi are better placed
Companies with Consumer Health businesses that could, unlike pure Rx plays, benefit from
EM growth, although we caveat this by noting that components of Consumer Health
businesses are open to disruption from e-commerce; GSK, Sanofi and Bayer (although
Bayer’s Consumer business is less EM-exposed)
Consistently innovative pure play Pharma companies, which over the long-term is unusual;
in our coverage universe, Novartis and Roche have historically been the most
consistently innovative (see Pharma IP in the US: who consistently gets most patents,
17 September 2018)
Arguably, smaller scale R&D-focused Pharma and Biotech companies, where innovative
new products can provide greater operating leverage, may be better placed long term
Rating and target price summary
Company Ticker Currency
Current
price TP Rating
Market cap
(USDm)
2019e
Core PE
2020e
Core PE
2019e
Underlying PE
2020e
Underlying PE
AstraZeneca AZN LN USD 6,138p 4,860p Reduce99,73021.4x 19.2x31.0x 28.6x
Bayer BAY GR EUR 64.23 EUR82 Hold99,7308.5x 7.6x131.x 12.2x
GlaxoSmithKline GSK LN GBp 1,574p 2,000p Buy67,92012.9x 12.4x20.0x 19.3x
Merck KGaA MRK GR EUR 97.38 EUR85 Hold100,11015.6x 14.5x25.7x 23.1x
Novartis NOVN SW CHF/USD 88.5 CHF84 Hold48,00216.6x 15.2x25.6x 24.3x
Novo Nordisk NOVOb DC DKK 305 DKK200 Reduce226,01219.7x 19.4x19.4x 19.2x
Roche ROG SW CHF 250.3 CHF205 Reduce86,61414.3x 14.0x18.9x 19.2x
Sanofi SAN PA EUR 78.9 EUR72 Hold216,08915.0x 14.9x19.9x 19.6x
Source:Bloomberg, HSBC estimates.Priced as of close at 26 November 2018。