Some 40 years ago, Jim Morrison of The Doors sang that 'the future's uncertain and the end is always near.' Such a bleak philosophy may not apply to the pharmaceutical industry, but global drugmakers do have their challenges, as a new report from KPMG, which makes clear that emerging markets will certainly be a growth driver, but the not the automatic salve that some suggest.
For instance, last year, the so-called emerging markets generated $154 billion in revenue, or 18 percent of global sales and that's forecast to hit $487 billion, or 37 percent of total global sales by 2020. Meanwhile, emerging markets comprised 12 percent of global pe-R&D operating profit last year and forecast to reach 30 percent by 2020.
And as IMS Health as noted previously, the combined share of prescription drug spending in the US and Europe will shrink from 61 percent in 2005 to 44 percent by 2015. At the same time, spending in the emerging markets will grow from 12 percent in 2005 to 28 percent by 2015. And aggregate emerging market revenue is forecast to grow at a compound 14 percent rate between 2010 and 2015.
But at the same time, pre-operating margins from emerging markets are expected to amount to 35 percent by 2020, compared with 60 percent in the US. The upshot? Even as emerging markets grow larger and faster, global profits will come under pressure. The overall pre-R&D industry operating margin could decline from an estimated 48 percent last year to 43 percent by 2020, KPMG writes.
"The importance of emerging markets and the pressure on margins," KPMG continues, "merits a wholesale review of the marketing and sales investment in both growth markets and those in decline, the personnel talent required to manage these businesses and above all the R&D portfolio being developed to supply appropriate products that payors will fund in these different markets over the next 10 years."
So what to do? One suggestion is for pharma to "stay close" to government thinking in emerging markets. Even though consumers pay outright for prescriptions, KPMG notes, governments often influence the prices that are paid. At the same time, the consultants advise that pharma should continue investing in 'local' R&D and manufacturing facilities to cement relationships and access, but not necessarily bulk up the sales force as was done in the US.
There is another concern, however. The KPMG report also note that emerging market governments are trying to increase consumer spending on meds, but this means that the 'established' strategy of relying on branded generics "could run out of steam as generics become commoditized. This suggests that every possible opportunity to drive consumer/OTC business" in these markets should be explored.
An example cited is China, where branded generics sell for higher prices than local equivalents, which are limited to a lower maximum price. But KMPG points out that a new price list was issued late last year that reduced the differential, known as separate pricing, on nearly 50 of the 200 drugs on the Essential Drug List. And separate pricing may be reduced or eliminated in the next few years.
In the end, "the dominance of emerging market economies by 2020 could result in a shift back to volume growth as a key measure of performance, with earnings growth following," KPMG concludes. "Improving efficiency is the right strategy, but until it is accompanied by sustainable revenue growth it is not likely to see the industry‘s valuation expand, all other factors in the stock market being equal" (here is the KPMG report).
13 Comments
McKesson is the future of non-health healthcare in USA and pharma is feeding their profit loop....
http://money.msn.com/investing/americas-highest-paid-ceos?cp-documentid=6866482
What's being missed is that most of the emerging market countries have either price controls or single-payer systems in place. Big Pharma will have a tough time gaming the system unless it resorts to some very brazen corruption tactics.
Cases in point would be Mexico and Brazil, where meds are bought by government tender; gaming those tenders might be possible, but to my knowledge, not without corruption (paying for a peek at other bids, colluding with other competitors).
The prevailing thinking in Chinese pharma is that foreign companies are only going to be allowed to make as much money as Sinopharm is willing to let them make.
Ed, thanks for the tribute to Mr Mojo Risin. My 2 cents:
Ode from Mr. Big Pharma to American public:
"When the Music's over; When the music's over; When the music's over, turn out the lights."
Ode from American public to my evil Big Pharma brothers and sisters:
"Cancel my subscription to the Resurrection; Send my credentials to the House of Detention; I've got some friends inside."
Pharma is fooling itself if it believes "emerging markets" will solve their problems. The US and western Europe are pinched financially - that will dry up funding and slush funds to "emerging markets." And most of these markets take delivery of 1-3 batches of a product per year. And it takes every bit of effort to build that miniscule effect on supply chain as it does for a major player. These regulatory agencies are bit players who just wrestle with industry (have this CoA signed by multiple inconsequential figures in different color inks...). They take FOREVER to take actions on submissions, develop regulations and guidance in opaque conditions (make it harder to get approvals so you pay more fees) and require sponsors to often build new testing labs as a hidden tax on doing business in these third world locations. It would take literally dozens and dozens of these new markets to even come close to the revenue stream from an older $150 million established product at the end of its lifecycle at one of the top 15 pharmas in the US or Europe. This is supposed to be the way out for pharma...?
