Faced with dwindling growth rates in the US and Europe, pharmaceutical companies are turning their attention towards emerging pharmaceutical markets whose double-digit growth is fuelled by their recent economic booms. However, although the patient potential of the emerging market countries is enormous, foreign pharma companies are currently tapping into only a fraction of the consumers, due to fairly poor access to drugs in countries like India and China, and to an extent in Russia, Brazil and Turkey. Nevertheless, many companies are keen to get a foothold as the purchasing power of the booming middle class and the countries’ as a whole is rising, and is driving the pharmaceutical market growth. According to a new report by independent market analyst Datamonitor, the new middle class wants better healthcare and is willing to pay for it. “The governments are improving public provision of healthcare, more individuals can pay for drugs out of pocket and Big Pharma are there ready to bank on it and compensate for lower growth of the mature markets of the West,” says Datamonitor senior pharmaceutical analyst Dr Tijana Ignjatovic.

 
Emerging pharmaceutical markets are growing at double-digit rates
With slowing growth rates in western pharmaceutical markets many pharmaceutical companies are turning towards the fast growing emerging markets 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 four to six percent 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 bn 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 bn, compared to India’s retail market sales of $5.5 bn. Turkey’s total market value in 2006 was $7.3 bn with five percent annual growth.
 
Large population and growing economy are main attractions… 
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 pharma companies, Dr Ignjatovic says. “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, this 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: sales of anti-infectives that traditionally dominate emerging markets are slowing down and are being taken over by drugs targeting the nervous system, 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, particularly modern western drugs. However, this makes these markets 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.
India’s booming middle class – created by the growth of the services industry – on the other hand accounts for only a tiny proportion of the total population and still has significant growth potential. However, its poor infrastructure may limit future growth.
 
…but insufficient IP protection and low public funding of drug consumption are downsides
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’ Glivec (imatinib) and Astra Zeneca’s Iressa (gefitinib) were rejected mostly on the grounds of prior known use or incremental innovation that is not recognized in India. Despite Novartis’ appeal to the Chennai High Court the initial decision was upheld, Dr Ignjatovic says. “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, 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 the HIV/AIDS drugs it may seriously undermine the position of foreign pharma.
 
Another major obstacle to 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, Dr Ignjatovic says. “The potential impact of increased public healthcare spending on the uptake of drugs produced by global pharma is twofold: firstly increased access to healthcare facilities means the population is more likely to receive prescriptions and purchase drugs. And secondly, patients will have wider access to drugs through expanded reimbursement on the public health systems,” she says.
 
A clear example of how expansion of the reimbursement system can influence market growth is Russia. The introduction of the federal reimbursement system (the DLO) has fuelled rapid market growth that reached 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.
 
Drug price controls threaten market potential but are not deterring big pharma
One downside and a major challenge for pharma operating in emerging markets are the tight drug price controls. In 2004 Turkey introduced a reference pricing system that resulted in Turkey having lower drug prices than in any other European country and 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 and losing the reimbursable status that would reduce their market penetration, or sticking to their reimbursable status, albeit with lower margins, with a hope that the pricing environment will improve and that drug consumption will grow”, Dr Ignjatovic says. “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 as the recently introduced reimbursement system becomes unable to cope with growing demand.
 
“Although tight drug price controls threaten the potential of many emerging markets, global pharma is becoming increasingly active in countries with high growth as the potential for higher healthcare spending in the future is outweighing the challenges.
 
“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. Thus, emerging markets present new opportunities for mature drugs whose sales are declining in the major markets of the West, a highly attractive option especially at the time when many drugs are at the edge of the patent expiry cliff,” she says.

The report