Is the promise of emerging markets wishful thinking?

LONDON—Investors and market-watchers have been concerned over the years about reduced revenues at pharmaceutical companies, thanks to patent cliffs, genetic competition and other market pressures. Lately, many pharmas have been trying to allay those fears with talk of opportunities in emerging markets, but business intelligence firm GlobalData is raising some red flags that such optimism is being overplayed.

GlobalData says, in a recent news release, that pharmas "may want to slow down and avoid making unrealisticpromises. They believe that by virtue of their rapid growth andindustrialization, emerging markets, including China, India, Brazil, andRussia, are the 'go-to' places in terms of offsetting revenue loss dueto the introduction of generic variants. However, recent reports fromWall Street indicate that actual drug sales in these countries couldfall short of forecasts as a result of decelerating economies, intenselocal competition and stringent government measures aimed at controllinghealthcare costs and supporting domestic companies."

According to GlobalData, there is a good chancethe recent wave of austerity in Europe could also have contributed tothis development "as governments are now unwilling to pay as much forpills. In some cases, new laws are pressuring companies to prove theefficacy of their drugs or risk having them dropped from the coveragelist, or covered at a lower rate. Consequently, this has a ripple effecton emerging markets as their governments refer to prices set in Europeto determine their own. Analysts believe that as much as a $47 billiongap could exist between what drug makers expect to make in emergingmarkets, and the actual realizable revenue"

GlobalData points out that, as noted in its 2012 Pharmaceutical Benchmark Report,the major pharmaceutical players are progressively exploring otheroptions outside of the developed markets for sales growth. The maturityof the U.S. drug market, an upsurge of generic drug sales and anuncertain regulatory environment have contributed to slower revenuegrowth from the top 25 pharmaceutical companies, increasing by only 2.6 percentin 2011 to $259 billion.

"Consequently, large pharmaceutical companiesincluding Pfizer, Merck, Sanofi, and GSK currently depend on emergingmarkets for a substantial share of their revenue. These marketspresently account for about one-third of GSK's annual sales and thecompany has declared its intention to double its revenues from China andIndia within the next five years," GlobalData notes. "To accomplish this, it has beenincreasing its sales force in emerging markets and trimming sales teamsin developed markets. Pfizer's emerging-market business yielded $2.6billion in revenues in Q2 2012, up 8 percent from Q12012."

GlobalData believesthat the recent investments by pharmaceutical companies in mergers,acquisitions, and collaborations with generic manufacturers in emergingmarkets is an indication of their readiness to focus on "low-hangingfruit" and strengthen their presence in those markets rather thanrelying on the "high-risk, high-return blockbuster model."

According to GlobalData, selling drugs in emerging marketscould potentially be a way to exploit the huge growth potential ofcountries like China, India, and Russia, but pharmaceutical companies musttread with caution by considering the present economic climate and beingmore realistic in their projections.