Will boost capital spending amid weak economy
Background: KPMG's business pulse survey
KPMG LLP, the audit, tax and advisory firm, surveyed C-suite and other top-level executives in the pharmaceuticals industry during the second quarter of 2011.
Participants were asked about business conditions in their sector, their expectations for revenue growth, specific industry challenges, and their capital spending plans. They were also asked to assess the impact of regulation and healthcare reform legislation on their businesses as well as their potential to engage in merger and acquisition activity in the year ahead.
Key Findings: KPMG's business pulse survey
KPMG's survey reflects the responses of 100 pharmaceuticals sector executives for U.S.-based companies with $100 million + annual revenue. The majority of respondents (52) percent worked for companies with annual revenues exceeding $10 billion, while 34 percent represented companies with annual revenue from $1 billion to $10 billion, and 14 percent represented companies with annual revenues from $100 million to $1 billion. Of the companies surveyed, 82 percent were publicly held and 18 percent were privately held.
- M&A activity is expected to heat up in the sector over the next two years. A significant majority (83 percent) of survey respondents expect their company to be involved in a merger or acquisition during the next two years, with 73 percent anticipating being the buyer within the transaction.
- Pharmaceutical executives are not expecting a full economic recovery for a few years, as only 31 percent of executives predict a full economic recovery by the end of 2012, while 54 percent don't expect a full economic recovery until the close of 2013 or later.
- Growth in foreign markets is seen as an increasing area of importance, as a similar number of executives foresee new products and therapies (47 percent) and customers from high growth markets outside the United States (45 percent) as big growth drivers over the next one to three years.
- Headcount is down significantly from a year ago, especially among large pharmaceuticals companies. Headcount among small -to-medium-sized companies is expected to rise slightly over the next year, while headcount among large companies is expected to continue to fall.
- The majority of pharmaceutical industry executives say that U.S. healthcare reform legislation is not addressing the real challenges for U.S. healthcare (63 percent) and is adding to the complexity and costs of their own operations (58 percent).
M&A key to future growth
Pharmaceutical executives are focusing on their growth strategies amid modest expectations for the economy, revenue, and hiring. This year's survey respondents see merger and acquisition activity as a driving force for their growth, while also viewing foreign markets as an increasingly important area for expansion. As many companies in the sector have significant cash to spend, their top investment priorities center on strategic acquisitions, new products and services, and research and development. Meanwhile, mounted regulatory and legislative pressures continue to present challenges and serve as significant growth barriers for the industry.
Pharmaceutical executives are looking at M&A and alliances to spur growth and help offset patent losses and regulatory and pricing pressures. Notably, 83 percent of sector executives said their company will likely be involved in an M&A transaction over the next two years, with 73 percent expecting to assume the role of buyer in such transactions.
According to survey respondents, the top drivers of M&A activity include access to new technology and products, access to new geographic markets, and product synergies.
Capital spending and investment
A large majority of survey respondents (78 percent) acknowledge having significant cash on their balance sheets. Of those, approximately one-third (33 percent) noted that investment was already underway, while 36 percent said investment would be made before the end of the first quarter of 2012.
Half of pharmaceutical executives surveyed said they expect their company to increase capital spending over the next year, while 25 percent expect it to decrease and 25 percent believe it will remain the same. The highest priority areas of spending increases include strategic acquisitions (40 percent), new products or services (38 percent), and research and development (38 percent).
Facing a tough economy, pharmaceutical executives do not expect significant improvements in the economy for a few more years. More than half (56 percent) of sector executives believe that the economy will see moderate improvement over the next year while only 5 percent believe the economy will significantly improve.
Pharmaceutical executives surveyed do not anticipate an overall U.S. economic recovery to take hold for a couple of years or more. Forty-four percent of survey respondents believe that the economic recovery could occur in 2012, while 54 percent believe it will not take place until 2013 or later.
More than half (55 percent) of pharmaceutical executives surveyed said their company's current revenue has increased from the same period in 2010, while only 11 percent reported lower revenue. They have a slightly brighter view of the year ahead with 64 percent of respondents expecting higher revenue one year from now while 16 percent anticipate lower revenue.
Executives view expansion into foreign markets as an area nearly as important for growth as the development of new therapies. Respondents said their own research (47 percent) and new customers from high growth markets outside the United States (45 percent) would be the biggest drivers of revenue growth during the next one to three years.
Significant profitability is not expected until far out on the horizon, with nearly half of sector executives predicting the period of greatest profitability to occur in 2015 or later
Headcount has dropped from a year ago, and that trend is expected to continue in the year ahead for large companies. However, that number is offset by small-to-medium-sized companies in the sector, which expect to see an increase in headcount over the next year.
The outlook for when headcount will return to prerecession levels reflects the general trend in industry downsizing, as 23 percent of executives do not expect their company's headcount to return to prerecession levels until the end of 2014 or later. Interestingly, the same number (23 percent) does not expect headcount to ever return to prerecession levels.
Looking forward, pharmaceutical executives view external factors with much greater concern than internal factors. A large majority of executives (76 percent) admitted being concerned about the economy, competition, and the impact of regulatory changes compared to their ability to compete or whether they have the right strategic direction internally (24 percent).
In addition, it is not surprising that sector executives identified regulatory and legislative pressures (60 percent) as the most significant barrier to growth over the next year, followed by pricing pressures (55 percent).
More than half (58 percent) of executives identified patent expirations of key therapies and generic competition as the top issue facing their companies. Increasing regulation and enforcement (45 percent) and a lack of new products in the pipeline (34 percent) were other key concerns.
Government pricing and reporting was cited by pharmaceutical executives as the regulatory/legislative issue expected to have the greatest impact on their business. Regulatory scrutiny over good manufacturing and clinical practices was also expected to have a significant impact, according to survey respondents.
A majority of pharmaceutical industry executives (63 percent) believe that U.S. healthcare reform legislation is not addressing the real challenges for U.S. healthcare and is adding to the complexity and costs of their own operations.
A majority (61 percent) of survey respondents expect operating costs to increase within the sector over the next year. Approximately one-third of survey respondents expect a growth rate of 1 percent to 5 percent.
Pharmaceutical executives are focusing their sights on growth initiatives despite the backdrop of a weak economy. While survey respondents predict modest improvements in the economy, revenue, and, in some cases, hiring, they expect to face significant industry and regulatory challenges in the year ahead. Mergers and acquisitions will play a starring role in spurring growth within the sector. Additionally, foreign markets are viewed as an important area for growth, as an almost equal number of sector executives expect new products and therapies as well as customers from high growth markets outside the United States to be the biggest drivers of growth in the next one to three years.
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