The US $109.6 billion brand-name pharmaceutical manufacturing industry may have proven resilient to the economic downtown, but competition from generic drugs has hampered its performance over the last five years, and revenues are expected to fall at an average annual rate of 2.6% during the next few years, a new report forecasts.

This decline will include a drop of 3.5% for this year, according to the study, from IBISWorld.

Historically, sales of branded pharmaceuticals in the US have been bolstered by favourable demographic trends and the use of medication as a significant part of healthcare, and manufacturers of branded drugs also benefit from patent protection, the report points out.

However, the patent cliff which was first reached last year, when numerous patents on blockbuster drugs began to expire, has begun hurting industry revenues. Because generic drugs are sold at a significant discount to brand-name treatments, manufacturers have come under pricing pressure from downstream customers, causing their operating profitability to decrease, it adds.

Players in the industry have tried to adapt to expiring patents by investing more in biologic medicines. President Barack Obama’s Patient Protection and Affordable Care Act of 2010 introduced a method for the US Food and Drug Administration (FDA) to approve generic biologic drugs, but it also initiated a 12-year patent period on these types of products.

While this legislation increases the threat from generic pharmaceutical manufacturers in this segment of the industry, it also paves a clearer path for operators to manufacture generic biologics; therefore, such products will continue to play an important role in shaping this industry's future, the study forecasts.

The brand-name pharmaceutical manufacturing industry in the US is moderately concentrated, with the top four players accounting for around half of total sector revenues, it goes on. Consolidation in the sector has been underway for more than five years, but a marked increase has been taking place in recent years, with the biggest headlines involving the mergers of Pfizer and Wyeth, Merck & Co and Schering-Plough and Roche and Genentech in 2009.

Merger and acquisition (M&A) activity has been primarily driven by the escalating costs of R&D, shorter exclusivity times and the need for global marketing power, the study notes. In addition, consolidation has been spurred by changes to the pricing and other competitive strategies of pharmaceutical companies - these include information technology, new US federal legislation and the emergence of institutions which include health maintenance organisations (HMOs) and pharmacy benefit managers (PBMs).

The industry has also undergone significant structural changes that include growth by the generic drug segment and the acquisition of PBMs by pharmaceutical companies.

Looking to the future, it says that the US healthcare reforms are expected to boost drug sales, as more American citizens gain prescription drug coverage in 2014. IBISWorld forecasts that the industry's revenues will increase over the next five years, but also expects companies' average operating profit margins to decrease slightly, as a result of the industry's undertaking to pay out a significant amount of taxes and discounts over the next 10 years, which it agreed as part of the 2010 healthcare reform. 

To maintain profitability, industry operators are expected to continue consolidating and reducing costs, mainly through reductions in employment and R&D, it says, pointing out that, during the five years to 2017, employment in the sector is projected to decrease by 0.9% per year on average, to total 125,085 individuals by the end of the reporting period.