Ironic that you start with a quote from Jim Morrison, whose father commanded the fleet during the Gulf of Tonkin incident that led to the escalation of the Vietnam War, and now I wonder if Vietnam is one of the emerging nations referred.
What will save Pharma is becoming more efficient at drug development. Form 2005 to 2009 were an awful performance in terms of drug evelopment, with only about two drugs per year attaining blockbuster status, and half of those based on an established mechanism of action. Not a long term viable model, when most "me too" drugs are gaining trivial sales, here and internationally. But 2010 to 2011 are revealing signs of improvement in drug development, with novel products in multiple sclerosis, hepatitis C, osteoporosis, prostate cancer, melanoma, lupus, and others. It remains to be seen whether this success is an anomaly or a sign of stable improvement in drug development. The problem for the industry is that one $100,000 per year product is easily absorbed by the current system, but if the industry has really become more successful, this approach of "The Tragedies of the Commons" in terms of pricing is not viable, as, for example, if 8 or more novel drugs are priced annually at $100,000 or more each.
Emerging Markets are the new Wild West for Big Pharma from a sales perspective. Compared to the 3-4 major distributors in the US, there are about 5000 distribution channels in China. Look for bribes, payola, all the goodies to get the drugs into the right (or wrong) hands. The operative strategy will be "money talks, all else walks".
Good point on the morass of distro channels in China. I'd really like to see anybody try to sell anything all over China without involving less than 50 separate distributors.
Andrew Witty @GSK just recently talked about the need for global Pharma to implement lean management as part of the cure for R&D productivity. It seems like one of the secondary/meta advantages of emerging markets might be that companies can "get it right" from early on rather than having to reengineer as they seemed forced to do in the traditional markets. Not just for R&D, but also market access, marketing, sales, medical affairs, etc.
@Gorkin, " But 2010 to 2011 are revealing signs of improvement in drug development, with novel products in multiple sclerosis, hepatitis C, osteoporosis, prostate cancer, melanoma, lupus, and others. It remains to be seen whether this success is an anomaly or a sign of stable improvement in drug development."
It should be KNOWN, scientifically, whether the success is an anomaly or a sign of stable improvement in drug development!
If this is not KNOWN, then the drug should not be out there - approved and ready for consumption.
There is a high degree of anxiety among scientists - the multidisciplinary group of experts that USED to be involved in bringing a drug to market 30-40 years ago in big pharma - that the *novel products* have a development history that includes *science* that is being confirmed as being completely bogus made up stuff - see the site link that was referenced before on this site:
http://retractionwatch.wordpress.com/
Interesting that none of the 10 retracted papers described on the Retraction Watch homepage originated from pharma.
Oh, the den of iniquity known as Academia!
Prescription Drugs have robbed far too many people of their dignity and lives. Big Pharma is the REAL drug cartel in North America. Their overmedicating of the American public through obscene advertising leads to nearly 100,000 deaths per year! Prescription drugs are more dangerous than any felony drug substance in the world including heroin, cocaine and even alcohol combined. Read about this issue and what’s killing people at http://dregstudiosart.blogspot.com/2011/07/illustration-friday-800-milligrams.html
Brandt, the oft-quoted (and mis-used) estimate of 100,000 deaths per year from prescription drug adverse events is a gross number, not net.
Accidental insulin overdose, for example, is one of the most common types of drug-related hospitalization and death. A type 1 diabetic who dies of an insulin overdose at age 50 instead of dying of his underlying disease at age 14 is hardly an indictment of insulin as "more dangerous than heroin".,,
If you're alive today and over age 50, there's a pretty good chance that the pharmaceutical industry played a role in that. I've personally experienced multiple bacterial infections that would have likely led to loss of life or limb in the pre-antiobiotic era, and nobody I've known has died of diptheria or smallpox.
@John - True, academia is weeding out the undesirables for Big Pharma - those who are not good at spinning cherry-picked data.