Mixed Fortunes

28 February 2007 (Last Updated February 28th, 2007 18:30)

The year 2006 was a tempestuous time for international healthcare markets, but what of 2007? IT and pharma deserve particular attention as leading markets such as the US face an uphill struggle. Analysts from Frost & Sullivan report on the global shift in the balance of power.

The major healthcare sectors have seen considerable change in recent years,
many of them affected by technological advances, privatisation and the growth
of geographical markets that previously had poor economic value.

The shapes of the medical IT and pharmaceuticals markets have been
particularly affected. In addition, areas such as Eastern Europe, Asia and
parts of South America have seen an increase in profits, while leading markets
such as the US have experienced a slump.

IT BUDGETS SOARING

"There is a growing consensus that a more intelligent, innovative healthcare system is within reach."

Stakeholders and decision-makers worldwide are realising the clinical,
organisational and financial benefits resulting from the implementation of
healthcare IT. Although disparate healthcare systems, payer mechanisms,
languages and clinical/treatment protocols have delayed a more uniform systems
adoption, healthcare IT is becoming an increasingly significant matter for the
political agenda of governments worldwide.

Healthcare IT segments that have shown significant growth in the last few
years include the PACS/RIS combination, the electronic medical record and
physician order entry, as well as prescribing systems with decision support
capabilities on the clinical side and enterprise resource management systems on
the administrative side.

With healthcare budgets expected to increase in the near future, healthcare
IT budgets will also rise. But where is this rising healthcare IT spending
likely to be going, and what are the hot spots for the healthcare IT industry
going into 2007?

STORAGE CAPACITY

No other industry requires such a phenomenal amount of information to be
stored for such long periods. Healthcare has an urgent need for high-capacity
data storage as its reliance on IT grows. The increasing use of PACS and other
heavy traffic applications has led to data management becoming one of the key
investment areas.

INTEGRATION AND INTEROPERABILITY

The electronic medical record (EMR) has emerged as the key system for
providing clinicians with an integrated view of clinical information in
hospitals. This creates a requirement for ancillary systems, such as those for
laboratories, radiology and pharmacy, to accept orders from the EMR and
replicate clinical data as components of an integrated clinical database.

With the goal of creating a single view of a patient’s health
information, hospitals are investing heavily in technologies that pull together
information from their various departmental systems into an integrated
electronic health record. For large hospital systems, this integration might
even include multiple acute care facilities, physician offices, local clinics
and outpatient labs.

Multi-module platforms are software solutions that have the capability to
support a wide range of clinical, administrative and business solutions. As
healthcare becomes more integrated, with a larger number of hospitals shifting
towards a single point of contact for healthcare IT solutions, multi-module
platform providers around the world will experience increased installation
rates.

INTERNET REVOLUTION

Providing remote access to physicians through web-based portals is an
important tool for attracting and retaining the services of the best doctors.
But interest is slowly piling up for a more all-purpose website. Hospitals are
recognising that in a consumer-directed healthcare world – where patients
are encouraged to shop around and compare providers for the best quality, costs
and services – a website can drive business development. Considerable
amounts have been invested in online patient accounting, patient-physician
communications, virtual facility visits and other advanced features.

Overall, these are exciting times. Healthcare systems worldwide are trying
to balance resources and improve business processes and workflows, and there is
a growing consensus that a more intelligent, innovative healthcare system is
within reach. What is certain is that IT is set to revolutionise healthcare
delivery, and thus on healthcare systems and processes.

GENERICS ADD TO PROFIT LOSS

2006 was an incredibly significant year in the history of the global
pharmaceutical industry, with the patent expiries of a number of blockbusters,
very few innovative drugs and an overall industry slowdown. According to IMS
Health, the global pharmaceutical industry grew at a rate of around 6% in 2006,
with a noticeable shift in the dynamics of the industry from the US to emerging
markets such as Asia and Eastern Europe.

One of the most notable trends in 2006, which is likely to carry over into
2007, is the increasing penetration of generics. If last year saw the patent
expiries of molecules such as Lipitor and Zoloft, this year will see the likes
of Risperdal losing their exclusivity. Although there were over 25 new products
in 2006, they did not perform well enough to offset the loss caused by this
phenomenon. Due to the continued patent expiries, the overall market is pegged
to reach over $20bn by the end of 2007.

