World Markets Healthcare Forecasting Special Report

Healthcare Forecasts Amidst Global Economic Turmoil: RecessionProof or Leaking Roof?

First published November 2011

Report Author Jing Zhang Healthcare Economist IHS

Healthcare Forecasts Amidst Global Economic Turmoil: Recession-Proof or Leaking Roof?

Contents:
Key findings Introduction Chart 1: Total Health Spending Growth, Developed vs Emerging Markets US Plans Cuts in Medicare Payments Chart 2: US Total Health Spending Growth The Eurozone France Implements P&R Cuts Chart 3: French Total Health Spending Growth Germany Implements Price Cuts, Sees High Generic Penetration Chart 4: German Total Health Spending Growth UK Continues Increases in Public Health Expenditure and Improves Access to Medicines Chart 5: UK Total Health Spending Growth Italy Introduces Austerity Measures Chart 6: Italy Total Health Spending Growth Spains Deficit Reduction and Cost-Containment Measures Cost-Containment Measures in CzechRepublic, Hungary and Slovakia Chart 7: Total Health Spending Growth in Czech, Hungary and Slovakia Impact of Developed Markets on Emerging Markets Chinas Healthcare Reform Chart 8: China Total Health Spending Growth Indias Health-Insurance Coverage Expansion and Price Controls Chart 9: India Total Health Spending Growth Brazils Rising Domestic Drug Production and Lowered Drug Prices Outlook and Implications Chart 10: Brazil Total Health Spending Growth 3 3 4 4 5 5 6 6 6 7 7 7 8 8 8 8 9 9 9 10 10 10 11 11 11

www.ihs.com
Copyright 2011. all rights reserved. All information contained herein is obtained by IHS GLOBAL INSIGHT, Inc. from sources believed by it to be accurate and reliable. All forecasts and predictions contained herein are believed by IHS GLOBAL INSIGHT, Inc. to be as accurate as the data and methodologies will allow. However, because of the possibilities of human and mechanical error, as well as other factors such as unforeseen and unforeseeable changes in political and economic circumstances beyond IHS GLOBAL INSIGHTs control, the information herein is provided as is without warranty of any kind and IHS GLOBAL INSIGHT, Inc., And all third party providers make no representations or warranties express or implied to any subscriber or any other person or entity as to the accuracy, timeliness, completeness, merchantability or fitness for any particular purpose of any of the information or forecasts contained herein.

Healthcare Forecasts Amidst Global Economic Turmoil: Recession-Proof or Leaking Roof?

Key findings: In parallel with the great divide between emerging and developed markets in terms of GDP growth, there is also a divide in their health spending. Health spending growth will continue to be strong in the emerging market economies while weakening in the developed market economies, going forward. A slow economy and high unemploymentplus reform initiativesare among the factors expected to affect US health spending adversely in the short and medium term, while Medicare expenditure will be a major factor in the long term. The French government is aiming at containing health-spending growth below a 3% threshold and has cut reimbursement for 200 drugs to 15% (down from 35%). The German healthcare system has undergone considerable reform over the past decade, as the government seeks to contain spiralling costs, particularly in terms of expenditure on pharmaceuticals. The Italian governments austerity measurescutting spending for healthcare access, imposing high co-payments and reducing drug priceswill raise out-of-pocket (OOP) expenses while lowering health spending and drug sales. Spain made substantial reductions to generic and off-patent brand prices in order to encourage higher generic utilisation and lower health-system costs. Unlike most of its European neighbours, the United Kingdom is actively seeking to bring expenditure levels up to be more in line with European norms. Cost-containment measures in the Czech Republic, Hungary and Slovakiaintroducing fixed co-payments while cutting reference prices and drug reimbursement expenditure will raise OOP expenses and lower growth in drug sales and health spending going forward. India and Chinas healthcare reformsincluding expanding medical insurance coverageshould translate into stronger growth in drug sales and health spending. The Brazilian governments effortsboosting domestic manufacturers drug production, hence shrinking the share of more expensive imported drugs; and reducing drug prices through direct negotiation with multinational drug makerswill decrease drug prices.

