Dismal EU Growth Forecasts Mean Pricing Pressure on (Innovative) Healthcare Exporters

Richard

On Thursday, the European Union cut its 2012 real GDP growth forecast to just 0.5% – down nearly 70 percent from its 1.9% projection just six months ago. Ominously, the EU added that “the probability of a more protracted period of stagnation is high. Given the unusually high uncertainty around key policy decisions, a deep and prolonged recession complemented by continued market turmoil cannot be excluded.” We anticipate this implies more export-market pricing pressure, and view this pressure as a dominant systematic risk to healthcare portfolios in the immediate term

In a call late last year we argued that exporters of healthcare products to European countries – where governments tend to be the dominant purchasers – faced intense pricing pressure as a result of the Euro zone debt crisis; and that makers of more innovative products (pharmaceuticals; artificial joints; pacemakers) faced greater risks than makers of less innovative products (gauze; bandages; sutures)

Our working thesis was that the relationship between the rate of change in consumables imports and the rate of change in GDP should be distinct across the three subcategories of hi-tech (more innovative), mid-tech, and lo-tech (less innovative) medical products. More specifically, we expected higher tech consumables to decline more when GDP was contracting – consistent with the idea that these governments’ single-payors would preferentially seek to reduce pricing on higher-margin innovative products during times of economic stress. Lower-tech products should behave more like commodities, wherein demand growth associated with an economic recovery would be more likely to increase commodity manufacturers’ capacity utilization, thus exerting at least a modest upward effect on pricing

When we examined imports of products in these categories into developed markets over several economic cycles, from 1989 through 2008, we found that in fact the change in demand during times of economic stress (GDP contraction) clearly follows the pattern we suggest – hi-tech consumable imports fall far more with a falling GDP than mid-tech consumables, which in turn decline far more with a falling GDP than lo-tech consumables (Exhibit 1). The dynamic is reversed (though far less responsive) during periods of economic growth

Plainly, these findings are daunting for manufacturers selling into the EU, particularly in the context of the updated growth forecasts – near zero; declining; risks heavily skewed to the downside – and immediate threat of further drastic austerity measures throughout the region. At the level of healthcare subsectors large-cap pharmaceuticals and biotech generally are most exposed

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