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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.
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.
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.
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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.
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.
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.
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 1a: Anticipated outsourcing trends by geographic sector in 2012.
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 1b: 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.
Figure 1c: Anticipated outsourcing trends by geographic sector in 2012, continued.
According to IMS, with projected drug sales increasing over 25% in 2011 to close to $50 billion, China is expected to be the world's third largest pharmaceutical market in 2011, after the US and Japan. The Chinese pharmaceutical industry primarily comprises an increasing number of manufacturers of low-cost generic products. The increase in research and development capacity is directly offset by the government's failure to implement and enforce fully internationally compliant patent laws. Presently, local producers lack any real capacity to innovate, although joint ventures and partnerships with foreign players are likely to reverse this trend. Realizing the economic and social benefits of pharmaceuticals, China is embraced by drugmakers from abroad and encourages local manufacturing and R&D by foreign firms.
The Brazilian pharmaceutical market has continued to grow at a rapid rate in recent years, fueled by a strong overall economy. Brazil's pharmaceutical market was valued at $25.8 billion in 2011, and there are more than 300 pharmaceutical companies in operation—of which an estimated one-fifth are multinationals. However, given their larger size and capabilities, multinational companies are estimated to account for 75% of the entire market. In recent years, the government has moved to align the drug regulatory environment with international standards, including significant IP reforms. The local biotechnology industry is also developing rapidly, presenting a number of opportunities for international players.
Although the number of manufacturing facilities has more than doubled over the past five years, the country is plagued by a weak labor market and has a strong dependence on imports of active pharmaceutical ingredients. Unless periphery industries step up investment in skilled labor and local production of raw materials, Brazil's drug industry will be unable to meet domestic needs, let alone meet export demand and become self-sustaining. The shortage derives from a lack of technical schools catering to the pharmaceutical market, with just one such school—the Institute of Science, Technology, and Industrial Quality—currently in existence. However, Brazil launched a major 10-year biotechnology initiative in 2007 that provides incentives for private sector R&D and production. Clinical trials opportunities also abound, as a number of contract research organizations (CROs) expand their capacity for Latin American trials.
The Russian pharmaceutical market is projected to expand 12.1%, to about $20.1 billion in 2011. A small number of strong domestic players are emerging, amid signs of consolidation in the manufacturing sector, with growing domestic and cross-border mergers and acquisitions activity. New legislation imposes a domestic clinical trials requirement, potentially imposing significant new costs for drug registration. The government's drug pricing, reimbursement, and purchasing policies are complex and opaque—including a history of sudden changes in policy without consultation with manufacturers. Domestic patent law also remains well below international standards, and enforcement is especially weak with little recent progress on the ground.
India is home to a reasonably advanced native pharmaceutical sector, albeit one specializing in generic drugs. The Indian pharmaceutical industry accounts for about 10% of the world's total pharmaceutical output. India's market is expected to reach $67.1 billion in 2011, and comprises domestic pharmaceutical manufacturers (primarily research-based companies with international links) organized under the Organization of Pharmaceutical Producers of India (OPPI), and foreign players operating from abroad. Local producers supply more than 70% of the market for bulk drugs, intermediates, formulations, capsules, and injectables. A large and cheap labor force, low production and R&D costs, and a strong balance of trade guarantee high output. Internal resources and international connections also make India one of the regional leaders in biotechnology.
Drug manufacturing is one of the relatively few industries in India open to 100% foreign ownership. They will continue to encourage international interest in the local market, which is increasing with the growing population and economic improvements. However, foreign interest will be a challenge to local players, especially in the face of rising scrutiny of IP and manufacturing quality standards. Western pharmaceutical companies have also been establishing their own manufacturing facilities in India, as the cost of setting up and operating such facilities is a fraction of that in the west.
The decline of the Mexican pharmaceutical market can be attributed to competition from low-cost Asian producers, high investment costs, weak product development, and a lack of intermediate materials. The manufacturing sector is highly dependent on imported raw materials and active pharmaceutical ingredients—approximately 30% of exports are in a semi-finished form. A growing number of manufacturing firms are currently opting to pursue bioequivalent generic drugs. Even manufacturers who have opposed tougher bioequivalence requirements now see legitimate generic drugs as the only way to secure market position domestically in the long term. Despite recent reforms, the enforcement of domestic patent law remains problematic and continued failure to enforce these laws may limit both investment and product launches by multinationals.
South Korea boasts approximately 250 pharmaceutical manufacturers, including 47 multinationals, which operate either independently or under a joint venture. However, the rise of China and India as more financially viable regional manufacturing bases has led to the closure of a number of internationally operated production facilities. Foreign companies are instead shifting their focus to R&D in the face of difficulties experienced in Japan. Failure by the government to align domestic patent law with international standards, with particular concern surrounding illegal copying and the enforcement of existing legislation, is proving detrimental to investment. However, South Korea recently signed a free trade agreement with the US to improve the intellectual property environment and trade regimes between the two countries. In effort to lure foreign investment and potentially boost the biotech sector, an international stem-cell research agency was recently established in Seoul.
The Turkish pharmaceutical industry still lacks capital investment and subsequently has minimal R&D capabilities. Foreign investors are free to repatriate their profits outside Turkey as an incentive—subject to certain limited restrictions—and to acquire immovable property or rights in Turkey. As a result, a number of major developers have chosen to make Turkey a production base for pharmaceuticals serving the Middle East, Asia, and Eastern Europe (especially given the possibility of EU accession on the cards in the medium term). Among the 49 manufacturing facilities in the country, multinational firms own 13. The availability of a skilled workforce keeps improving but domestic patenting law is below international standards, with the protection of confidential test data and counterfeiting being key concerns.
The EM–7 region, while still a comparatively minor contributor to overall global drug sales for most global pharmaceutical companies, will likely grow in size and importance over time. In light of the primarily positive macro growth indicators across all the profiled EM–7 pharmaceutical markets, there will likely be heightened negotiations for partnerships between global pharmaceutical companies and locally based CMOs and CROs. Although European drug companies are showing more interest in these partnership opportunities, the US is not far behind. The key to ongoing success for the pharmaceutical industry in emerging markets remains the improvement of R&D productivity to a point where the discovery of new, meaningful products that can serve remaining unmet medical needs become a reality. Products like these could then see sustainable demand in both established and emerging markets alike.
Victor Coker is director of business intelligence at That's Nice, LLC, New York, NY, firstname.lastname@example.org