Global Pharma: is the "Emerging Market" a Dated Concept? (Part 2 of 5)

by Ben Comer, for Pharnaceutical Executive

Generics: Challenge or Opportunity?

Despite healthy growth forecasts for many of the 17 emerging markets surveyed by IMS, a closer look at the numbers may staunch initial enthusiasm: It's worth noting that market growth and pharma company growth is not the same thing. Spending on innovative brand drugs is expected to decrease across the board, with any gains offset by patent losses. Even though the global pharmaceutical market is predicted to cross the $1 trillion mark in 2015, approximately $400 billion to $430 billion, or 39 percent, will come from the sale of generic drugs. In 2010, generics accounted for just 27 percent of the global drug market.

To capitalize on the skyrocketing generics spend, top pharmas have dusted off brands with expired patents and rejiggered them for emerging markets, often with the help of local generics players. In India alone, partnerships have been forged between Merck and Sun Pharmaceuticals, AstraZeneca and Torrent Pharmaceuticals, Bayer and Cadila Healthcare, GSK and Dr. Reddy's Laboratories, and Abbott paid $3.7 billion for key parts of Piramal Healthcare last year. But the branded generics game is not without risk; while some patients in emerging markets are willing to pay extra for the prestige (or presumed safety) that comes along with a drug manufactured by a Pfizer or a Merck, the margins necessary to make a deal worthwhile are beginning to face a crunch, as local governments intervene in negotiations or try to scale back reimbursement coverage.

Drug Spending by Geography

Latin America, which represented 6 percent of the $856 billion global pharmaceutical industry in 2010, provides an example of the growing pains for pharma. Drug spending in the region is expected to rise by between 11 percent and 14 percent in the next five years, to as much as $82 billion by 2015. Brazil leads Latin America in terms of spending on drugs, and while that spending will increase, brand drugs will take a hit, despite a relatively large original brand market, says Michael Kleinrock, research director, IMS Institute for Healthcare Informatics. "Government policies will have longer-term impact on brand growth over the next five years ... a lot of the growth is essentially going to be volume-driven," he says.

Indeed, brand drug prices in Latin America have been driven down by the adoption of international price referencing, where the lowest price wins. "Brazil's international price referencing significantly impacts the rest of Latin America," said John Brennick, director, worldwide market access, Janssen Global Services, at a panel at the Drug Information Association's (DIA) annual meeting in June. "Brazil takes the lowest price reference available," based on nine reference countries including Australia, Canada, France, Greece, Italy, New Zealand, Portugal, Spain, and the US or the drug's country of origin, said Brennick. That price can then represent "your product's maximum price for its entire patent life on the market in Latin American countries." Brand growth is also hampered by the fact that 79 percent of drug costs in Brazil are paid for out of pocket; Mexico's out-of-pocket percentage is even higher.

Some traditionally innovative drug-oriented companies have opted to buy in to Brazil's generics market. Last October, Pfizer bought 40 percent of Teuto, a Brazillian drug company, for $238 million. Sanofi bought Medley, and its portfolio of 189 generic products, for €500 million in 2009, although the deal was held up for a year by antitrust concerns.

Global Drug Spending by Segment

Many of the growing pains present in Latin America hold true for other emerging market countries. Generic drug buy-ins are likely to continue, particularly with the shift in the profile of disease caused by things such as urbanization, diet, smoking, and rising life expectancy. "By 2030, the burden of disease in the emerging markets will look very similar to the burden in terms of chronic conditions in mature markets, "says David Campbell, senior principal, IMS Consulting Group. As the bulk of drug spending moves from acute disease to chronic disease, R&D-driven organizations are increasingly considering a play in branded generics, or pure generics sales. As an illustration of the pricing pressures in Brazil, and the appeal of generic buy-in, consider the following case presented at DIA by Alexandre Schiola, head of regional market access for Latin America at Bayer. Elan and Biogen Idec's Tysabri received regulatory approval in August 2008, and was eligible to be classified as a category 1 drug by the Brazilian Health Ministry. The wholesaler price in August 2008, as well as the accepted international price, was $2,400 per dose. The expected price in Brazil, with taxes and margins, was $3,900. But the price that received approval was $2,219.

Examples like the one above can be impossibly frustrating. But challenges in pricing and market access have a way of weeding out companies without a stomach for change and innovation. Where some companies see a prohibitive set of circumstances, others see opportunity. In some cases, product process can be the source of innovation.