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pharmafile | March 25, 2008 | News story | Sales and Marketing |Â Â emÂ
Faced with dwindling growth rates in the US and Europe, drug companies are turning their attention towards emerging pharmaceutical markets where recent economic booms have fuelled double-digit growth. However, although the patient potential of these countries is enormous, foreign pharmaceutical companies are currently tapping into only a fraction of the market.
Poor access to drugs in countries like India and China, and to an extent in Russia, Brazil and Turkey limits the potential market available to pharmaceutical groups. Nevertheless, many companies are keen to get a foothold as the purchasing power of the booming middle class is rising, driving market growth. Governments are improving public provision of healthcare, and more individuals can pay for drugs out of pocket, so the largest companies are ready to profit, compensating for lower growth in mature markets.
Double-digit rates of growth
With slowing growth rates in western pharmaceutical markets, the fast growing emerging markets may be necessary as new sustainable sources of revenue growth. Some of the countries that have attracted the most attention are Brazil, Russia, India, China and Turkey. Although the current pharmaceutical market values in these countries are not impressive compared to more mature markets, most are experiencing tremendous growth rates compared to the modest 4-6% growth seen in the US and Europe.
The Brazilian retail pharmaceutical market was worth $8.4 billion in 2006 and growing at a rate of 24%. Russian market research company Pharmexpert puts the value of the Russian pharmaceutical market at $10.7 billion in 2006, noting a record 27% growth from 2005. China and India both grew at 15%, bringing the hospital market value in China to $10.7 billion, compared to India's retail market sales of $5.5 billion. Turkey's total market value in 2006 was $7.3 billion with 5% annual growth.
Large populations and growing economies
Although the Russian market has demonstrated tremendous growth over the last few years, and Brazil and Turkey's healthcare systems are more mature, it is China and India that have attracted the most interest from drug companies. The key attraction of India and China is obvious; their huge populations. Even if only a fraction of the population has access to modern drugs, that group still represents a sizeable number of consumers.
The increase in the elderly population, compounded with an increasingly westernized lifestyle, is also resulting in epidemiological trends in emerging market countries becoming more similar to the major markets. A shift in therapeutic focus is evident as sales of anti-infectives, which traditionally dominate emerging markets, are slowing down. These are being overtaken by drugs targeting the nervous system, and cardiovascular, gastro-intestinal and metabolic diseases such as diabetes. Although sales of oncology drugs are still low compared to the major pharmaceutical markets, they are growing at a fast rate.
Recent rapid economic growth seen in the emerging market countries is one of the key drivers of the growth of their pharmaceutical markets. Growing disposable income, particularly of the new middle class, and the resulting increase in out-of-pocket expenditure on drugs, combined with the investment into public health provision seen in some countries, is resulting in increased drug consumption. Modern western drugs have seen particularly strong sales growth. However, these markets are vulnerable to any downturn in the economy: China's economy's over-reliance on exports to the US makes it vulnerable to economic turmoil in the west, while Russia's economy is over-reliant on the natural resources industry, making it vulnerable to fluctuations in oil and gas prices.
On the other hand, India's booming middle class, created by the growth of the services industry, accounts for only a tiny proportion of the total population and still has significant growth potential. However, the country's poor infrastructure may limit future growth.
Insufficient IP protection and low public funding
Despite the passing of the Patent Act of 2005, recognizing product and not only process patents for pharmaceuticals, India has failed to deliver on its initial promise of improved intellectual property protection. Since the Patent Act was passed patent applications for Eli Lilly's Forteo (teriparatide), Novartis's Glivec (imatinib) and AstraZeneca's Iressa (gefitinib) were rejected mostly on the grounds of prior known use, or incremental innovation that is not recognized in India. Despite Novartis's appeal to the Chennai High Court the initial decision was upheld. Multinational pharma companies active in India are now reconsidering their portfolio of marketed drugs and may decide to focus on more mature products. In view of the court's decision on Glivec, there is concern that the trend for rejecting the patents of life-saving drugs may continue.
However, in December 2007 Pfizer's HIV/AIDS drug Celzentry (maraviroc) became the first known HIV/AIDS drug to get a patent in India. Although this event may signal a change in the tide for patent protection in India, post-grant opposition from local manufacturers and patient groups could still result in the decision being overturned.
China also failed to improve its IP laws and, in a move that surprised the industry, Brazil issued a compulsory license for Merck's HIV/AIDS drug Sustiva (efavirenz) in May 2007. Thailand has also issued a line of compulsory licenses and should this trend continue in other countries, or expand beyond HIV/AIDS drugs, it may seriously undermine the position of foreign pharma.
Another major obstacle to the higher uptake of branded drugs in emerging markets is poor access to pharmaceuticals through public health provision. However, as their economies strengthen, many of these countries are investing in improving access and quality of healthcare to their citizens: Turkey, Brazil, Russia and China have all made steps to improve access to healthcare services through public systems. The potential impact of increased public healthcare spending on the uptake of drugs produced by global pharma is twofold. First of all, increased access to healthcare facilities means the population is more likely to receive prescriptions and purchase drugs. Added to this, patients will have wider access to drugs through expanded reimbursement on the public health systems.
A clear example of how expansion of the reimbursement system can influence market growth can be seen in Russia. The introduction of the federal reimbursement system (the DLO) has fuelled rapid market growth, reaching double digits in 2005 and 2006. However, sustainability of such systems is key; poor planning and high demand are threatening the future of the DLO.
Price controls threaten potential
A major challenge for pharma operating in emerging markets is tight drug price controls. In 2004, Turkey introduced a reference pricing system that resulted in it having lower drug prices than any other European country, and this has impacted market growth negatively. Other countries, such as Brazil and India, also have different mechanisms for price controls that may be expanded in the future.
China is implementing a strategy of price cuts on reimbursable drugs. This practice is leaving global pharma with a choice of opting out of price cuts, thereby losing the reimbursable status that would reduce their market penetration, or sticking to their reimbursable status with lower margins, and hoping that the pricing environment will improve and that drug consumption will grow. Russia is an exception, with virtually free drug pricing. Consequently drug prices in Russia are among the highest in Europe, however, this may change in the future if the recently introduced reimbursement system becomes unable to cope with growing demand.
Although tight drug price controls and poor IP protection threaten the potential of many emerging markets, global pharma is becoming increasingly active in these countries as the potential for higher healthcare spending in the future is outweighing any potential setbacks.
In addition, the preference for foreign brands exhibited by the rising middle class in many emerging market countries, especially in India and China, is translated into healthcare, thus enabling branded companies to compete with generics in certain market segments. Therefore, emerging markets present new opportunities for mature drugs whose sales are declining in major western markets, which is a highly attractive option, especially at a time when many drugs are on the verge of patent expiry.
Related research:
Emerging markets series: Benchmarking key countries Brazil, Russia, India, China and Turkey
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