Pharmaceutical groups are short on growth. Can emerging markets fill the gap? Faced with a wave of drug-patent expirations and with few new blockbuster drugs in the pipeline, companies are focusing their marketing efforts on the developing world, where healthcare spending has historically been far lower. Novartis and Roche already generate nearly 25% of sales from emerging markets. Merck hopes to achieve this by 2013 and AstraZeneca, by 2014. Generating emerging-market revenues is one thing, but turning them into profits is another.
Currently, the US and Western Europe account for roughly two-thirds of global healthcare spending despite accounting for less than 15% of the world's population. Total emerging-market spending is just over $200 billion but is forecast to catch up swiftly, according to UBS. By 2020, developed and emerging markets could be almost equal in size, driven by an expansion of state healthcare coverage. In emerging markets, the state's share of healthcare spending is just under 50%, compared with more than 70% in the developed world. China, Brazil and Russia have all made clear commitments to expand coverage.
But opportunities are fragmented. Six big countries (Brazil, Russia, India, China, Mexico and Turkey) made up only half of emerging-market pharmaceutical sales in 2009, according to IMS Healthcare data. The resulting need for a presence in many countries is complicated by the challenge of diverse operating environments. In Brazil and China, advertising of over-the-counter medicines is forbidden, which means pharmaceuticals firms require huge sales forces. In India, three quarters of all healthcare spending is by individuals, meaning companies need to be adept at selling drugs in small quantities.
Not surprisingly, that is reflected in markedly lower margins on emerging-market sales. For example, GlaxoSmithKline last year reported operating margins of 36% in emerging markets, compared with 60% and 68% in the US and Europe, respectively. AstraZeneca puts margins 25%-30% lower than those in the developed world. Decisions on pricing are key: Roche chooses to restrict its market by trying to maintain prices globally. Others opt for volume over profitability, risking price arbitrage across borders.
Meanwhile, local players including Russia's Veropharm and India's Lupin and generics manufacturers such as Israel's Teva are expanding fast, adding to the competitive pressure. Language and culture, not to mention regulators, can all favor domestic players. And new markets are not a panacea for old problems, such weak R&D productivity and new-product pipelines.
Emerging markets will be the primary driver of pharmaceuticals' forecast 4.5% global annual sales growth to 2020, believes UBS. But that, in itself, is not going to restore big pharmaceutical firms' multiples to their former glory. For that, they need to persuade investors that they really can develop new blockbuster drugs.
Write to Hester Plumridge at Hester.Plumridge@dowjones.com
Tuesday, May 25, 2010
Developing Nations Won't Solve Big Pharma's Growth Troubles