Emerging Market for Pharma

by Tony D'Altorio

Emerging Markets for Pharma

by Tony D'Altorio, Investment U Research

August 25, 2009

The shape of the global market for pharmaceuticals is undergoing a rapid change.

As recently as 2006, more than half of the market growth was in the United States. This data comes from IMS Health, a consultancy that is a leading provider of pharmaceutical trends.

However, the necessity for the pharmaceutical industry to develop new markets is urgent. The latest forecasts from IMS Health suggests that global sales in the industry will grow by just 2.5 – 3.5 percent this year, the smallest expansion it has ever recorded. The United States – which still accounts for two-fifths of all revenues – will decline by 1-2 percent.

Many large pharma companies are now realizing that a lot of future growth is likely to occur outside of what used to be their core markets. Recent months have seen ambitious geographical diversification plans adopted by a number of pharmaceutical companies. These plans aim to boost sales, mainly in the emerging world.

This is a new strategy put into place by many pharmaceutical companies. We will take a look at the state of the global pharmaceutical industry and how this new trend of diversifying into emerging markets may lead to profits for investors in these companies.

The “Pharmerging” Markets

The figures from IMS Health did highlight one source of optimism for pharmaceutical companies: The seven countries IMS Health calls the “pharmerging countries”… China, Brazil, India, Russia, Turkey, South Korea and Mexico.

The potential for the pharma companies to increase their revenues is enormous, as these seven markets represent about 45 percent of the world's population. And there are a half billion people living in these seven “pharemerging markets” that can afford Western medicine.

Sales in the “pharmerging markets” will expand by 13-14 percent in 2009. This will account for 52 percent of all global growth in pharmaceutical sales. In 2006, only 12 percent of the growth in global pharmaceutical sales came from these countries. These countries currently account for only 12 percent of the global dollar value of the pharma industry (About $80 billion), but that still represents a significant shift in market dynamics.

Despite the current economic crisis, these “pharmerging markets” are expected to continue growing. IMS forecasts similar growth trends over the coming five years as rising incomes and expanding health insurance coverage combine with increasing demand for top-shelf medical treatments.

One of the main factors that will be driving this growth is government policy. One of the most notable government actions is the recent Chinese commitment to invest $123 billion in reforms that will improve healthcare provision for its 1.3 billion citizens. In 2008, China's pharmaceutical market was only around $20 billion, less than one-tenth the size of the Western market.

China is now the fastest growing market for pharmaceuticals, expanding at 20% a year.  With the reforms now taking place in China, IMS predicts that by 2013, China will be the third largest pharmaceutical market worldwide in value terms; up from ninth in 2003. China is expected to be the largest pharmaceutical market by 2050.

And that's just China. IMS estimates the pharmaceutical industry sales in emerging markets will total more than $300 billion by 2017. That's the same size as the American market and the top five European markets.

The Challenges Pharma Companies Face

European pharmaceutical companies have a head start in the “pharmerging markets” over their rivals in the United States. Bayer, for example, has been operating in China since the late 19th century. GlaxoSmithKline CEO Andrew Witty spoke about the “pharmerging markets” and said, “It's all about demographics and the economic rise of the middle class.”

American companies have lagged so far in the move toward “pharmerging markets,” because while there was robust growth in the United States market, many US pharmaceutical companies simply did not bother to look for opportunities outside the American market. It is now the companies that are the most dependent on the pharmaceutical market in the United States that are in trouble.

The main problem pharmaceutical companies will face is that emerging markets are complex and different, both from the established markets and each from the other. A strategy that works in China will not work well in Brazil or India. Sanofi-Aventis CEO Chris Viehbacher spoke about this problem, “Emerging markets tend to get lumped together, but each has a different profile.”

Different companies have adopted different strategies for investment. Some have preferred to assert full control of manufacturing by opening new factories and taking control of local drug manufacturers. Others have opted to share the risks by taking minority stakes in local drug companies and entering into partnerships that split the revenues with local operators.

Whatever method is used, the key will be to develop long-term relationships and local managerial talent. The challenge facing the pharmaceutical companies will be to pick the right products and the right strategy for the right market.

Pharma Stocks in Pharmerging Markets

The challenge facing investors will be to pick the right pharmaceutical companies that have a solid strategy for future growth in the “pharmerging markets.”

As stated earlier, most American companies are lagging behind their counterparts around the world. Many of the overseas pharmaceutical companies are investing heavily into the “pharmerging markets” and pay a decent dividend to boot. Some of the major global pharma companies that trade here in the United States and are worth looking at include:

AstraZeneca ADR (NYSE: AZN), GlaxoSmithKline ADR (NYSE: GSK), Novartis ADR (NYSE: NVS), Sanofi-Aventis ADR (NYSE: SNY), and Teva Pharmaceutical ADR (NASDAQ: TEVA), the top global generic-drug company. Roche ADR (OTC: RHHBY), the owner of Genentech, Bayer ADR (OTC: BAYRY), and Daiichi Sankyo ADR (OTC: DSKYY) trade over-the counter and should not be excluded because of that.

Good investing,

Tony D'Altorio

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