UPDATE 1-Glaxo plans to outgrow rivals in emerging markets

Thu Dec 10, 2009 10:08am EST

* Overall emerging markets drug demand seen doubling by 2015

* Glaxo sees its emerging market margins in mid-30s pct

* Seeks acquisitions, says some valuations "unreasonable"

* Shares up 1 percent

(Adds shares, details on competitors' plans, more on deals)

By Ben Hirschler

LONDON, Dec 10 (Reuters) - GlaxoSmithKline Plc (GSK.L) believes it can outgrow its rivals in emerging markets, the new battleground for the world's top drugmakers as sales stall in Western markets.

Abbas Hussain, the company's head of emerging markets, said on Thursday his three-pronged strategy included scaling up branded generics, winning extra vaccine business and pushing traditional patented medicines into developing markets.

He is also keen on making more acquisitions but said price was a problem.

"It's very reasonable to say that my ambition is that we will beat the market growth rate," he told reporters ahead of a briefing for investors.

"Emerging markets today are roughly worth 50 billion pounds ($81 billion). By 2015 this should double and by 2020 you are looking at emerging markets in size being equivalent to the U.S. market and the major five in Europe."

The new middle classes of Asia, Latin America, the Middle East and Africa are luring the world's top pharmaceutical groups as generic competition and disappointing new drug pipelines erode sales growth in the United States and Europe.

Glaxo and others are also eyeing new opportunities in Japan, where a raft of medicines that are already well established in home markets are winning approval and being launched.

Emerging markets, with nine-month sales of 2.1 billion pounds and year-on-year growth of 19 percent, currently make up 13 percent of Glaxo group sales. Japan accounts for some 4 percent.

CHEAPER GENERICS

Healthcare information group IMS Health sees demand for drugs in emerging markets growing by 13 to 15 percent a year in the coming decade, compared with just 1 to 3 pct for mature markets, and Hussain reckons Glaxo can do even better.

But patent-protected drugs -- the mainstay of Big Pharma sales in the West -- can only play be a relatively small part.

The lion's share of sales will come from cheaper generic products, carrying the Glaxo brand as an assurance of quality, as well as vaccines, designed to immunise millions of children against a range of common diseases.

Lower prices in emerging markets mean lower profitability than in Western pharmaceutical markets but Hussain said operating margin levels of around 35 percent were around the group average and would not change significantly in future.

"Going forward, in the mid-30s is probably around where we can expect the margins to remain," he said.

At present, the cost of goods represents around 35 percent of emerging market drug sales and operating expenses about 30 percent.

"The mix will change slightly as we accelerate some of the more aggressive pricing strategies," Hussain said. "But over time as we move out of the investment phase ... our operating expenses as a percent of sales will go down."

Glaxo Chief Executive Andrew Witty told the Reuters Health Summit last month the group's diversification strategy would not have a major impact on overall margins, adding that emerging market research costs were very low compared with developed markets. [ID:nLC573992]

Glaxo shares rose 1 percent by 1430 GMT, outperforming the European drugs sector .SXDP which gained 0.4 percent.

Separately the company said it plans to increase its investment in Britain following a government decision to slash corporation tax for patent-derived income. [ID:nGEE5B91GL]

SEEKING DEALS

Glaxo has taken a lead in striking deals to increase its footprint in key markets, by acquiring branded generics from both Bristol-Myers Squibb (BMY.N) and UCB (UCB.BR), as well as striking product development and distribution deals with South Africa's Aspen Pharmacare and Dr Reddy's (REDY.BO) of India.

But it faces fierce competition from rivals such as Pfizer (PFE.N), Novartis (NOVN.VX) and Sanofi-Aventis (SASY.PA).

Hussain said he would continue to look for new deals in emerging markets but added some company valuations were becoming "unreasonable".

He declined to comment on the possibility of taking an equity stake in Dr Reddy's, as Glaxo has done with Aspen.

People familiar with the situation said earlier this year Glaxo had emerged as a frontrunner for a phased buy-in at Dr Reddy's, India's second-largest drugmaker. [ID:nBOM410702] (Editing by David Holmes) ($1=.6156 Pound)