Introduction: The global economy is being dragged down by Europe and the United States. Markets are crashing because fiscal austerity programmes are being implemented at the very moment that economic growth has disappeared. Although IHS Global Insight had been anticipating what Morgan Stanley has called a bumpy, below-par and brittle (BBB) recovery in the developed markets (DM), the path now looks even more BBB. If growth in the first half offers any clues, the US and the euro area will be dangerously close to recession over the next several quarters. The risks to global recovery include oil prices (should unrest in the Middle East and North Africa spread to the big oil-producing countries) and altering growth in emerging markets (EM). The single biggest risk facing both the US and Europe, however, is a policy mistake, specifically an advertent or inadvertent tightening of policy. EM economies will not be immune to the DM slowdown, even though the great EM-DM growth divide continues. Although EM GDP keeps cruising above its 20-year trend rate of 5%, there is a significant further cooling of growth compared with last years bonanza. The current slowdown in EM growth now looks set to be prolonged into 2012 by the weaker DM outlook. Despite slowing growth, however, EM economieswhich account for half of global GDP (using purchasing power parity weights)will generate fully 80% of global GDP growth for 201112. There is a DM-EM divide in health spending as well. Health-spending growth will continue to be strong in the EM economies, especially in India and China, largely because of healthcare reform and high GDP growth, while weakening in the DM economies will be driven by anaemic economy and cost-containment measures, including higher generic utilisation, higher co-payments and cuts in drug pricing and reimbursement.

Health-spending growth will continue to be strong in the EM economies, especially in India and China, largely because of healthcare reform and high GDP growth.

Healthcare Forecasts Amidst Global Economic Turmoil: Recession-Proof or Leaking Roof?

Generics are identified as being among the key market dynamics expected to drive healthcare spending through to 2015. To gauge the DM-EM growth divide in health spending, we have compared the spending growth in the G7 economies (France, Germany, Italy, Japan, the UK, US and Canada) with that of the BRIC5 economies (Brazil, Russia, India, China and South Africa). We expect spending in the G7 to grow by 6.5% in 2011 and 3.2% in 2012, and spending in the BRIC5 to grow by 20.8% in 2011 and 17.3% in 2012. Chart 1: Total Health Spending Growth, Developed vs Emerging Markets

US Plans Cuts in Medicare Payments The US economy is now at stall speed, with the prospect of adverse shocks from a European financial crisis, spikes in oil prices and confidence declines on the part of businesses and households. The disappointment in the first halfwith GDP up by an annual average rate of less than 1%illustrates the brittleness of the US recovery in the face of external shocks (oil, Japans earthquake), despite ongoing quantitative easing and fiscal stimulus at the time. The economy is idling, waiting for the usual drivers of recoveryhousing and consumer spendingto catch up. It is going to be a long wait, given the persistently high unemployment rate. Small business, which employs over half of all private-sector employees, saw its August optimism index fall to the lowest level since July 2010. Small businesses outlook on the economy and better sales has plunged. The odds of a recession have risen to 40% in the US, but a double-dip downturn is still not the most likely scenario. A slow economy and high unemployment, plus reform initiatives, are among the factors expected to affect US health spending adversely in the short and medium term. The persistent issue of cost containment poses the greatest concern to the innovative pharmaceutical industry. Pricing pressures are only likely to increase in the future as employers and the US governmentwhich will take a more active role as a third-party payor in the health-insurance marketdemand that health insurers reduce their burden of healthcare costs through aggressive cost-containment strategies. The use of tiered copayments and step therapy programmes, which promote lower costs and generic drugs, has rapidly grown over the past three years. Other measures, such as increasing disclosure requirements of spread amounts, rebates, discounts and generics dispensation for Pharmacy Benefit Managers will further dampen sentiment in the industry. In 2012, the reform process will move ahead with norms on annual fees on the pharmaceutical industry, value-based purchasing for Medicare, health insurance exchanges and renewed efforts to reduce healthcare disparities. Health insurance exchanges are set to be operational in two years time. Through the health reform, the US government is aiming to reduce the number of uninsured from almost 20% of the population to just 8% in the next five years. This will expand the insurance market and add to the rise in health expenditure.

A slow economy and high unemployment, plus reform initiatives, are among the factors expected to affect US health spending adversely in the short and medium term.

Healthcare Forecasts Amidst Global Economic Turmoil: Recession-Proof or Leaking Roof?

