Sales growth of branded products has halved since 2001 as patents expire, so pharmaceutical firms aim to recoup from ’pharmerging’ markets, where demand is rising in tandem with GDP.
The argument that margins will be much lower in the developing world is not necessarily true. The emerging economies tend to have significantly higher out-of-pocket healthcare costs than in developed countries, which often have larger welfare and/or insurance provisions in their healthcare systems. Out-of-pocket costs include paying for visiting the doctor for a diagnosis and also for any prescribed treatment. For example, in Brazil and India, out of pocket costs run to 80% and more, but in Britain the proportion is closer to 25%. In addition, the larger economies of India and China have a burgeoning middle class, running into hundreds of millions of people, who have more than enough disposable income to pay for their growing healthcare needs.
The developing world represents more than 80% of the world’s population. This large base is becoming not only highly urbanised, but is also ageing. Over the next two decades, the population aged over 60 in the developing world will grow at more than 3% a year, with numbers forecast to rise from 475m in 2009 to 1.6 billion in 2050. This will result in an increase in the healthcare industry customer base and the amount of the national income spent on healthcare.
Economic prosperity has led to a change in diet and consumption patterns; this has resulted in increased incidences of chronic illness, including cancer, cardiac and respiratory disease and diabetes. Obesity has increased dramatically in the developing world. The World Health Organisation estimates that the global diabetes population will grow to 330m by 2025, compared with only 30m in 1985, with most of the patients coming from the developing world. Chronic diseases that are manageable with long-term treatment represent the biggest opportunity for pharmaceuticals companies in emerging markets.
The growing importance of emerging markets has brought ethical issues such as affordable healthcare and access to medicine to the fore. Ecclesiastical is a signatory to the Access to Medicine Index, a global initiative to encourage companies to put ethics at the heart of their work in the emerging markets. The western pharmaceutical companies that strive to fulfill ethical criteria take steps to reduce the prices of patented medicines in less developed countries and tackle neglected diseases.
The scramble for these new markets has been led by European companies. Sanofi-Aventis has spearheaded the initiative with pharmaceutical sales of more than 20% from emerging markets in 2009. GlaxoSmithKline and AstraZeneca have prominent positions in India and China respectively, with both British-based companies generating 13% of pharmaceutical sales from emerging markets.
In contrast American companies have been slower, with only Pfizer and Merck managing to post sales of over 10% in emerging markets. The long-term future of the western pharmaceutical companies is dependent on developing a long-term strategy to maximise market share and investment returns in emerging markets.
Slowed growth in the traditionally lucrative western markets has been the key driver for the pharmaceutical industry’s new focus. So, with western growth potential limited with challenges from patent expiration, generic competition and reduced national healthcare spend in the near term, emerging markets look significantly more attractive, particularly from an ethical investing standpoint.