Following several decades of multilateral efforts to ensure good governance within emerging markets to reduce economic volatility, it is no small irony that the credit crisis originated in the US, the heart of the global economy. Abundant liquidity and a shareholder imperative on financial institutions to boost returns at a time of low interest rates triggered a rise in mortgage lending to those with poor credit histories. The relaxation of lending criteria led to a rapid rise in borrowing, which was in turn facilitated by innovation within the investment banking industry. Instead of holding the debt to maturity, mortgage lenders sold it on to other financial institutions, which mixed together sub-prime and less risky debt in new products and resold them - after receiving investment grade status from the credit ratings agencies - to other institutions. To begin with, this securitisation of sub-prime debt was viewed positively, as it spread the risk globally. However, three core problems arose. First, the products were often difficult to understand, leaving many who had purchased investment-grade debt unwittingly exposed to a risky asset class. Second, as much of the debt was held off balance sheets by banks, the level of institutional exposure was virtually impossible to calculate. Third, the bursting of the US housing market bubble left assumptions regarding default rates on sub-prime loans looking overly-optimistic. These problems created a perfect storm. Essentially, in the face of a sudden loss of confidence in sub-prime mortgages, the floor fell out of the market for assets based upon them, and the products - which had obviously been over-priced - became impossible to value. With suspicion that institutions were not forthcoming on their overall exposure - or even on what basis that exposure should be valued - confidence in counterparties plummeted, resulting in a sharp contraction in interbank lending. This was a problem that US and European central banks were unable to fully resolve via a relaxation of their own lending criteria. Furthermore, initial hopes for full disclosure were only partly assuaged and a continued lack of confidence has been exacerbated by fears that the institutions that provide insurance on debt default may have insufficient financial reserves to meet their contractual obligations should default rates on sub-prime loans rise.

... To A Global Economic Downturn

The loss of confidence in financial markets has led, despite interest rate cuts, to a decline in global liquidity. Institutions are making less capital available for investment, and that which is available is being offered on less attractive terms. The cost of servicing debt and rolling it over has increased for companies, resulting in a lack of business investments. Private consumption has also shrunk - as external conditions remain weak, consumers prefer to save rather than spend - which in turn has led to a fall in business investments, and a rise in unemployment as the production of goods has declined. Therefore, although the financial system stands at the centre of this turmoil, the wider economy is suffering the consequences of the deteriorating credit conditions. GDP growth has declined and the global economy has slipped into a recession. The US forecast stands at -3.0%, while the eurozone and Japan is expected to contract by -4.2% and -6.1% respectively in 2009. Several euro bloc members are being hit extremely hard in this economic cycle, with the worst-affected being Ireland, at -9.4%. Germany and Italy are forecast to post falls in real GDP this year of -5.8% and -4.5%, respectively. Growth is not expected to pick up strongly in 2010, with the Japanese economy picking up by just +0.7%, and the euro bloc posting relatively flat growth of +0.1%. The US is the outlier in this respect, with a forecast expansion of +1.2%, the second-best rate of growth among developed states in 2010 (behind Canada).

Emerging Markets

Demonstrating the extent of the downturn, emerging markets are forecast to post a mild contraction, of -0.2%, on aggregate in 2009. The +3.3% growth pencilled in for 2010 would be the third-worst annual performance of the decade, compared with +3.0% expansion in 2001, when the US was last in recession. Thanks nearly entirely to China's +5.6% real GDP growth forecast, rather than any relative regional economic strength, Emerging Asia will grow by +3.5% in 2009. Several states are going to be hit very hard by the decline in global trade, including Singapore (-7.2%) and Taiwan (-4.5%). Latin America will contract by -2.6% in 2009. Mexican real GDP is set to shrink by -7.1% amid a two-year recession that will see negative growth again in 2010. As a whole, Latin America is set to underperform every other region, with Venezuela performing particularly badly (contractions of -5.6% and -6.4% in 2009 and 2010, respectively). Central and Eastern Europe, the worst regional performer in 2009, will see real GDP shrink by -5.7%, highlighted by major contractions in Russia (-7.1%) and Turkey (-5.7%). The recovery in 2010 - to 1.5% - will be weak. Sub-Saharan Africa will post near to zero growth in 2009, and will expand by just +3.0% in 2010. Among other states, South Africa will experience an economic contraction in 2009. The Middle East & North Africa region is expected to post a +1.1% regional growth rate in 2009, thanks mainly to steady growth performances in Egypt (+3.7%), Iran (+2.4%) and Qatar (+6.5%), and despite contractions in the UAE (-2.9%) and Kuwait (-1.0%). In this report, the author provides an analysis of the implications of the economic downturn on the pharmaceutical industry. The study contains a regional and country-specific analysis of the pharmaceuticals sector and wider healthcare market, and also provides an overview of impact of the downturn on the companies that operate in the industry.