We expect total health spending to grow 4.7% in 2011 and 5.0% in 2012. As Congress opens a politically charged exploration of ways to pare the deficit, President Barack Obama is expected to seek USD300 billion to USD500 billion of savings over 10 years in Medicare and Medicaid. If approved, this will hurt healthcare demand and public health spending going forward. We expect public health spending to grow 6.4% in 2011 and 6.9% in 2012. Chart 2: US Total Health Spending Growth

In the long term, Medicare expenditure will be a major factor affecting US health spending. The Budget Control Act enables a short reprieve for Medicare until the bipartisan committee announces its savings measures, which will inevitably include Medicare and, to a much lesser extent, if at all, Medicaid. The direct impact of the legislation will be felt by treatment providers, primarily due to payment cuts. Along with the considerations of raising eligibility (e.g. for Medicare beneficiaries to 67 years from 65) and a means test, the committee is also expected to consider a much larger focus on pharmaceutical product prices and treatment costs. For fiscal year 2012, Social Security and Medicare account for the largest mandatory expenditure programmes, with Social Security at USD761 billion and Medicare at USD468 billion. Medicaid is lower, at USD269 billion. Furthermore, Medicare expenditure accounted for 3.3% of GDP in 2010, and that figure is expected to increase to over 5% by 2035. The projected low growth in Medicare expenditure will help contain growth in total health spending and drug sales during the period. The Eurozone: The Weakest Link Despite the problems in the US, the Eurozone is clearly the weakest link in the global chain. While the crisis was unfolding, the outlook for domestic growth and the sovereign debt crisis in the Eurozone were both worsening. Part of the concern is deteriorating fiscal balances due to weak growth. A bigger worry is the fragility of the banking systems and the large exposure to sovereign debt. Eurozone economic activity has already had to cope with the fact that fiscal policy is becoming increasingly restrictive across the Eurozone during 2011. Debt-encumbered economies such as Spain and Italy have to take the strongest action to improve their public finances, while other countries, including France, have also come under serious pressure to bite the fiscal bullet harder. Germany is also tightening fiscal policy in 2011, albeit to a limited extent. Looking ahead, recurrent serious Eurozone sovereign debt tensions are likely to continue to weigh down growth periodically by damaging confidence and pushing up market interest rates for the vulnerable countries in the area.

For fiscal year 2012, Social Security and Medicare account for the largest mandatory expenditure programmes, with Social Security at USD761 billion and Medicare at USD468 billion.

Healthcare Forecasts Amidst Global Economic Turmoil: Recession-Proof or Leaking Roof?

France Implements P&R Cuts The Eurozone sovereign debt crisis has threatened France. The economy endured surprise falls in consumer spending during the second quarter. The rising risk of contagion towards the core of Europe pushed funding costs higher and induced the French government to commit to additional austerity measures. As part of its austerity strategy, it has had extensive use of emergency measuresincluding price and reimbursement cutsto contain growth in drug sales and health spending. The government is aiming at containing health spending growth below a 3% threshold and has cut reimbursement for 200 drugs to 15% (down from 35%); the French statutory health insurer has announced price cuts for patented and generic drugs; and generics launched from 2009 are priced 55% below their originators. We expect total health spending to grow 3.7% in 2011 and 4.0% in 2012. Chart 3: French Total Health Spending Growth

The French government is aiming at containing health spending growth below a 3% threshold and has cut reimbursement for 200 drugs to 15% (down from 35%).

Germany Implements Price Cuts, Sees High Generic Penetration Despite increasing employment and wage growth, consumer spending has also faltered in Germany, reflecting the unsettling impact of the Eurozone debt crisis. German growth will stay fairly weak during the second half of 2011. Like France, Germany is also tightening fiscal policy in 2011, albeit to a limited extent. The German healthcare system has undergone considerable reform over the past decade as the government seeks to contain spiralling costs, particularly in terms of expenditure on pharmaceuticals. The government plans to increase forced discounts on prescription drugs from 6% to 16% (a cost of around EUR4 billion for the pharma industry by 2013) and to impose a three-year price freeze on drug prices, until 31 December 2013. The latest policy changes are expected to reduce growth of public expenditure on medicine noticeably. Germanys drug-reimbursement spending growth slowed to 1% in 2010, following 4.8% growth in 2009, driven mainly by the three-year freeze on drug prices and increase in mandatory discounts for innovative drugs reimbursed by the funds, implemented in August 2010. We expect public health spending to grow 1.7% in 2011 and 4.2% in 2012. Germany has a high generic penetration: 28% of the public health insurance market by value and 62% by volume in 2009. Discounts, a price freeze and high generic penetration will help decrease value-based drug sales and health spending. We expect total health spending growth to reach -1.1% in 2011 and 5.1% in 2012.

