BMI View: The Australian pharmaceutical market is expected to continue on a moderate growth trajectory over our forecast period. This is mainly explained by rising chronic disease burden as well as government funding to list new medicines under the Pharmaceutical Benefit Scheme . However, revenue opportunities for multinational drugmakers in Australia will remain limited by cost containment measures. This was accentuated in the Sixth Pharmacy Community Agreement passed by authorities in June 2015, which drives a downgrade in our pharmaceutical market forecast for the country. Among the measures outlined, the move to allow biosimilar substitution in an attempt to curb spending on biologic drugs poses additional risks to innovative drugmakers with a strong portfolio of biologic treatments.
Headline Expenditure Projections
Pharmaceuticals: AUD13.48bn (USD12.15bn) in 2014 to AUD13.98bn (USD10.35bn) in 2015; +3.7% in local currency terms and -14.8% in US dollar terms, due to significant exchange rate fluctuations. Forecast revised downwards from last quarter.
Healthcare: AUD151.84bn (USD136.85bn) in 2014 to AUD156.99bn (USD116.18bn) in 2015; +3.4% in local currency terms and -15.1% in US dollar terms, due to exchange rate fluctuations. Forecast revised downwards from last quarter.
Risk/Rewards Index: In Q415 Australia retains its ranking position as the third most attractive market to pharmaceutical investors in the Asia Pacific region (scoring 65.8 out of 100), after Japan (73.3) and South Korea (66.2). Australia's score is driven by a relatively high drug spending per capita, a large pensionable population and robust population growth but dragged down by poor sector growth.
Key Trends And Developments
Medicines Australia raised concerns over increasing alarmist and misguided information spread by the media on negotiations for the Trans-Pacific Partnership (TPP) trade deal and its impact on drugs prices in the country. In an open letter to parliament earlier in 2015, the agency, in partnership with AusBiotech and Research Australia, had requested policymakers to ignore the 'hysteria and fear mongering' and instead focus on gaining positive outcomes through the TPP. The agency suggests that the trade deal would open new markets for Australian-based industries and raise opportunities for investment in research and development and manufacturing in the country.
The Australian government passed the Sixth Pharmacy Community Agreement. According to Health Minister Sussan Ley, it is projected that the measures to be implemented will save taxpayers AUD2bn (USD1.4bn) over a five-year period with another AUD6.6bn (USD4.9bn) worth of proposed efficiencies throughout the pharmaceutical benefit scheme supply chain, with measures to be implemented in a phased schedule. The agreement highlights that drugmakers will be bearing the brunt of the austerity measures - falling in line with our long held view. The agreement sees the introduction of additional price control mechanisms on top of the existing price disclosure cycle, affecting both innovative and generic drugs. In addition, downside risks to biologic sales will be strongly heightened by the move to allow the substitution of biosimilar medicines.
Against this backdrop, the prospect of biosimilar substitution in Australia has raised safety concerns by consumers and clinicians, such as the Australian Rheumatology Association and Diabetes Australia, stating 'risks of side-effects and immune reactions', and 'scant evidence' supporting biosimilar substitution (AJP). In response, Australia's Pharmaceutical Benefits Advisory Committee (PBAC) is keen to reassure citizens about the safety of biosimilar versions of biologic drugs and has placed advisory information and scientific evidence on its website in an effort to quell concerns. The PBAC advises the government on what medicines should be subsidised for consumers, and has recently recommended allowing biologics to be substituted with biosimilars if it is found to be safe and effective.
As part of the FY2015/16 budget, Australia's government has pledged AUD1.6bn (USD1.2bn) over five years to list new medicines on the PBS, aiming to ensure access to innovative medicines. In addition, the government introduced legislation to develop the AUD20bn (USD15.3bn) Medical Research Future Fund (MRFF). Subject to the passage of legislation, the MRFF will be established from August 1 2015, Treasurer Joe Hockey said (Pro Bono Australia). The Fund will get an initial contribution of AUD1bn (USD0.76bn) from the balance of the Health and Hospitals Fund. Additionally, savings from the Health portfolio will also add to the fund until it reaches the targeted AUD20bn (USD15.3bn) capital level by 2019/20, Hockey added. Funding was originally to be raised by the controversial GP co-payment, which was eventually scrapped after public criticism.
BMI Economic View: The Australian economy continued to slow in Q115, and we maintain our 2015 real GDP growth forecast of 2.3% (versus 2.7% in 2014). The country's worsening terms of trade and unwinding investment boom continue to act as major headwinds to growth. That said, the lack of an explicit easing bias by the Reserve Bank of Australia (RBA) and potential risks to the property market caused by low interest rates suggest to us that further cuts by the central bank are unlikely, and we expect the RBA to keep its cash rate steady at 2.00% over the course of 2015 and 2016.
BMI Political View: The Liberal-National coalition government's popularity continues to slide, and the opposition Australian Labour party (ALP) is in a good position to win the upcoming 2016 federal election. The government led by Prime Minister Tony Abbott will continue to struggle to pass its proposed austerity measures amid significant parliamentary and public opposition, and fiscal consolidation would take a further hit if the Labour party comes into power.