The issue was subjected to much scrutiny at the FT Global Pharmaceutical and Biotechnology Conference in London, UK, 17–18 November 2009, with panellists highlighting a range of issues including the differences both between emerging and western markets and between individual emerging markets; the imperative to ensure high ethical standards in all markets; the opportunity to cater to the expanding ‘self-pay’ sector created by burgeoning middle classes; and the challenge to provide affordable medicines for the vast numbers of people at the bottom of the ‘healthcare pyramid’.
Until very recently, ‘Big Pharma’ has focused by far the largest part of its resources on the EU and North American markets, and to a lesser extent, Japan. But as Mr Arthur Higgins, Chairman of Bayer HealthCare, declared, “Western healthcare systems are unsustainable”. With the crisis in these systems running alongside a concomitant boom in healthcare spending in fast-growing emerging economies, it is natural that Big Pharma should look to shift some of its attention to the latter, even as it labours to delineate solutions that could address the problems of the west while protecting its own continuing ability to cash in on the market.
“Emerging market activity will be a source of out-performance for pharma stocks,” thinks Dr Gbola Amusa, Managing Director, Global Pharmaceuticals Sector Co-ordinator and Head of European Pharmaceuticals Research at UBS. With his assessment of pharma as “a declining industry” in which stocks are at their lowest valuation since the 1990s, it would appear that such activity will not be an optional extra but a central component of future growth. Fortunately, the viability of such a strategy is increasing. “Emerging markets for pharma are now just big enough to matter,” said Dr Amusa. “They are up from 5% of [Big Pharma’s] business five years ago to 20–30%.”
Sanofi-aventis CEO Chris Viehbacher commented on the sheer volume of the opportunity for sales in emerging markets, notably China and India. “Twenty-five million babies are born each year in India, and 20 million in China, compared with around eight million in Europe and North America. Think of the possibility for vaccine sales there,” he said. Increasing urbanisation and a westernisation of lifestyles, changing infection rates and an increase in ‘lifestyle diseases’ like diabetes and heart disease represent an opportunity for Big Pharma. But it needs to recognise how closely linked health care is to local culture, and adapt accordingly, he added.
One area in which some emerging markets are actually ahead of western markets is the use of communications technology in health care. Dr Swati Piramal, Vice Chairperson of Piramal Life Sciences and Director of Piramal Healthcare, noted the revolutionary use of mobile technology to provide medical services to patients in remote regions. Mr Andrew Thompson, whose company Proteus Biomedical makes low-cost computer chips from food ingredients to be incorporated into drugs, enabling direct communication with pharmaceutical companies and healthcare providers, pointed out that of the world’s 6.8 billion people, six billion have internet access, and half of those take care of sick people. He sees a great opportunity for improving health compliance, monitoring and patient support on a global scale, through the use of the internet and mobile phones.
Importantly, there are good grounds for forecasting ongoing growth. “In emerging markets, healthcare spending as a percentage of GDP is low, and pharmaceutical spending as a percentage of GDP is even lower. Pharma spending is highly correlated to GDP per capita, so it’s a good place to target,” explained Dr Amusa, who predicted that emerging markets would provide 70% of Big Pharma growth going forward. He thought large-cap European companies with lower US exposure and higher emerging market exposure would be particularly well placed to take advantage of this dynamic. He noted, however, that the price-volume trade-off in shifting sales to emerging markets would probably lead to a decline in margins of around four percentage points.
Pharma market to triple in India
Much of the emerging market growth will come from rising individual consumption among the swelling ranks of middle classes. As Dr Piramal, noted, 140 million people in India alone are expected to move above the poverty line in the next 10 years, and the pharmaceutical market is expected to triple in size there by 2015. With the emerging middle class comes a “fabulous opportunity”, thought Mr Viehbacher, “if we can find an offering at the price point of those consumers.”
While international pricing variations have vexed the industry and governments for a long time, pricing issues within single countries will be more of a problem for pharmaceutical companies in future. Although large parts of the population are enjoying western-style middle-class wealth and standards of living, the numbers of people still in poverty are huge. “For the first 200 million people living in big cities, the pricing is similar to Europe. For the next 200 million you need to restructure to attract the market,” said Dr Piramal, acknowledging that it “can be difficult to do it without leakage”.
This imperative is leading to a shift in outlook that is particularly noticeable in the domestic emerging-market pharmaceutical industries, which are racing to dramatically reduce the cost of developing medicines, something that western Big Pharma should not overlook. “Piramal is aiming to make a new drug for less than US$100 million,” said Dr Piramal. “This should enable better access for people at the bottom of the pyramid. The rise of Indian research companies selling cheaper products will bring about a paradigm change.”
Running alongside the expansion in the self-pay market will come a similar expansion in state healthcare and infrastructure, something that Dr Amusa thought was “under-appreciated by investors”. Indeed, in Mr Viehbacher’s view, explaining to investors emerging markets in general can be a challenge. Others agreed, and pointed out that the healthcare scenarios differed quite widely between individual emerging markets.
“It’s important to understand the national pricing policies, reimbursement schemes and who has access, and not just focus on the self-pay middle classes,” observed Amgen’s Executive Director of Business Development Laurie Stelzer, who said that her company was committed to a strategy of increasing patient access to its medicines, and would sign partnerships in emerging markets to do so. “We expect low teens growth in emerging markets versus a slowdown in the EU and US,” she said. With the US still accounting for 80% of Amgen’s revenues, emerging-market expansion represents both an important opportunity and a significant challenge, and she acknowledged the difficulty of tackling issues of IP and data protection as well as affordability. Trade-related aspects of intellectual property rights has gone a long way to addressing the former, noted Mr Alex Howarth, Chief Business Officer of moksha8 Pharmaceuticals, a US-based speciality pharmaceutical company focused solely on emerging markets.
Generics: an opportunity in emerging markets
One way that Big Pharma could compete on price is by selectively entering the generics sector in certain markets, a move that GlaxoSmithKline’s CEO Andrew Witty described as tactical rather than strategic, and which would enable multinationals to leverage their large existing sales forces. “Generic market growth is seen to be highest in ‘cluster one’ countries like China, India, Mexico and Russia,” he explained. The rate of growth in these markets is around 9–12%, compared with 8–11% in ‘cluster two’ countries including Brazil, France, Italy, and Japan and just 3–5% in ‘cluster three’, which includes Germany, the Netherlands, the UK and the US.
“Big Pharma is focused on clusters one and two,” Mr Witty said. There is “a chance to get commercial synergies between branded and generic portfolios in emerging markets, where generics are sold to doctors, and at nearly the same price as innovator products,” he noted. Mr Howarth observed that pricing of generics and branded drugs was often very similar in Latin American countries such as Brazil and Mexico, where the large self-pay markets tend to attach a strong importance to brands and regard generics with suspicion.
For Mr Higgins, successful Big Pharma companies of the future will need to derive at least 20% of their revenues from the top-seven emerging markets. However, they should take care amid the confusion of rapid expansion not to let standards slip. “Ethical conduct is crucial, and we can’t have different standards in different markets.” He emphasised the need for stakeholder trust, which would be built upon Big Pharma seriously committing to supporting prevention programmes, addressing neglected diseases and improving health care in the developing world, as well as displaying good corporate citizenship and compliant behaviour in all markets.
In the words of Mr Viehbacher, the pharmaceutical industry now “needs to view all of the world’s 6.8 billion people as customers.” Despite the challenges this presents, panellists were in broad agreement with this view.
Malone E. Emerging markets key to big pharma growth. Scrip News. 2009 Nov 26.