The government plans to increase forced discounts on prescription drugs from 6% to 16% (a cost of around EUR4 billion for the pharma industry by 2013) and to impose a three-year price freeze on drug prices, until 31 December 2013.

Healthcare Forecasts Amidst Global Economic Turmoil: Recession-Proof or Leaking Roof?

Chart 4: German Total Health Spending Growth

UK Continues Increases in Public Health Expenditure and Improves Access to Medicines The debt crisis and speculation about the possibility of sovereign defaults cast doubt on the resilience of the UKs recovery. The country is facing weaker economic growth in 2012, as the growth outlook for its key trading partners has deteriorated substantially; recovery in the UK will therefore take longer. We expect total health spending growth to reach 5.3% in 2011 and -3.3% in 2012. Unlike most of its European neighbours, which are implementing cost-containment policies in a bid to reduce expenditure, the UK government is actively seeking to bring expenditure levels more in line with European norms. After years of under-funding, the UK government is now ploughing money into the public healthcare system, with a continued rise in expenditure expected throughout the next decade. Continued increases in public health expenditure and a political push to improve access to innovative medicines will have a positive impact on drug sales and public health spending for some time to come. We expect public health spending growth to reach 1.9% in 2011 and -1.5% in 2012 Chart 5: UK Total Health Spending Growth

Unlike most of its European neighbours, which are implementing costcontainment policies in a bid to reduce expenditure, the UK government is actively seeking to bring expenditure levels more in line with European norms.

Healthcare Forecasts Amidst Global Economic Turmoil: Recession-Proof or Leaking Roof?

Italy Introduces Austerity Measures The Eurozone sovereign debt crisis has spread to Italy. The rising risk of contagion towards the core of Europe pushed funding costs higher and induced the Italian government to commit to additional austerity measures. The Italian government has approved new austerity measures worth EUR45.5 billion to balance the public-sector budget by 2013. These austerity measures, howevercoupled with other factors including slowing global demand and tighter credit conditionsare likely to trigger a recession in 2012. Italy has made substantial reductions to generic and off-patent brand prices in order to encourage higher generic utilisation and lower health-system costs. The Italian drug agency AIFA carried out a blanket cut in the price of thousands of reimbursed drugs, leading to reductions in state drug reimbursement. Furthermore, effective in 2014, more co-payments will be charged to Italians for pharmaceuticals provided as part of public healthcare. The Italian governments austerity measuresby cutting spending for healthcare access, imposing high co-payments and reducing drug priceswill raise out-of-pocket (OOP) expenses and lower health spending and drug sales. We expect total health spending to grow 0.8% in 2011 and 0.6% in 2012. Chart 6: Italy Total Health Spending Growth

Effective in 2014, more copayments will be charged to Italians for pharmaceuticals provided as part of public healthcare.

Spains Deficit Reduction and Cost-Containment Measures Spains recovery prospects continue to be limited by very high unemployment, high debt levels and an ongoing major correction in the construction sector. The rising risk of contagion towards the core European countries pushed funding costs higher and induced the Spanish government to commit to additional austerity measures. The government raised value-added tax in 2010 as part of its fiscal consolidation. During 2010, several measures were taken in order to lower pharmaceutical expenditure. Spain made substantial reductions to generic and off-patent brand prices to encourage higher generic utilisation and lower health-system costs. These measures will lower value-based drug sales and health spending. We expect total health spending growth to reach 6.5% in 2011 and -0.1% in 2012. Cost-Containment Measures in Czech Republic, Hungary and Slovakia Compared with the major DM economies, Central Europe appeared to be faring better in terms of economic recovery. Despite ongoing fiscal tightening, the Czech economy is expected to maintain its growth momentum, driven primarily by strong foreign demand. Hungarys recovery in economic activity continues, driven mainly by inventory accumulation and external demand. The global recession affected the Slovak economy to a greater extent than most other Organisation for Economic Co-operation and Development countries, primarily owing to its exposure to world trade. In tandem with developments in its main trading partner economies, however, the economy is now recovering at an above-average pace.

