Pharmaceutical Companies Rethink Emerging Market Potential

They believe that by virtue of their rapid growth and industrialization, emerging markets, including China, India, Brazil, and Russia, are the ‘happening places in terms of counteracting revenue loss due to the introduction of generic variants, according to recent market research.

However, recent market reports indicate that actual drug sales in these countries could fall short of forecasts as a result of slowing economies, intense local competition, and tight government measures geared at controlling healthcare costs and supporting domestic companies.

GlobalData (London, UK), an international market research firm, believes the recent wave of austerity in Europe could also have contributed to this development as governments are now not willing to pay as much for pills. In some cases, new laws are insisting that companies to validate the effectiveness of their drugs or risk having them cut from the coverage list, or covered at a lower rate. Accordingly, this has a ripple effect on emerging markets as their governments refer to prices set in Europe to determine their own. Analysts believe that as much as a USD 47 billion disparity could exist between what drug makers expect to make in emerging markets, and the actual realizable revenue.

The key pharmaceutical players are increasingly pursuing other options outside of the developed markets for sales growth, according to GlobalData. The maturity of the US drug market, an increase of generic drug sales, and an uncertain regulatory environment have contributed to slower revenue growth from the top 25 pharmaceutical companies, increasing by only 2.6% in 2011 to USD 259 billion. Consequently, large pharmaceutical companies including Pfizer, Merck, Sanofi, and GSK currently depend on emerging markets for a substantial share of their revenue. These markets presently account for about one-third of GSK’s annual sales and the company has declared its intention to double its revenues from China and India within the next five years.

To accomplish this, it has been increasing its sales force in emerging markets and trimming sales teams in developed markets. Pfizer’s emerging-market business yielded USD 2.6 billion in revenues in Q2 2012, up 8% from Q1 2012. GlobalData believes that the recent investments by pharmaceutical companies in mergers, acquisitions, and collaborations with generic manufacturers in emerging markets is an indication of their willingness to focus on “low-hanging fruit” and strengthen their presence in those markets instead of relying on the “high-risk, high-return” epic model. In February 2012, Merck formed a joint venture with Supera Farma Laboratorios, a Brazilian pharmaceutical company, to market, distribute, and sell generic drugs solely in Brazil. In October 2010, Pfizer spent USD 240 million in buying a 40% stake in Brazilian generics manufacturer Laboratorio Teuto Brasileiro. Meanwhile, in April 2009, Sanofi acquired Medley Pharmaceuticals, Brazil’s largest domestic generics manufacturer, for USD 600 million, giving it a 12.0% market share in Brazil at the time.

GlobalData analysts believe that although marketing drugs in emerging markets could potentially be a way to exploit the huge growth potential of countries such as China, India, and Russia, pharmaceutical companies must proceed with caution by considering the present economic climate and being more realistic in their projections. Drug sales in emerging markets are susceptible to policy changes as most hospitals and health insurance are managed by the government. Moreover, it appears doubtful that pharmaceutical companies will be able to meet some of the conditions that have been laid down by countries such as Russia. One such condition is that foreign pharmaceutical companies construct local factories before receiving the government’s approval for sale and reimbursement.

Currently, some of the companies have been reexamining their forecasts and presenting more representative data regarding sales growth. Pfizer recently cut its growth projections in emerging markets to high single digits from the low double digits predicted in early 2011. In a similar development, Eli Lilly has declared that slower growth in China and pricing pressures in certain countries are affecting sales and could have an impact on its goal of doubling 2010 emerging market sales to USD 4.6 billion in 2015. Although China, India, and Russia might be unable to claim having the world’s largest pharmaceutical companies, their economies might yet determine the fate of pharmaceutical companies worldwide.

GlobalData is a global business intelligence provider offering analytics to help clients make better, more informed decisions. The company’s research and analysis is based on the expert knowledge of over 700 business analysts and 25,000 interviews conducted with industry insiders yearly.

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