UPDATE 1-AstraZeneca will be picky in emerging markets

Tue Mar 16, 2010 8:36am EDT

* Emerging markets strategy not dependent on acquisitions

* Branded generics will be capped at 10-15 pct of EM sales

* Reiterates EM sales to be 25 pct of group total in 2014

(Adds graphic, background on strategy, shares)

By Ben Hirschler

LONDON, March 16 (Reuters) - AstraZeneca (AZN.L) expects double-digit growth in emerging markets, the new battleground for Big Pharma as Western drug sales stall, but said it would be much more selective than some of its rivals.

The drugmaker is not planning a wholesale rush to sell branded generics in the developing world. Instead, it plans to focus on around 100 medicines in 30 markets where it can achieve favourable pricing.

"We will be very selective in branded generics," head of global commercial operations Tony Zook told reporters on Tuesday ahead of a briefing for investors.

Cheap off-patent medicines sold in high volumes in emerging markets under a multinational brand name are a growing target for major drugmakers, although some investors worry about the impact on margins of this move down the value chain.

Zook said AstraZeneca's selective approach should limit any margin hit.

AstraZeneca struck its first branded generics supply deal, with India's Torrent Pharmaceuticals (TORP.BO), last week and Zook said other deals could follow, although the group's strategy was not dependent on acquisitions.

Overall, branded generic medicines are expected to account for only 10 to 15 percent of total emerging market sales by 2014.

A key leg of AstraZeneca's strategy will continue to be building sales of products developed in its own laboratories, some of which, like ulcer pill Losec, are off patent but still growing strongly.

Emerging markets are forecast to contribute around 70 percent of pharmaceutical industry growth in the next five years, making them an enticing target.

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For a graphic on emerging market drug sales click on

r.reuters.com/qav93j

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EARLY INVESTOR IN CHINA

AstraZeneca was an early investor in China but, across the piece, it has been less aggressive than rivals in pushing into lower-income markets.

Zook reiterated that the company expected emerging markets to account for 25 percent of group sales by 2014, up from 13 percent, or $4.35 billion, in 2009. Yet rivals such as Sanofi-Aventis (SASY.PA), Novartis (NOVN.VX) and Bayer (BAYGn.DE) are already at around that 25 percent level.

The more selective approach underlines a broader strategic decision by AstraZeneca to stay a "pure play" pharma company while Pfizer (PFE.N), GlaxoSmithKline (GSK.L), Sanofi and Novartis have all embraced diversification.

The cautious approach on generics, in particular, also reflects an acute awareness of margins, since lower prices in emerging markets mean lower profitability than in Western markets.

AstraZeneca has increased its margins in emerging markets to around 72 percent of its level in established markets in 2009, from 55 percent in 2004, and Zook said he didn't see significant variation in margins going forward.

Like other drugmakers, AstraZeneca hopes emerging markets can offset generic competition that will erode sales growth in the United States and Europe. But this is a tall order.

"We think AstraZeneca's sub-scale emerging markets business will do little to alleviate mid-term patent issues," analysts at Collins Stewart, who rate the stock a "sell", said in a note ahead of the investor briefing.

Shares in AstraZeneca were flat in a little changed market for drug stocks .SXDP by midday. (Editing by Dan Lalor and Hans Peters)