Embracing Generics and Emerging Markets
Did you know that the average daily cost of drugs dropped by one third between 2005 and 2010? And that Medicare drug spending has come in below predicted levels? Seems like a strange thing in this age of stealth inflation and $200,000-a-year medicines, but the reason is quite simple: We are in freefall off the patent cliff, and the average drug spend for consumers should continue to decline as popular drugs go generic. Prices should decrease by another third through 2015, according to IMS Health estimates.
That’s great news for consumers; maybe not so much for drug companies. But needless to say, they’ve seen this coming for a long time, and they’ve been planning. Plan A--to replace all those off-patent drugs with new innovative blockbusters (or value-added versions of the same products) has met with mixed success at best. Plan B--to make highly targeted, very expensive specialty drugs, often linked to companion diagnostics--is shaping up to be one of the most interesting trends of the next decade. But in the meantime, there’s Plan C, and it’s likely to gain momentum in 2012: The move to emerging markets.
The industry’s embrace of emerging markets gained momentum during the merger mania of 2009, and it’s not likely to slack off this year for a number of reasons. Obviously, these markets--particularly what IMS Health dubbed the 17 “pharmerging” markets (most notably China, Brazil, India, Russia, Turkey, South Korea and Mexico) are a source of new, and increasingly affluent, customers. The easy way to access them--and work through a tangle of regional regulation, patent laws, and more--is to buy local generics companies and manufacturers.
An added benefit is that these acquisitions can magnify the value of other assets. At the recent JP Morgan Healthcare conference, GlaxoSmithKline CFO Simon Dingemans pointed out (hat tip to the In Vivo Blog) how well its 2009 acquisition of Stiefel has worked out. GSK was able to plug Stiefel’s dermatology products, which had limited international distribution, into its own expanding global network and get a lot of new business out of emerging markets that Stiefel by itself was unlikely to tap.
Emerging markets also serve as a way to help companies participate in the surging global generics market. Sanofi, for instance, got the ball rolling in Latin America with its 2009 acquisition of Medley, which made it the number one generics company throughout Mexico and Latin America. Now the company wants more. Fresh from the acquisition of Genzyme, Sanofi CEO Chris Viehbacher recently said he is looking at a potential $2.6 billion in bolt-on acquisitions this year, most likely focused on emerging markets. And German pharma Gruenenthal has just put together a $1.3 billion warchest earmarked specifically for Latin America, particularly the large markets of Brazil and Mexico.
We’ve seen how this focus is shifting company priorities--like fewer jobs in the U.S. and Europe, more in Asia. That too will probably continue, because the opportunities are so large and yet the obstacles so formidable. IMS predicts the pharmaceutical industry sales in emerging markets will total more than $300 billion by 2017. That dwarfs the U.S. market.
Yet it won’t be easy. Consider China, which offers the dual advantages of not only being the world’s fastest growing pharmaceutical market but also being a relatively cheap place to conduct R&D, particularly in preclinical chemistry. That’s attracted contract research organizations to the region--Quintiles continues to expand there (see Career Track), and it has also led major pharma companies to expand their presence. But making the most of this opportunity will require a lot more effort, because even large companies have a hard time reaching their customers. There are over 7,000 drug distributors in China, and the top three account for only 20% of the market. Struggling with those kinds of issues will be taking up a lot of attention from pharma’s top brass. Biotech, meanwhile, can concentrate on those expensive new drugs.
-Karl ThielRead the BioPharm Executive online newsletter January 25, 2012.
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