Introduction ... 7

From A Credit Crunch... ... 7

chart: A Dip In 2009 7

Global & Regional Real GDP Growth

... To A Global Economic Downturn .... 8

Emerging Markets 8

Pharmaceuticals & Healthcare Markets Analysis . 9

Middle East And Africa Overview .....9

chart: Consistent Scores 9

Middle East And Africa Pharmaceuticals & Healthcare Business Environment Ratings

chart: Growth Slows In 2009 ..10

Middle East And Africa Drug Expenditure, Q208-Q309, US$bn

South Africa . 10

chart: An Attractive Market For Innovative Drugmakers ...10

South Africa Pharmaceuticals & Healthcare Business Environment Ratings Q208-Q309

chart: Strong Growth Expected ..10

South Africa Drug Expenditure, Q208-Q309, US$bn

UAE ..11

chart: Solid Scores ..11

UAE Pharmaceuticals & Healthcare Business Environment Ratings Q208-Q309

chart: Strong Investment In Healthcare To Support Drug Market Growth ....11

UAE Drug Expenditure, Q208-Q309, US$bn

Asia Pacific Overview ...12

chart: Stable Ratings ....12

Asia Pacific Pharmaceuticals & Healthcare Business Environment Ratings Q208-Q309

chart: Resilient To The Economic Downturn .....12

Asia Pacific Total Drug Expenditure, Q208-Q309, US$bn

China ..... 12

chart: Economic Development: A Driver For Drug Market Growth ...13

China Drug Expenditure, Q208-Q309, US$bn

chart: Opportunities Present For Drugmakers ...13

China Pharmaceuticals & Healthcare Business Environment Ratings Q208-Q309

Taiwan ... 13

chart: Increased Demand For High Value Medicines .14

Taiwan Pharmaceuticals & Healthcare Business Environment Ratings Q208-Q309

chart: Government Is A Force Behind Drug Market Growth ....14

Taiwan Drug Expenditure, Q208-Q309, US$bn

India . 14

chart: India Pharmaceuticals & Healthcare Business Environment Ratings ...14

Q208-Q309

chart: Continued Government Investment In Healthcare Will Drive Growth .15

India Drug Expenditure, Q208-Q309, US$bn

Central and Eastern Europe .....15

chart: Declining In Attractiveness ...16

Central & Eastern Europe Pharmaceuticals & Healthcare Business Environment Ratings Q208-Q309

chart: Economic Downturn Inflicting Damage On Drug Market ...16

Central & Eastern Europe Total Drug Expenditure, Q208-Q309, US$bn

Bulgaria . 16

chart: Declining Business Environment Ratings ..16

Bulgaria Pharmaceuticals & Healthcare Business Environment Ratings Q208-Q309

chart: Drug Market Affected By A Decline In Spending . 17

Bulgaria Drug Expenditure, Q208-Q309, US$bn

Latvia ..... 17

chart: A Drop In Business Environment Ratings ... 17

Latvia Pharmaceuticals & Healthcare Business Environment Ratings Q208-Q309

chart: A Fall In Drug Expenditure In 2009 ...18

Latvia Drug Expenditure, Q208-Q309, US$bn

Ukraine .. 18

chart: Falling In Attractiveness ..18

Ukraine Pharmaceuticals & Healthcare Business Environment Ratings Q208-Q309

chart: Downturn Affecting Drug Market Expenditure .19

Ukraine Drug Expenditure , Q208-Q309, US$bn

Western Europe 21

chart: Region Declines In Attractiveness ... 21

Western Europe Pharmaceuticals & Healthcare Business Environment Ratings Q208-Q309