Healthcare Forecasts Amidst Global Economic Turmoil: Recession-Proof or Leaking Roof?

The Czech Republics introduction of fixed co-payments for prescriptions has resulted in a decline in the volume of drug sales. The Czech government has also imposed a one-year 7% blanket price cut for a large group of drugs, coupled in many cases with a 7% reduction in reimbursement. Hungary has introduced therapeutic reference pricing for reimbursable drugs. The Hungarian government has introduced an amendment to the Pharma Economic Act, under which generics priced 40% higher than the benchmark price are automatically taken off the reimbursement list. Approximately 406 reimbursed drugs in Hungary will eventually see their prices cut by up to 10%. Slovakias cost-containment pressures and the desire to reform the system have led the government to introduce patient co-payments, a reference-pricing system and prescribing controls. The Slovakian government also introduced an international reference-pricing system, which means that drug prices are referenced to the average of the cheapest six markets in the EU. Cost-containment measures in the Czech Republic, Hungary and Slovakiaby introducing fixed copayments, cutting reference prices and drug reimbursement expenditurewill raise OOP expenses and lower growth in drug sales and health spending going forward. We expect the combined total health spending to grow 5.8% in 2011 and 4.8% in 2012. Chart 7: Total Health Spending Growth in Czech Republic, Hungary and Slovakia

Hungary has introduced therapeutic reference pricing for reimbursable drugs. The Hungarian government has introduced an amendment to the Pharma Economic Act, under which generics priced 40% higher than the benchmark price are automatically taken off the reimbursement list.

Impact of Developed Markets on Emerging Markets The current slowdown in EM growth now looks set to be prolonged throughout 2012 by the weaker DM outlook. The EM will not do well if there is a US or European recession. A persistently higher inflation rate in the recent past is eroding consumers purchasing power and weakening consumption growth. The stagflation risk has risen, as the moderation in domestic demand growth is taking place at a time when exports have started to weaken again, amid a slowdown in the DM economies. However, EM giants such as China and India show better resilience than their respective regions. Growth in Brazil will be a little lower than the downgrade for the region as a whole though. The good news is that policy-makers in the EM economies are moving in the right direction, initiating structural changes to boost domestic demand on a sustainable basis. There are already signs that some form of easing is either under way or in the works in some large EM economies. Chinas Healthcare Reform Amid the slowdown in the DM economies, the downside risks to growth will become a bigger concern than upside risks to inflation for China. Policy-makers are steadily initiating measures, such as a rural pension scheme, provision of low-cost housing and increasing minimum wages. Fiscal policy will possibly be more active. The increase in government spending is likely to focus on supporting socialhousing construction, selective infrastructure projects and incentives for boosting consumer spending. The recently announced income-tax cut for individuals and cuts in reserve requirements at the local level highlight a mild easing bias that may already be in place.
9

Healthcare Forecasts Amidst Global Economic Turmoil: Recession-Proof or Leaking Roof?

Benefiting from the three-year healthcare reform due to be finished by the end of 2011, 1.27 billion Chinese are under medical insurance coverage, which will boost the insurance-coverage ratio to 95%, from 15% of the total population a decade ago. To contain healthcare costs, the government implemented several drug-price cuts, lowering prices by 2030%. The price cuts, especially on essential drugs, are likely to deepen even further. Chinas healthcare reformthrough expanding medical-insurance coverage, upgrading grassroots medical institutions and setting up the basic medicine systemshould translate into stronger growth in drug sales and health spending, although the extent of growth may be limited by the governments steep drug-price cuts. We expect total health spending to grow 16.6% in 2011 and 14.3% in 2012. Chart 8: China Total Health Spending Growth

We expect total health spending in China to grow 16.6% in 2011 and 14.3% in 2012.

Indias Health-Insurance Coverage Expansion and Price Controls In India, investors focus will shift from upside risks to inflation to downside risks to growth. A combination of factorsincluding persistently high inflation, a higher cost of capital, a cut in fiscal spending, the weak global capital markets environment and a slow pace of investmentwill cause a further slowdown in growth for India. The government is likely to accelerate the policy reforms needed to boost private investment, including infrastructure projects. Chart 9: India Total Health Spending Growth

10

Healthcare Forecasts Amidst Global Economic Turmoil: Recession-Proof or Leaking Roof?

