Risks and trends

The big attraction of the pharmaceutical sector is that it is very defensive. Most of the risks it is subject to are specific to the company and are diversifiable. There are also some risks to the sector as a whole, but these are also diversifiable. Key risks are:

• risks to specific drugs, which we have covered on other pages,
• political risk; legal or regulators changes,
• tighter spending by major buyers; especially governments and insurers.

The greatest political risks are legal or regulators changes that would reduce the barriers to entry and monopoly pricing power that bring in most of the industry's profits. Some examples of threats:

• any weakening of patent laws in any major market,
• regulatory changes that make the approval of generics easier or faster,
• government spending less on drugs, by reducing the prices bodies such as the NHS pay,
• insurers spending less on drugs.

Legal changes to encourage generics, the prices paid by governments, and tightening of spending policies by insurers have already happened to an extent. The threat is that all these could be taken further, for example through efforts to encourage biologic generics.

There are some favourable trends to counter this. Ageing populations are hugely helpful to pharmaceutical sales. The risking costs of health-care in general do have one positive impact: drugs are usually a small part of the costs of treatment, and other rising costs may encourage the use of greater volumes of drugs as a substitute (when possible). On the other hand, the need to contain these rising costs obviously motivates buyers to make efforts to spend less: either by using lower volumes, or by negotiating or imposing (which governments can, and do, do) lower prices.

As mentioned in passing earlier, all these are also diversifiable risks.