Business Environment

The world pharmaceutical market in 2009 was valued at $709 billion, an increase of 5% over 2008 at CER (maintaining the rate of growth for the period 2007 to 2008). As shown in the World pharmaceutical markets information the 2009 growth rate in North America recovered from its 2008 decline while the 2009 growth rate in Other Established Markets fell back from its 2008 level. On the other hand, Emerging Markets, in particular Emerging Asia Pacific, saw strong double-digit growth.

In 2009 the top five markets in the world remained the US, Japan, France, Germany and Italy, with the US representing 42% of global sales (2008: 42%). Further down the rankings, China moved into sixth place, displacing the UK to eighth place behind Spain.

Expanding patient populations

The world population has doubled in the last 50 years from three billion to over six billion and is expected to reach nine billion by 2050. In addition, the number of people who can access the highest standards of healthcare continues to increase, particularly among the elderly, who represent a rising proportion of populations in developed nations.

Furthermore, the faster-developing economies, such as China, India and Brazil, continue to offer new opportunities for the industry to supply an expanding number of patients who can benefit from medicines. As shown by the World pharmaceutical markets information and the Expanding patient populations information below, Emerging Markets now represent approximately 85% of the world population and 16% of the total pharmaceutical market. Pharmaceutical industry growth in Emerging Markets was more than triple the rate of growth in Established Markets in 2009.

Unmet medical need

In most Established Markets, ageing populations and certain lifestyle choices drive an increased incidence of chronic diseases such as cancer, cardiovascular/metabolic and respiratory diseases which require long-term management. The prevalence of chronic disease is also increasing in middle-income countries, and is now beginning to have an impact in the least developed countries. Many diseases remain under-diagnosed or sub-optimally treated and, as diagnostic techniques and treatments improve and access to medicines widens, the burden of disease is projected to continue increasing over the next 20 years. In addition, the appearance of new medical challenges such as the H1N1 influenza (swine flu) pandemic potentially adds to the burden.

Advances in science and technology

Existing medicines will continue to be vital in meeting the demand for healthcare, particularly in an increasingly genericised market. In addition, innovation resulting from advances in both the understanding of the key processes involved in the initiation and progression of disease and the application of new technologies will be critical to meeting current and future unmet medical need. As we noted last year, the use of large molecules, or biologics, is becoming an increasingly important driver of innovation. It has been predicted that within the world's top 100 pharmaceutical products, 50% of sales will come from biologics based on forecasts for 2014. This compares with only 28% in 2008 and 11% in 2000. With advances in the technologies for the design and testing of novel compounds, new opportunities also exist for the use of innovative small molecules as new medicines.

Pricing pressure

The growing demand for healthcare continues to increase pressure on payer budgets. Whilst payers may recognise the need to reward innovation, they have a duty to spend their limited financial resources wisely. As a result, cost-containment in healthcare, including containment of pharmaceutical spending, continues to be a focus. This is particularly the case as the current global economic downturn increases cost pressures on healthcare payers and those patients who pay directly for all, or a significant proportion, of the cost of their medicines.

The research-based pharmaceutical industry's challenge is to manage this downward pressure on the price of its products, whilst continuing to invest in the discovery, development, manufacture and marketing of new medicines. In addition, most of our sales are generated in highly regulated markets where governments exert various levels of control on price and reimbursement.

Multiple pricing systems exist across the globe, which create a complex matrix that must be managed to optimise revenues. This may be further complicated by currency fluctuations within regions. The principal aspects of price regulation in our major markets are described further in the Geographical Review.

Payers increasingly require that the economic as well as therapeutic value of medicines be demonstrated and that this value be supported by evidence of real outcomes. Meeting these needs across a diverse range of national and local reimbursement systems requires significant additional investment of resources and funds by the industry. Personalised healthcare (PHC) offers one way of increasing the value of medicines to patients, physicians and payers. Under PHC the optimal treatment for each individual, in terms of the choice of medicine and dose, is determined by analysis of the patient's biochemical or genetic make-up. An example of this approach is the use of a companion diagnostic test to allow use of Iressa for the treatment of lung cancer, specifically in those patients who have an activating mutation of the epidermal growth factor receptor.

R&D productivity

The research-based pharmaceutical industry continues to drive for increased productivity in R&D to ensure a strong pipeline of commercially viable medicines for launch. Companies have addressed this challenge in a variety of ways. Some have sought to increase output with limited incremental cost and others have restructured R&D functions to promote innovation and entrepreneurship. Others have acquired companies with synergistic development pipelines.

Regulatory requirements

The pharmaceutical industry is one of the most regulated of all industries. Whilst efforts to harmonise regulations globally are increasing, the number and impact of these regulations continue to grow. Since the withdrawal of Vioxx^™, regulators have been applying a more systematic approach to safety assessment and the management of known and emerging risks both before and after a medicine is approved. Today, regulators also require greater amounts of safety data before approval than in the past. This has led to a change in the structure of development programmes and to the need for additional resources to carry them out. For example, companies might initially seek approval for a narrower list of medical indications, or request conditional approvals that may later be expanded through additional studies as part of a medicine's life-cycle management.

Competition

Our main competitors are other research-based pharmaceutical companies that sell innovative, patent-protected, prescription medicines. Competition also comes from collaborations between traditional pharmaceutical companies and smaller biotechnology and vaccine companies.

Generic versions of drugs that are no longer patent protected also compete in the market. Manufacturers of generic drugs price them at a significantly lower level than the innovator equivalents. This is partly because generic manufacturers do not invest the same amounts in R&D or market development as research-based pharmaceutical companies, and therefore do not need to recoup that investment. Such competition generally occurs when patents expire but can also occur where the validity of patents is being disputed or has been successfully challenged before expiry. In addition, competition can occur when a generic medicine in the same product class as an innovator product (a product which does not yet have a generic equivalent) enters the market and competes to meet the same medical need.

To date, biologics have sustained longer life-cycles than traditional pharmaceuticals and have faced less generic competition. This is because the manufacturing process for biologics is generally more complex than it is for small molecule medicines and it is significantly harder to produce an identical copy of a biologic compared to a small molecule medicine. However, biologics are now becoming subject to competition from 'biosimilars' and, while the regulatory regimes for 'biosimilars' are less well established than those for generic small molecule medicines, regulatory authorities in Europe and the US are currently reviewing abbreviated approvals processes.

Further information about the specific risk of the early loss and expiry of patents is explained in the Intellectual property section and more general information regarding the principal risks and uncertainties faced by AstraZeneca can be found in the Principal risks and uncertainties section.

North America Sales $bn

Growth

4% 2009

Market value

44% 2009

Other Established Markets Sales $bn

Growth

4% 2009

Market value

40% 2009

Emerging Markets Sales $bn

Growth

15% 2009

Market value

16% 2009

Data based on world market sales using AstraZeneca's market definitions as set out in the market definitions table. Source: IMS Health.

Source: International Monetary Fund, World Economic Outlook Database, October 2009

Population figures are for 2008

GDP growth is based on real GDP in US dollars for the years 2003-2008

GDP per capita is nominal GDP per capita for 2008