chart: Government Efforts To Contain Costs Affects Drug Market 21

Western Europe Drug Expenditure, Q208-Q309, US$bn

Italy .. 21

chart: Losing Attractiveness ..21

Italy Pharmaceuticals & Healthcare Business Environment Ratings Q208-Q309

chart: Cost Containment Measures Restrict Market Growth .22

Italy Drug Expenditure, Q208-Q309, US$bn

Belgium .. 22

chart: Losing Its Appeal 22

Belgium Pharmaceuticals & Healthcare Business Environment Ratings Q208-Q309

chart: A Dip In 2009 ...22

Belgium Drug Expenditure, Q208-Q309, US$bn

Germany 23

chart: A Slight Drop In Attractiveness .23

Germany Pharmaceuticals & Healthcare Business Environment Ratings Q208-Q309

chart: A Weak Euro Affects Growth In 2009 ....24

Germany Drug Expenditure, Q208-Q309, US$bn

UK .... 24

chart: Declining Business Environment 24

UK Pharmaceuticals & Healthcare Business Environment Ratings Q208-Q309

chart: A Decline In Drug Expenditure In 2009 ..25

UK Drug Expenditure, Q208-Q309, US$bn

Americas ...25

chart: A Rise, Followed By A Decline In Ratings ....26

Americas Pharmaceuticals & Healthcare Business Environment Ratings Q208-Q309

chart: Growth Expected In 2009 ..26

Americas Drug Expenditure, Q208-Q309, US$bn

Brazil 26

chart: An Attractive Location .26

Brazil Pharmaceuticals & Healthcare Business Environment Ratings Q208-Q309

chart: Long-term Market Potential As A Result Of Continued Unmet Need For Drugs .. 27

Brazil Drug Expenditure, Q208-Q309, US$bn

US .... 27

chart: Maintains Top Ranking In Americas And Globally .....27

US Pharmaceuticals & Healthcare Business Environment Ratings Q208-Q309

chart: A Slow Down In Market Growth 28

US Drug Expenditure, Q208-Q309, US$bn

Companies Analysis . 30

Stock Market Analysis .... 30

chart: Pharma Remains A Defensive Stock ..30

Standards & Poor Global 1200 Index

Companies: Financial Analysis ... 31

Pfizer ..... 31

chart: Affected By A Decline In Patents 31

Pfizer Revenue And Profit, March 2008 - March 2009, US$bn

AstraZeneca 31

chart: Affected By Generic Competition 31

AstraZeneca Revenue And Profit, March 2008 - March 2009, US$bn

chart: A Steep Decline .32

Top Ten Pharmaceutical Products Sales (US$bn)

Big Pharma Shows Resilience ..33

The Biotech Industry . 33

The French Biotech Industry 33

The Australian Biotech Industry .. 33

The UK Biotech Industry . 33

Biotech Acquisitions .. 34

Takeda Pharmaceuticals 34

Merck Serono ..... 34

Sanofi-Aventis ..... 34

Johnson & Johnson .. 35

Generic Drugmaker Acquisitions 35

Mylan ..... 35

Daiichi Sankyo .... 36

GlaxoSmithKline . 36

Sanofi-Aventis ..... 36

Novartis . 37

Fresenius SE 37

Watson Pharmaceuticals 37

Companies In Emerging Markets Also Show Resilience .....38

Piramal Healthcare ... 38

Aurobindo .... 38

Zydus Cadila ... .... 39

Chemical Company of Malaysia . 39

Beximco Pharmaceuticals .... 40

Ranbaxy 40

Conclusion .... 41

Drug Expenditure Outlook .... 41

chart: 3.07% CA GR Expected 42

BMI's Global Pharmaceutical Market Forecast (US$bn)

chart: Emerging Markets Will Drive Drug Expenditure Growth .42

Global Pharmaceutical Market Forecasts By Region

Appendix 43

How We Generate Our Pharmaceutical Industry Forecasts ... 43

Table: Pharmaceutical Business Environment Indicators ...43

indicators: limits to potential returns, risks to potential returns, country risk

Pharmaceutical Business Environment Rating Methodology .. 44

Ratings Overview 44

Ratings System .. 44

Indicators ..... 44

Weighting ..... 44

Table: Weighting Of Components .44

indicators: component - limits to potential returns, risks to realisation of returns

Sources . 44