Big Pharma’s Emerging Markets Foray Hits Roadblocks

Scrutinized business practices are playing a role

   

Big Pharma’s Emerging Markets Foray Hits Roadblocks

Large pharmaceutical companies have been touting the opportunities in emerging markets as the cure to offset the slower growth in Western countries, where the big drugmakers are losing patent protection on many of their blockbuster drugs. The loss of marketing exclusivity has been compounded by the well-publicized budget pressures in European countries, where governments are cutting the prices they’re willing to pay for medications.

But the heavyweights of the drug business are discovering that conquering the pharmaceutical markets in countries such as China, Russia, Brazil and Turkey isn’t easy. Just look at the results recently reported by several companies. For instance, AstraZeneca (NYSE:AZN) saw emerging market sales growth drop to 7% in the third quarter from 10% the second and 13% in the first, hit by an upset in Brazil, where generics have arrived early for key drugs Crestor and Seroquel.

And GlaxoSmithKline (NYSE:GSK) has seen its prices squeezed in Turkey and Russia, although company CEO Andrew Witty told Retuers that he remains an “extreme bull” on emerging markets. “This is a very fast-growing volume environment … (but) they are not immune from pressure,” he added.

Those pressures are coming from governments that also seek to limit spending on medications, as well as heightened scrutiny of company business practices. For instance, the U.S. Justice Department has mounted an investigation under the Foreign Corrupt Practices Act to see if drugmakers are offering overseas bribes, and Britain, too, has a new Bribery Act that covers overseas payments in a similar way.

In April, Johnson & Johnson (NYSE:JNJ) paid $70 million to settle U.S. charges that it paid bribes and kickbacks to win business in Greece, Iraq, Poland and Romania, in the first such settlement by a big drug company. AstraZeneca also is being investigated for its conduct in several countries.

Despite the obstacles, it’s clear why Big Pharma is stepping up efforts in the emerging markets. By 2015, sales in these countries are expected to account for 28% of global pharmaceuticals spending, up from 12% in 2005, while the U.S. and Europe combined will shrink to 44% from 61%, according to IMS Health.

The majority of sales in emerging markets come from so-called branded generics — off-patent medicines that cost more than those made by local companies. People are willing to pay more for these drugs because they are perceived to be of higher quality than those made by local companies.

This strategy of relying on brand names as trusted products won’t go on much longer, according to Tim Race, an industry analyst at Deutsche Bank. “It works in some markets where you’ve got pretty shoddy regulation,” Race told Reuters.  “But the Chinese and Brazilians and others are quite quickly coming online with better regulation, creating better trust in local products.”

It’s clear, however, that long-term emerging markets represent a bonanza for drug companies. That’s because one of the downsides of economic growth is an increase in disease prevalence due to people living longer and lifestyle changes. Consider China – in that country alone, 92 million people have diabetes and 148 million have pre-diabetes, according to the New England Journal of Medicine. China also has 100 million people suffering from hypertension, and the country’s lung cancer rates are among the highest in the world.

 


Article printed from InvestorPlace Media, http://investorplace.com/2011/11/big-pharmas-emerging-markets-foray-hits-roadblocks/.

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