This comes about due to increased wealth, changes in diet, urbanisation and increased longevity.
Based on analysis carried out in conjunction with Atlantic Securities into which areas were likely to grow significantly in emerging markets as a result of this shift, the main growth was in: vaccines, type-2 diabetes, oncology, cardiovascular and dementia.
Large pharmaceutical companies face a number of well-known headwinds, particularly in their home markets in the European Union and US. Here, governments are tightening safety regulations (making it harder to achieve new drug approvals) and are keen to get better value for money and make savings in their bloated healthcare bills, which translates into falling drug prices.
Many of the patents on the biggest drugs are also expiring, which opens the market up to competition from cheaper generic products. The drug companies are responding by targeting significant cost savings to reduce the negative impact on their margins and various approaches to limit the impact of generics (for example, partnering with genetics companies).
The big drug companies started with a very short-term approach to emerging markets. Broadly, the companies argued that they did not want to lower prices in emerging markets, as they feared the drugs would be reimported into developed markets and would undercut their existing products.
The emerging markets are the future for the big drug companies. A more proactive approach, which includes tiered pricing and being more accommodating, is the more logical and profitable strategy in the longer run. Such an aggressive approach in these markets would eventually backfire, leaving it difficult for drugs companies to navigate the domestic regulators and gain access to these large, lower-priced markets.
For the past three years, there have been some proactive moves by pharmaceutical companies. Vaccines for pneumococcal and rotavirus are now being offered to developing countries at a 90 per cent discount to western prices.
The World Health Organisation identifies pneumococcal as the number-one vaccine for preventable deaths among children under the age of five worldwide and rotavirus is the most common cause of severe diarrhoea in young children.
Vaccines are identified as one of the five main treatment needs in emerging markets. Exposure to these key therapeutic areas will be a significant driver of future sales.
How companies are managing the availability of drugs to emerging markets will be a major differentiator in predicting the success (or failure) of the big drug companies in emerging markets.
The work of the Access to Medicine Index is a useful tool to help differentiate between company approaches.
The drug companies started to report separate emerging market sales in 2010 and this has translated into increased earnings expectations in the next five years. Forecasts remain low for these companies due to the adverse impact of the patent cliff.
The market is currently discounting little, if any, value for emerging market exposure or future drugs that have yet to be approved, which makes this a potentially interesting time to invest. It is important to recognise that emerging markets exposure is about gaining access to a potentially large volume of lower-cost drugs.
