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

The emerging-markets fix

As European governments restrict spending on healthcare, pharmaceutical manufacturers are increasingly turning to emerging markets to provide the impetus for top-line growth in the coming years. From the standpoint of large multinational pharmaceutical companies, margins and operating profits from emerging markets are typically much lower than those in developed nations. Seventy percent of global spending on generic drugs is expected to come from developing markets by 2015. Off-patent branded generic drugs are popular in developing nations because brand names are associated with quality, which is appealing in markets where domestically manufactured drugs often lack the same level of quality control.

Developing nations, generally speaking, have been enjoying rapid growth rates in gross domestic product and rising levels of disposable income. An increasing number of people in such countries are able to buy goods and services they previously could not afford. Healthcare expenditure, including spending on pharmaceuticals, typically increases with rising standards of living. Furthermore, these populations are now becoming subject to ailments and conditions—such as cardiovascular disease, cancer, and diabetes—that previously have primarily affected those in developed nations.

Emerging markets also yield additional benefits in terms of raw materials and production. Often, developing nations provide opportunities for attractive low labor-cost manufacturing bases. This allows multinational drug makers to establish new manufacturing plants where pharmaceuticals may be sold to other emerging markets, as well as to developed countries.

Figure 1a: Anticipated outsourcing trends by geographic sector in 2012.
Despite positive growth prospects for emerging markets, multinational pharmaceutical manufacturers still face some obstacles. Although significant progress has been made in recent years, protecting intellectual property (IP) rights and enforcing patents remain distinct challenges. Increased pricing and market-access issues will also negatively affect growth in emerging markets.

Figure 1b: Anticipated outsourcing trends by geographic sector in 2012, continued.
Primary research data from Nice Insights' recent Pharmaceutical and Biotechnology Outsourcing survey reveals the desired market when outsourcing 23 services (see Figures 1a–1c). With domestic profitability concerns, established European pharmaceutical companies may look to emerging markets for outsourcing partners or as locations for expansion. Any treatment of emerging markets would be incomplete without a discussion of the EM–7 regions, China, India, Brazil, Russia, South Korea, Mexico, and Turkey. Currently, the most prominent emerging markets include Brazil, China, India, Russia, Turkey, Mexico, and South Korea. These markets are uniform in that per-capita drug consumption is low, and each country's healthcare infrastructure is still evolving, relative to more mature markets. However, each country has its own unique economic, political, and cultural issues that help define its pharmaceutical market. Thus, to succeed in the EM–7, multinational pharmaceutical companies have to adapt differently depending on the distinctive needs of each country.

Figure 1c: Anticipated outsourcing trends by geographic sector in 2012, continued.
Rising per-capita GDP correlates strongly with rising per-capita healthcare. The EM–7 regions are attractive in this regard, as their GDP in aggregate is forecast to nearly triple by 2020. Nice Insight's research provides perspectives on issues associated with partnerships in these markets, and projects the portion of their anticipated spending, as outlined below.


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