Indias latest initiativestaken by state governments to improve insurance coverage and affordability and access to healthcarewill help reduce OOP expenditure for beneficiaries and lead to increased demand for pharmaceuticals. The consumption of drugs is expected to boom over the long haul, as the nations middle class expands. In the short-to-medium term, drug pricing controls are expected to persist and will continue to feature as a policy initiative. Indian drug regulators latest price-control measures coupled with health-insurance coverage expansionwill reduce OOP expenses and boost health spending and volume-based drug sales. We expect total health spending to grow 12.0% in 2011 and 11.3% in 2012. Brazils Rising Domestic Drug Production and Lowered Drug Prices Brazil is currently facing a weaker-than-expected global environment than a few months ago. The countrys labour markets are showing some signs of moderation, but remain fairly robust, ensuring a stable demand for health spending and drugs. We expect total health spending to grow 20.7% in 2011 and 15.0% in 2012. Brazils drug companies are planning to increase their research and development and bring their own patented drugs for domestic and foreign markets. The government is considering investing USD890 million on new drugs, vaccines and medical-technology research for the 201115 period. Genericdrug sales are expected to grow faster than the overall branded pharmacy sector and are likely to account for more than 20% of the market by end-2011, which will erode the market share of innovative drugs. The Brazilian governments effortsby boosting the drug production of domestic manufacturers, hence shrinking the share of more expensive imported drugs, and by reducing drug prices through direct negotiation with multinational drug makerswill decrease drug prices. Chart 10: Brazil Total Health Spending Growth

Indian drug regulators latest price-control measures coupled with health-insurance coverage expansionwill reduce OOP expenses and boost health spending and volume-based drug sales.

Generic-drug sales are expected to grow faster than the overall branded pharmacy sector and are likely to account for more than 20% of the market by end-2011, which will erode the market share of innovative drugs.
Outlook and Implications There is going to be a long wait for a recovery in the DM, as fiscal austerity programmes are being implemented at the very moment that economic growth has disappeared. Reflecting government healthcare cost-containment agenda, pharmaceutical products are increasingly subject to strict pricing and reimbursement conditions in many European countries, and it is widely believed that the US is following suit. There is no mistaking the adverse macro impact of pricing and reimbursement regulation on growth in drug sales and health spending going forward. In addition, there is the adverse micro consequence that pricing and reimbursement regulation may have on pharmaceutical innovation, by reducing the value of pharmaceutical projects and by curtailing the resources available to carry them out. Meanwhile, strong growth in health spending looks set to continue in the EM, driven by strong economic growth and an increasingly accommodative policy stance, the negative externality of the DM stalling growth notwithstanding.

11

Healthcare Forecasts Amidst Global Economic Turmoil: Recession-Proof or Leaking Roof?

World Markets Healthcare Forecasting Service

In this environment of rising healthcare costs, post-recession strapped budgets, and complicated regulations, do you have a clear view on global healthcare and pharmaceutical expenditure and sales in the near term? The World Markets Healthcare Forecasting Service (WMHCF) provides a comprehensive view of healthcare markets, their key drivers, and the market impact of key events. Featuring a forecast database and primary research, the service gives you the tools you need to quantify future market growth.
WMHFS brings you clarity on these uncertain markets through: Macroeconomic forecasts Quarterly updated database: Ten-year expenditure forecasts for 36 countries Pharmaceutical sales forecasts for 30 countries and 11 therapeutic areas The service helps you: Plan sales and budgets with greater accuracy Identify market growth opportunities and quantify market size Hedge exposure to contracting markets Understand what drives healthcare market forecasts

Meet the Expert:

Jing Zhang, Healthcare Economist, IHS
Jing Zhang is a healthcare economist at IHS, responsible for healthcare and pharma forecast and analysis. He leads the World Markets Healthcare Forecasting Service. Jing holds a Ph. D degree in economics from Temple University. Before joining IHS, Jing worked as an economist in the federal government at FDIC, National Credit Union Administration and IRS.

Learn more about the World Markets Healthcare Forecasting Service at www.ihs.com/healthcare or use your smart phone to scan the QR code:

12

4506_1111AA_Healthcare Report