Outsourcing to Emerging Markets: The Effect of the European Economic Crisis - Pharmaceutical Technology

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Outsourcing to Emerging Markets: The Effect of the European Economic Crisis
Each developing economy has unique economic, political, and cultural issues that help define its pharmaceutical market. To succeed, multinational pharmaceutical companies will have to adapt differently.


Pharmaceutical Technology
Volume 36, Issue 2, pp. s34-s42

With Europe's economic troubles causing domestic profitability concerns, established pharmaceutical companies may look to emerging markets for outsourcing partners. Each developing economy has unique economic, political, and cultural issues that help define its pharmaceutical market. To succeed, multinational pharmaceutical companies will have to adapt differently depending on the distinctive needs of each country.


STEVE ALLEN/GETTY IMAGES
Global macroeconomic trends will continue to affect the pharmaceutical and biotechnology outsourcing sector for the foreseeable future. Beginning in the second half of 2009, uncertainty developed among investors concerning the rising government debt levels across the globe followed by a series of downgraded government bonds of certain European states. During the past three years, affected governments have proposed austerity measures (e.g., higher taxes and lower expenses). Consequently, many investors moved their portfolios to safer markets such as Germany and Switzerland. By the end of 2011, Germany was estimated to have made more than €9 billion (approximately US $13.8 billion) out of the crisis while Switzerland also benefited from a substantial influx of foreign capital. In October 2011, the 17 member countries of the Eurozone agreed on intergovernmental measures aimed at preventing the collapse of member economies.

Austerity pricing

Constrained by compressed government budgets and sovereign debt issues, many European countries have imposed reductions in pharmaceutical pricing. Most of the pricing cuts have been in the 4–5% range, with deeper reductions generally seen in countries with sovereign debt issues or serious budgetary problems. France announced plans to reduce its 2011 pharmaceutical budget by close to $700 million, while simultaneously curtailing tax incentives for orphan-designated drugs. Another noteworthy announcement is a program in Greece designed to save more than $2.5 billion by reducing drug prices by at least 20%. Italy aims to achieve close to $2 billion in savings through price reductions and tightened consumption. As a result, the aggregate growth has been weak for the top five European pharmaceutical markets, rising approximately 2–3% in 2011.

Price cuts

At the micro level, deficit-led pricing pressures have had a considerable effect on financial performance for many companies that rely heavily on revenues from European pharmaceutical markets. The collective impact involves a complex matrix of price-erosion mechanisms, ranging from price reductions across the market, to pricing restrictions in certain countries. The effects of these mechanisms on company revenues, earnings and valuations have not yet fully manifested. Regardless of the massive slowdown, developed markets continue to provide core revenue streams for major pharmaceutical companies. The key to maintaining revenues involves strengthening late-stage pipelines through innovation.


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