Summit News

Analysis: Drug industry doses up on emerging markets

NEW YORK (Reuters) - Big Pharma’s drive into emerging markets could make drugmakers look a lot more like consumer goods companies in future. That may be no bad thing.

Emerging markets are the new battleground for pharmaceutical companies as sales stall in Western markets, but the focus on volume makes them a very different business proposition to premium-priced markets in the United States and Europe.

Kris Jenner, who runs the T. Rowe Price Health Sciences Fund, believes it gives drugmakers the opportunity to build steady, long-term revenue streams more normally associated with fast-moving consumer goods companies.

After the massive de-rating of the drugs sector in recent years, that is nothing to sniff at.

"The value that the market places on the earnings stream of Procter & Gamble PG.N is substantially greater than that it places on Merck or Pfizer," Jenner said at the Reuters Health Summit in New York this week.

Pfizer Inc PFE.N and Merck & Co MRK.N are both trading below 10 times 2011 earnings, at a discount to P&G at more than 16 times.

Tapping into the healthcare needs of billions of new consumers in places like China, India, Brazil, Russia and the Middle East is challenging, however.


“Making money in these markets is not easy,” said Murray Aitken, senior vice president at pharmaceutical market information company IMS Health. “They’re mostly dominated by domestic companies that are well-established, well-entrenched and well-connected.”

One way to get a firmer foothold is to go out and buy the local incumbents -- hence the recent rash of deals by Western drug firms to acquire established businesses.

In one of the largest such deals, Abbott Laboratories Inc ABT.N paid a hefty $3.7 billion in May for the branded generic drugs operations of India's Piramal Healthcare PIRA.BO, after beating competition from Western rivals to the asset.

Some companies, including GlaxoSmithKline Plc GSK.L, reckon the rush into emerging markets has driven up asset prices too far and too fast in some places, particularly China and India.

As a result, Glaxo is now more likely to make acquisitions outside the so-called BRIC nations of Brazil, Russia, India and China, Chief Strategy Officer David Redfern said.


IMS forecasts that 17 key emerging markets will account for around 50 percent of global growth in pharmaceutical sales worldwide over the next five years, making them an irresistible target for Western manufacturers.

Next year alone, these markets are expected to grow by between 15 and 17 percent to $170 billion to $180 billion.

"We're getting 15 percent growth out of emerging markets, while the U.S. is ex-growth, and we're moving resources around to make sure we can take advantage of that," AstraZeneca Plc AZN.L Chief Executive David Brennan told the Summit.

China, the biggest prize, is set to overtake Japan as the world’s second-biggest pharmaceuticals market after the United States in 2015, IMS market guru Aitken told the meeting. But he warned drugmakers should not bank on just one country for success.

Recent policy shifts in both Russia and Turkey, which hit prices and access to medicines, underscored the potential dangers of overexposure to a single market, he said.

“Companies that are focused on one or two or three or four emerging markets are going to be hit by volatility,” Aitken said. “We would suggest a portfolio of markets.”

So far, European drugmakers like Bayer AG BAYGn.DE, the inventor of Aspirin, Sanofi-Aventis SA SASY.PA, Glaxo and AstraZeneca have done best in emerging markets, largely reflecting their long histories in these countries. But U.S. players, such as Pfizer and Abbott, are catching up fast.


Glaxo's Redfern and Novo Nordisk NOVOb.CO Chief Executive Lars Sorensen both said success in emerging markets hinged on addressing as many income levels as possible.

For Novo, that means a wide range of products and price points for different types of insulin. Glaxo, meanwhile, offers everything from modern cancer drugs to single tablets of Panadol in its top developing world market of India.

It boils down to striking the right balance between volume and price, which T. Rowe Price’s Jenner believes companies can do without destroying margins.

“The price points of their medicines are lower, but the volumes that they potentially stand to sell are higher and the operating costs to sell and distribute those medicines are lower,” he said.

Writing by Katie Reid and Ben Hirschler, editing by Matthew Lewis