Photo Credit: AFP/GettyImages/Miguel Medina
Emerging-market governments, especially those in the Brics and their nearest aspirants, are facing enormous challenges to meet the expectations of their citizens to have universal access to cost-effective healthcare. China, for example, according to a calculation made by management consultants McKinsey, is looking at a near-tripling of its annual healthcare bill to $1 trillion by 2020 (equivalent to total global spending on medicines today). Against that background, China’s crackdown on high drug prices and alleged corporate malpractice by multinational pharmaceutical companies starts to make a lot more sense.
China’s charges against the U.K. drug maker GlaxoSmithKline (GSK), which is accused of widespread bribery to boost sales and prices (charges the company denies), is only the latest and most headline-grabbing example of a trend being seen across emerging market countries. India has rejected patent applications from western drug makers such as Novartis, giving local drug companies a free run with generic versions of some medicines. India has also introduced this year new price-setting policies that tie drug prices to industry averages as a way to cut into the premiums branded drugs can command. Brazil, too, is fostering a local generics industry. It, like Turkey, is enforcing price cuts. Beyond its bribery investigation into GSK, China is conducting a sweeping probe of drugs pricing involving some 60 companies and tightening regulatory enforcement.
Big Pharma sees emerging markets as their key future growth driver. Western companies are being squeezed by blockbuster drugs going off patent in the U.S. and Europe and by the cutbacks on public-sector healthcare spending being pursued by cash-strapped governments. IMS Health, which tracks pharmaceutical industry trends, forecasts that emerging countries’ share of global spending on medicines will increase to 30% by 2016, up from 20% in 2011, with the whole pie increasing by a quarter to $1.2 trillion.
At the same time, the rising wealth and growing middle classes of the leading emerging economies are creating a new market. Namely, for already-extant medicines that treat the diseases that come with rising standards of living, such as diabetes, heart problems and some cancers — medicines that can be sold for higher profit margins than the primary-care products that have accounted for the bulk of the drugmakers’ emerging market sales in the past. Those margins are further fattened as the multinationals’ brands are seen by patients as proxies for quality and safety.
It will take some time for local generics industries to be established to a level where they can provide across-the-board competition for the multinational drugmakers. Meanwhile, price controls and tighter regulation will nibble away at Big Pharma’s sales in large and growing markets like China, India and Brazil. IMS Health gives an indication of quite how high stakes a game this is when it says that as much as 45% of Big Pharma’s revenues could eventually be lost.
