Drugmakers chase new markets as US, Europe flop
London, May 7, 2008
As sales of big-brand medicines in the United States and Europe falter, Western drug companies have new targets in their sights - the emerging wealthy middle classes of China, India and Russia.
And such a drive into new areas of double-digit revenue growth could trigger a wave of restructuring and unconventional deals, analysts predict.
GlaxoSmithKline chief executive-designate Andrew Witty last week made emerging markets a top priority by poaching Eli Lilly manager Abbas Hussain to head a new region focused on such countries in a high-level reshuffle.
The world's second-biggest drugmaker reckons emerging markets account for nearly 25 per cent of drug sales growth and will grow three times faster than western countries. Glaxo is not alone.
"All the major pharma companies are taking a fresh look at their strategies to really take advantage of the emergence of these major new markets," Murray Aitken, senior analyst at healthcare information group IMS Health, told Reuters.
"The slowdown that we're seeing in the developed part of the world is helping to accelerate these reviews." Increased generic competition at home and failing new drug pipelines mean the sector's traditional defensive reputation is under siege.
Pfizer, the world's largest pharmaceuticals group, told analysts in March it aimed to raise its share of the Asian market to 6 per cent by 2012 from 4 per cent, and will expand operations in China from 110 cities to more than 650.
The prize is clear. IMS believes emerging market drug sales will hit $400 billion by 2020 - equivalent to revenue today from the United States and Europe's top five markets combined - and contribute more than 50 per cent to global market growth.
The importance of non-traditional international markets was also a notable feature of first-quarter results, according to Citigroup analysts.
Novartis sales outside the US and Europe, for example, grew 16 per cent to $2.46 billion in the first three months of 2008, while AstraZeneca's sales in emerging markets were up 11 per cent at $981 million.
By contrast, total US drug sales grew 3 per cent and European sales 4 per cent in the 12 months to February, according to IMS data. Sales of anti-infectives have dominated emerging markets but growing wealth, the adoption of a Western lifestyle and ageing populations mean medicines for cardiovascular and respiratory disease and cancer are rapidly becoming more important.
Pricing remains a wild card. Russia, with its wealthy elite, has some of the highest drug prices in Europe, but elsewhere price controls are a threat, according to Datamonitor analyst Tijana Ignjatovic.
Turkey, for example, has a system of reference pricing that makes its prices significantly lower than in the rest of Europe.
One solution for drugmakers is likely to be increased use of tiered pricing, with charges in individual markets adjusted according to the population's ability to pay.
Western drugmakers will also need to adjust their portfolios to compete effectively against strong, low-cost local producers, particularly in India and China.
Such local companies typically produce cheap generics - something most Western companies have shunned with the exception of Novartis. In future, that might change.
"As a part of their strategy to become more competitive in emerging markets, we may well see more companies increase their portfolio of generic products," said IMS's Aitken.
Inadequate patent protection is another obstacle multinationals need to negotiate as they wade deeper into Asia and Latin America - and here the picture is mixed.
Brazil and Thailand have over-ridden patents on Aids drugs, while a court battle in India over Novartis's cancer drug Glivec shows a new patent law of 2005 has not solved all the industry's concerns about weak protection there.
China is seen less of a problem i