In addition, cost containment measures by the public and private sectors
added to the pressure on big pharmaceutical companies in 2006. As a result,
there was a great deal of consolidation in the form of mergers and
acquisitions. The lack of genuinely innovative drugs in the pipelines of some
of the major companies led them to look for medium-level biotechnology
companies with strong R&D.

Another trend is the increasing interest in generics firms, owing to the
huge generics opportunity. US drug developer Barr’s acquisition of
Croatia-based Pliva is a case in point. Some of the other noteworthy deals in
2006 include the acquisition of US-based Schering by German company Bayer, and
that of Swiss biotech firm Serono by Germany’s Merck KGaA.

THE YEAR IN PHARMA

IMS Health estimates the global pharmaceutical market will grow by around 6%
in 2007, almost identical to the growth seen in 2006. Indeed, this year is
expected to usher in a number of opportunities for generic market players,
niche biotechnology companies and speciality pharma companies.

New products such as Pfizer’s smoking cessation drug Chantix and
inhaled insulin Exubera, Merck & Co’s Gardasil for cervical cancer
and Genentech’s Lucentis for age-related macular degeneration are
expected to provide significant breakthroughs, and offset some of the loss
caused by the increase in generics.

On the financial front, valuations are expected to become more reasonable,
attracting further investment. However, investors will have to be wary of
choosing the right companies with an optimum product mix to minimise their
risk. Another important trend expected to occur in 2007 will be a marked
reduction in sales and marketing spending by big pharmaceutical companies. This
money is likely to be channelled into improving R&D.

Further consolidation is expected, with most of the major companies looking
to find the appropriate strategic partner to diversify their risk and maximise
their opportunities. Finally, emerging markets such as India, China, Brazil and
Eastern Europe are expected to continue growing, by more than 10%, primarily
due to their booming economies, larger population bases and excellent
scientific capabilities.

THE GROWTH OF ASIA PACIFIC

Asia Pacific is the world’s fastest-growing pharmaceutical market, and
is the fourth largest in the world, behind the US, Japan, and Europe. The South
East Asian markets are expected to see double-digit growth in 2007 .

Strong economic growth, with Asia Pacific governments having increasing
foreign reserves, means the market is now in a better position to increase
healthcare expenditure and invest in better patient care.

Singapore and China are improving healthcare payouts and extending the scope
of healthcare insurance, while Indonesia, Malaysia and Thailand are expanding
coverage of social security to provide more affordable healthcare services for
their residents.

The outlook for medical devices continues to be robust due to the high
growth of patients’ incomes, but higher costs of distribution and
operations are likely for medical device companies, with increasingly stringent
medical device regulation in the region.

"Hospitals are recognising that in a consumer-directed healthcare world, a website can drive business development."

Higher distribution costs could arise from higher than expected inflation
rates. However, margins should still improve for most medical device
companies.

Investments in healthcare-related information systems are surging across
Asia Pacific as both government and private healthcare organisations roll out
plans to create the ‘electronic hospital’.

While adoption rates vary greatly between countries, progress remains
steady, with Singapore, Australia, South Korea and Japan continuing to adopt
cutting-edge IT and China, Malaysia and Thailand moving up the ladder.

Boosts in medical tourism and outsourcing trends in healthcare services have
led to an increased adoption of clinical information systems and various forms
of telemedicine.

Factors driving this market expansion are strong economic growth, increasing
economic liberalisation, broadening middleclass and ageing populations, and an
expanded government and private sector role in improving healthcare.

Issues facing pharmaceutical companies in South East Asia include minimal
intellectual property protection, differing disease needs, haphazard drug
distribution, a shortage of trained doctors and pharmacists, and a host of
pricing and reimbursement issues.

Despite the much-discussed spate of patent expiries and rising cost
pressures, the outlook for pharmaceuticals in 2007 is one of guarded optimism.
It is only the companies that plan ahead and reinvent themselves that are
likely to succeed in this dynamic and competitive environment.