Emerging markets may kill Big Pharma

A study by IMS Health shows emerging markets are writing more scripts -- and Western companies may be missing out

By InvestorPlace Mar 17, 2010 7:31AM

drug companies pharma stocksThinks are pretty bleak at Big Pharma right now. Looming patent expirations and the Great Recession have held back shares, sparked widespread layoffs and slowed growth to a crawl.

 

But seeing drug companies move sideways over the past several years is one thing -- watching them slowly eroded by global competors in the future will be even worse for shareholders. 

 

That's exactly the fate predicted for current drug giants such as Pfizer, Merck and others in a recent IMS Health study. The report shows emerging markets are seeing widespread prescription growth -- and that major Western companies risk being squeezed out of the market by regional competitors.

 

Specifically, IMS predicts that by next year, drug sales in China will surpass prescriptions in France and Germany -- while Brazil will be buying more medications than the U.K.  That means drugmakers in emerging markets are on the verge of a tremendous explosion in sales and profits much like the U.S. pharmaceutical industry saw at the end of the 20 century.

There’s more. The report warned that unless the current leaders in big pharma get their act together,  they will be forever eclipsed by the local players in these markets.

 

The biggest issue is that mature drug companies in the u.S. are struggling to grow sales. Companies based in the United and Western Europe have seen sales growth slow to the low single digits in the last eight years thanks to patent expirations and a growing use of generic drugs. But who do you think is making cheaper alternatives to all those treatments?

 

That's right: Emerging market stocks.

 

Take India's Dr. Reddy's Laboratories (RDY). This company develops and manufactures generic and brand name drugs. Since this company is located in India, it has two important advantages: low cost of operation, and immediate access to the tremendous populations of Asia.

 

As more and more big name drugs lose patent protection, Dr. Reddy's is ramping up production to offer these important medications at much lower costs. RDY isn't just riding the coattails of other drug makers though. Dr. Reddy's is building up its biotech business and is expanding its drug discovery research arm. During the last quarter, the company launched 27 new generic products, but also filed 16 new product registrations and filed 11 DMFs globally – meaning it is dedicated to dominating not just the generic drug industry in India but also is committed to bringing new treatments to the market.

 

The IMS report should have big pharma shaking in their shoes. With their most profitable medications becoming fair game for the competition at the same time that the customer base in  merging markets is exploding, it could be very tough times ahead in the Western drug industry.

 

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