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).