Sector Friday - Pharmaceuticals

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This week the focus is on Pharmaceuticals. The sector includes the manufacture of medicines, vitamins, drugs for veterinary use, vaccines and diagnostic preparations.

About the sector

  • In 2012 the pharmaceuticals sector contributed around £9.7 billion of output to the UK economy.
  • Pharmaceuticals make up 9% of UK manufacturing.
  • The sector employs around 45000 people, who work in over 450 firms.
  • Pharmaceuticals is the second most export intensive manufacturing sector with half of output exported.
  • The sector is R&D intensive accounting for almost 40% of total R&D investment in manufacturing and around 10% of global R&D.

The UK pharmaceuticals sector is an important global player. Of the top 50 global pharma companies 37 have sites in the UK. These companies account for around 90% of the turnover in the industry. The UK is regarded as a world leader in small molecule pharmaceuticals. Over the past decade or so the UK has developed around a fifth of the top 75 leading global medicines, second only to the US.

Overseas markets are important to the pharmaceuticals sector and over the past decade export growth to non-EU markets has slightly outpaced that to the EU. In recent years export growth has been particularly strong to markets in the Middle East, Eastern Europe and South America.

Pharmaceuticals and manufacturing output 2000=100

Source: ONS

Past, present and future trends

Over much of the past decade growth in the pharmaceutical sector has out-performed wider manufacturing with annual growth averaging over 5% between 2000 and 2009. However, the sector as recorded declining output over the past three years; in contrast to other parts of manufacturing this contraction is a result of structure changes in the industry rather than a consequence of the economic downturn. Increasing competition from generic drugs as patents expire, regulatory changes and decisions to invest in faster-growing emerging markets have all hit growth and these factors will continue to influence medium-term prospects.

The global market for prescription and over-the-counter (OTC) drugs will continue to grow in the next three years, reaching an estimated value of $1.2 trillion in 2016. Expansion in emerging markets is expected to be particularly brisk.

Policy changes in the UK, such as the Patent Box should continue to make the UK attractive for research-intensive pharmaceuticals companies and some have committed to continued investment in the UK on the back of such annoucements. However, the sector will need to adapt and respond to a number of key challenges. These include; changes in pricing - including in the UK - for pharmaceutical products; increased demand for customised products and growing supply chain complexity and a rising burden of disease combined with declining government healthcare budgets.

In the short term we are forecasting another year of declining output in the pharmaceuticals sector in 2013 followed by modest growth in subsequent years.

Author

Chief Economist

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