Pharma’s changing formula: article with interactive table

The pharmaceutical industry’s outlook is less miracle cure and more complicated course of treatment. Breakthroughs in cancer therapies, precision medicine, and obesity treatments could reshape public health, but rising costs are intensifying the debate over affordability, healthcare budgets, and who ultimately pays for innovation.

The sector’s long-term prognosis remains healthy, though future winners will be determined as much by economics and policy as by scientific discovery.

Blockbuster medicines: a concentrated dose

Global pharmaceutical sales are approaching $2tn and are expected to continue growing at a mid-to high single-digit rate over the coming years. Sales are supported by ageing populations, rising rates of chronic disease, and expanding access to healthcare in emerging markets.

This is a slightly more moderate pace than in recent years, when growth was boosted by the pandemic and the emergence of GLP-1 therapies, which regulate blood sugar and appetite. Even so, the sector is still expanding faster than its historical average.

Pharma’s changing formula New treatments and AI offer hope amid pricing and patent pressures Growth is increasingly concentrated in a handful of lucrative therapeutic areas and their leading brands. Firms that successfully develop and commercialise these mega-blockbuster medicines can reap large rewards, with sales reaching several billion dollars. This concentration also increases the importance of individual product cycles, competitive positioning and patent protection (which gives a company the exclusive right to sell a medicine for a set period). Consequently, stock selection is more important than ever, since companies vary widely in the quality of their drug pipelines, competitive positioning, and patent durability.

Drug innovation: raising the bar

Approvals from health regulators have risen significantly over the past decade, and scientific progress continues to expand the range of diseases that can be treated effectively. New treatment approaches include:

• Antibody-drug conjugates, which use antibodies to deliver drugs to targeted cells
• Radioligand therapies, which deliver radiation to specific diseased cells • Cell and gene therapies
• Next-generation obesity medicines 

Together, these treatments are helping address significant unmet medical needs, where existing options are inadequate or unavailable.

Drug discovery: can AI beat the odds?

AI could transform the pace and scale of innovation in the sector. The economics of pharmaceutical research help explain both the sector’s high returns and the controversy surrounding its prices.

Developing a drug takes 10 to 15 years and around $1bn of investment, on average. If we include the cost of failures, the average investment is closer to $2.5bn.

Improving this process, even a little, can create enormous economic value because of the wastage at every stage. Only one or two of every 10,000 substances tested as possible medicines eventually reach the market. Of those that progress to testing on people, only one in ten receives approval. These clinical trials account for half of the industry’s substantial research and development investment, with Phase III studies (the large-scale final stage of testing before approval) alone accounting for about a quarter.

AI is already influencing several stages of the development process. Researchers are using advanced computer models to identify disease targets, analyse genetic data and interrogate scientific literature at a speed impossible through traditional methods alone. AI tools are helping design and optimise molecules with desirable properties. Predictive systems are being developed to identify potential safety risks before compounds enter expensive human studies.

One challenge AI cannot yet overcome is pharmacokinetics: how a medicine moves through, is broken down by, and leaves the body. Time-based toxicology studies, which assess whether a potential medicine could cause harm, and pharmacokinetic testing in early human trials are therefore still needed before drugs can safely progress to late-stage trials.

If AI can improve clinical trial success rates, reduce the number of failed development programmes or shorten timelines to approval, the impact on industry returns could be substantial. Given the time and money involved in pharmaceutical research and development, even modest improvements in efficiency can lead to meaningful gains in productivity.

Drug pricing: the bitter pill

Scientific progress alone does not guarantee commercial success. The central challenge facing the industry is affordability. Healthcare systems around the world are struggling to balance growing demand from ageing populations for innovative medicines against limited budgets.

The debate over drug pricing has become one of the most important influences on investors’ valuations of pharmaceutical companies. For more than a decade, concerns over potential drug pricing reform in the US, cutting the prices companies would be able to charge, have weighed on the pharmaceutical sector. The US remains the world’s largest pharmaceutical market, accounting for more than half of global drug sales.

Recent policy developments have made the picture clearer. These include negotiations over the prices paid by the US Medicare public health insurance programme. They also encompass revised pricing frameworks under ‘most-favoured-nation’ deals, which are agreements between the US government and drug manufacturers. Greater clarity over US policy has supported the sector’s strong performance, but drug pricing remains a key risk for investors to monitor as rising healthcare costs keep the issue high on the US political agenda.

Patent cliffs: expiry looms

Another key consideration for investors is patent expiry. When several blockbuster medicines lose patent protection at around the same time, revenues can fall sharply as cheaper competitors enter the market. These periods, known as patent cliffs, increase reliance on drugs in development and new product launches to sustain industry growth.

In the next five years, some of the world’s largest medicines will lose patent protection. These include the cancer immunotherapies Keytruda and Opdivo, the GLP-1 medicine semaglutide, sold as Ozempic for diabetes and Wegovy for obesity, and the immunology drug Dupixent. Despite this heavy schedule of patent expiries, industry sales look set to continue growing as new drugs replace those losing protection.

Pharma’s five-year cliffhanger

Major drugmakers face the loss of patent protection on some of their biggest sellers by 2030.

Click on the column headings to change the table order.

Pick your prescription carefully

Overall, the sector offers compelling long-term potential. Demand has strong structural drivers, scientific innovation is accelerating and AI could greatly improve the economics of drug development. Although pharma is being influenced by AI, like almost every industry, it remains a defensive sector, which tends to hold up better when stock markets are falling. This means it could provide some diversification from the AI trade, which has left portfolios heavily exposed to the fortunes of technology companies. But while the sector offers strong opportunities, the growth profiles of individual companies vary greatly, depending on their degree of innovation and exposure to patent expiries. That makes careful stock selection increasingly important because poor returns would be a bitter pill to swallow.