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Pharmaceuticals Forecast Methodologies

How We Generate Our Industry Forecasts

BMI’s industry forecasts are generated using the best-practice techniques of time-series modelling. The precise form of time-series model we use varies from industry to industry, in each case being determined, as per standard practice, by the prevailing features of the industry data being examined. For example, data for some industries may be particularly prone to seasonality, i.e. seasonal trends. In other industries, there may be pronounced non-linearity, whereby large recessions, for example, may occur more frequently than cyclical booms.

Our approach varies from industry to industry. Common to our analysis of every industry, however, is the use of vector autoregressions. Vector autoregressions allow us to forecast a variable using more than the variable’s own history as explanatory information. For example, when forecasting oil prices, we can include information about oil consumption, supply and capacity.

When forecasting for some of our industry sub-component variables, however, using a variable’s own history is often the most desirable method of analysis. Such single-variable analysis is called univariate modelling. We use the most common and versatile form of univariate models: the autoregressive moving average model (ARMA).

In some cases, ARMA techniques are inappropriate because there is insufficient historic data or data quality is poor. In such cases, we use either traditional decomposition methods or smoothing methods as a basis for analysis and forecasting.

It must be remembered that human intervention plays a necessary and desirable part in all our industry forecasting techniques. Intimate knowledge of the data and industry ensures we spot structural breaks, anomalous data, turning points and seasonal features where a purely mechanical forecasting process would not.

Pharmaceutical And Healthcare Industry

There are a number of principal criteria that drive our forecasts for each pharmaceutical variable.

Figures for Pharmaceutical And Healthcare sector data are based, where possible, on primary national industry association, global healthcare organisation and government/ministry sources and official data. Where these are unavailable, pharmaceutical expenditure forecasts are based on a range of variables:

• Government policy, industry trends and expenditure levels stated in international and national press;
• Industry trends and expenditure levels stated in pharmaceutical company official financial reports or releases;
• Likely expenditure patterns owing to major healthcare (disease) and demographic patterns;
• Likely alterations in expenditure patterns owing to economic/political activity.

Expenditure per capita and percentage of GDP is calculated using BMI’s own macroeconomic and demographic forecasts.

Sources

Sources used in Pharmaceutical And Healthcare reports include national industry associations, government ministries, global health organisations, officially released pharmaceutical company results and international and national news agencies.

Pharmaceutical Business Environment Ratings Methodology

Ratings Overview

Conceptually, BMI’s Pharmaceuticals Business Environment Ratings system provides a globally-comparative, numerically-based assessment of the Risk/Return trade-off for the industry in each state covered in BMI Reports. In order to provide clients with a detailed assessment of this trade-off, the overall rating is comprised of two distinct sub-ratings:
Limits of Potential Returns: Evaluates the industry’s current size and growth potential, and also assesses broader industry/state characteristics that may enable/inhibit the industry’s development.
Risks to Realisation of Potential Returns: Evaluates issues within (a) the Pharma sector, and (b) the broader political/economic/business environment, that indicate the level of uncertainty surrounding the realisation of potential returns.

These ratings are themselves comprised of sub-ratings:

• The ‘Limits’ Rating is comprised of:
• Domestic Market: This evaluates industry growth/size dynamics
• Country Structure: This evaluates the broader economic/socio-demographic environment

• The ‘Risks’ Rating is comprised:
• Market Risks: This is a subjective evaluation of industry regulatory and competitive issues
• Country Risk: This evaluates the industry’s broader Country Risk exposure, which is based on industry-specific vulnerabilities that may be assesses using any combination of the 56 components of BMI's proprietary Political, Economic and Business & Operational Risk Ratings

Weighting

Given the number of indicators/datasets used, it would be inappropriate to give all sub-components equal weight. Consequently, the following weight has been adopted.

Component	Weighting
Limits of Potential Returns	60%
- Pharmaceutical Market	- 75%
- Country Structure	- 25%
Risks to Realisation of Potential Returns	40%
- Market Risks	- 60%
- Country Risk	- 40%

 

Indicators

The following indicators have been used. Overall, the rating uses three subjectively-measured indicators, and around 20 separate indicators/datasets.

Indicator	Rationale
Limits to potential returns
Market structure
Market expenditure, US$bn	Indicator denotes breadth of pharmaceutical market. Large markets score higher than smaller ones.
Market expenditure per capita, US$	Indicator denotes depth of pharmaceutical market. High value markets score better than low value ones.
Sector value growth, % y-o-y	Indicator denotes sector dynamism. Scores are based on annual average growth over our 5-yr forecast period.
Country structure
Urban-Rural split	Urbanisation is used as a proxy for development of medical facilities. Thus, predominantly rural states score lower.
Pensionable popn, % of total	Proportion of the population over 65 years of age. States with aging populations tend to have higher expenditure per capita.
Population Growth, 2003-2015	Fast growing states suggest better long term trend growth for all industries.
Risks to potential returns
Market Risks
IP Laws	Markets with fair and enforced intellectual property regulations score higher than those with endemic counterfeiting.
Policy/reimbursements	Markets with full and equitable access to modern medicines score higher than those with minimal state support of healthcare.
Approvals process	High scores awarded to markets with a swift appraisal system. Those weighted in favour of the local industry or are corrupt score lower.
Country Risk
Economic structure	Rating from BMI’s Country Risk Ratings (CRR). It evaluates the structural balance of the economy; noting issues such as reliance on single sectors for exports/growth as well as past economic volatility.
Policy Continuity	Rating from BMI’s CRR. It evaluates the risk of a sharp change in the broad direction of government policy.
Bureaucracy	Rating from BMI’s CRR to denote ease of conducting business in the state.
Legal framework	Rating from BMI’s CRR to denote strength of legal institutions in each state – security of investment can be a key risk in some Emerging Markets.
Corruption	Rating from BMI’s CRR, to denote risk of additional illegal costs/possibility of opacity in tendering/business operations affecting companies’ ability to compete.

 

 

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