Oil's well that ends well? Low Brent crude price a boon for pharma says analyst
Earlier today, the price of a barrel of Brent crude – which is the international benchmark oil blend against which other oils are priced - fell to below $50 for the first time since 2009.
The decline follows just two days after West Texas Intermediate crude – the US oil benchmark – dropped below $50 a barrel for the first time in as many years and continues the downward trend the price of oil has followed since its peak value of $110 last June.
The fall is due to increased availability. Soaring prices last year made expensive extraction techniques like fracking and deep water drilling economically viable, prompting North American producers to increase output.
Meanwhile, the Organization of the Petroleum Exporting Countries (OPEC) decided not to cut output which, combined with increased North American production, resulted in a glut in the market.
Pharma Economics
Low oil prices are bad for countries whose economies rely on oil exports. Russia for example – which generates around a third of its export revenues by selling oil - has already had its currency crash, making it increasingly unattractive to foreign investors.
For the drug industry, however, lower oil prices are likely to be positive according to Joshua Owide, GlobalData’s Director of Healthcare Industry Dynamics.
He told in-Pharmatechnologist.com that: “As with any other industry heavily reliant on manufacturing and logistics, the impact of lower oil prices will have significant direct and indirect benefits on the sector, most notably impacting large-cap multinationals.”
Owide predicted the biggest benefit would be in cost of goods sold – the cost of making a drug – when he said would fall as “lower oil prices will lower the cost of raw materials, directly and indirectly, as well as the running costs associated with manufacturing.”
“Furthermore, direct and indirect costs relating to logistics and sales infrastructure should also decrease, which will become apparent from any shift in the sector’s selling, general and administrative margin through 2015” he said.
Biomanufacturers are likely to benefit more than small molecule drugmakers according to Owide, who pointed to more complex and resource intensive manufacturing process and use of delivery technologies as the basis for his forecast.
Margins
Drugmakers facing generic competition are also likely to welcome Brent crude's fall according to Owide.
“A number of companies are at risk from generic competition, and the reduction in oil prices is timely with respect to helping insulate their margins prior to the onset of generic competition. Conversely, companies with positive outlooks stand to deliver even higher shareholder returns than already predicted by optimistic shareholders.”
